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The “Claim seeking Ineffectiveness of a Debtor’s Disposition” is one of the most significant and effective tools available to a creditor in order to protect themselves from the fraudulent actions of their debtor. This legal recourse is available to be utilized when a debtor deliberately disposes of their assets in the favor of third parties in a manner that harms the creditor’s rights by reducing the general guarantee available for the repayment of debts. In such cases, creditors have the right to challenge the validity such disposition, rendering it ineffective against the creditor despite the transaction remaining to be valid between the debtor and the third party. Consequently, the asset in question returns to the debtor’s general guarantee, paving the way for its execution to satisfy the creditor’s claims.

Conditions for Admissibility of the “Claim seeking Ineffectiveness of a Debtor’s Disposition”

For a creditor to assert their right to bring this action, certain conditions must be met:

1. Pre-existence of the Creditor’s Right:
   The creditor’s right must have arisen prior to the debtor’s disposition being challenged. The right must also be due, enforceable, and undisputed. It is important to note that the critical factor is the date on which the creditor’s right originated, not the date it became due or its amount was determined.
2. Debtor’s Insolvency:
   The debtor must be proven to be insolvent, meaning they do not possess sufficient visible assets to cover their debts. Insolvency can also be established if the debtor has visible assets that are insufficient to satisfy all their debts or if execution against the debtor’s assets is impractical for the benefit of their creditors.
3. Facilitation of Proof through Legal Presumptions:
   Recognizing the challenges creditors face in proving insolvency, legislators have introduced a legal presumption to ease this burden. The creditor only needs to provide evidence of the debtor’s outstanding debt. This creates a legal presumption of the debtor’s insolvency, which the debtor may refute by demonstrating the existence of other assets—beyond those subject to the action—that are sufficient to satisfy the debt and are not practically unavailable for execution.
4. Timing of the Disposition:
   The relevant date for considering the debtor’s disposition is the date of its execution, not the date of its registration or publication, even in cases where the law requires the transaction to be registered.

A New Condition Introduced by the General Assembly of the Dubai Court of Cassation: Proof of Bad Faith on the Part of the Third Party

Previously, fulfilling the above conditions was sufficient for the admissibility of the “Claim seeking Ineffectiveness of a Debtor’s Disposition.” However, the General Assembly of the Dubai Court of Cassation has recently introduced a new requirement. The court determined that invalidating a debtor’s disposition against third parties who acted in good faith would disrupt the stability of transactions and contradict the principle of protecting bona fide parties.

This principle recognizes that third parties who entered into a purchase transaction in good faith, believing it to be legitimate and conducted with the rightful owner, should not suffer due to the fraudulent intent of the debtor. Accordingly, the General Assembly issued a decision requiring an additional condition for the admissibility of the action i.e., proof of bad faith on the part of the third party.

To meet this requirement, the creditor must demonstrate that the third-party purchaser acted in bad faith and was aware that the debtor’s disposition was intended to harm the creditor by removing the asset from the general guarantee to evade execution. It is important to highlight that “Good Faith” in this regard as per Dubai Cassation Court refers to the transferee’s full and genuine belief, at the time of disposition, that the transferor holds absolute ownership of the property being disposed of, free from any encumbrances or third-party rights and that any doubt as to such belief, no matter how slight, negates the existence of good faith.

Balancing Justice and Transactional Stability

The decision of the General Assembly aligns with the principles of justice and transactional stability. It ensures the protection of bona fide third parties who entered into sale and purchase agreements in good faith, trusting the validity of the transaction. This approach serves the public interest by safeguarding general credit and upholding the legitimate trust upon which individuals rely in their dealings. This principle is further reinforced by Dubai’s Real Estate Registration Law, which establishes a crucial concept that any individual who acquires rights in real property in good faith, based on the records in the real estate registry, cannot have those rights revoked for any reason.

Such judicial development strikes a fair balance between protecting creditors from fraudulent dispositions and upholding the integrity of transactions for bona fide third parties, fostering trust and confidence in commercial and financial dealings thereby, promoting a healthy and reliable economic environment.