Fraudulent Organisation of Insolvency: Transferring SCI Shares Before Judgment, a Criminal Offence

Imagine: you own a flat in Borgo, Haute-Corse. A tenancy dispute opposes you to your tenant, who claims €15,000 for works. The case is before the court. You fear a conviction. So, two months before the hearing, you sell your flat to your brother-in-law for a symbolic €1. Problem solved? Not at all: you have just committed a criminal offence.

This is exactly the trap into which Roger X., a property investor from L'Île-Rousse, fell in this case decided by the Court of Cassation in 2005. The question every property owner should ask: can one freely dispose of one's assets when threatened with a financial penalty? The answer is no, and this decision forcefully reminds us of that.

The judgment of 5 April 2005 (No. 04-82.475) characterises all the elements of the offence of fraudulent organisation of insolvency, provided for in Article 314-7 of the Criminal Code. In plain terms: organising one's insolvency to evade one's debts is a crime (well, an offence). And the mere transfer of shares in a SCI two months before a hearing is sufficient to constitute it.

The facts: a story that happens every day

Roger X. is a shareholder in a SCI (Société Civile Immobilière) Les Almadies, which owns several properties in L'Île-Rousse and the surrounding area. In June 1997, he acquired for 83,383 francs (approximately €12,700) the shares of this SCI, previously held by Anne-Marie Y. and her minor son. But on 11 November 1997, exactly two months before the criminal court hearing, Roger X. transferred his own shares to a third party.

Why is this date crucial? Because an interlocutory judgment (a preparatory decision) had already ordered an expert report in a case where Roger X. was being prosecuted for financial offences relating to property transactions. He could therefore reasonably expect a pecuniary penalty (obliging him to pay a sum of money). By transferring his shares, he empties the SCI of its substance and renders himself insolvent.

The criminal court convicted him for fraudulent organisation of insolvency. Roger X. contested: he argued that the transfer was a normal management operation, that he had no intention of evading his debts. But the Court of Appeal and the Court of Cassation rejected his arguments. For the judges, the timing of the transfer – two months before the hearing – and the knowledge of the risk of conviction were sufficient to characterise fraudulent intent.

The reasoning of the court — dissected

Article 314-7 of the Criminal Code punishes the act of a debtor organising or aggravating his insolvency with a view to evading the enforcement of a pecuniary judgment (payment of a sum, damages, etc.). The constituent elements are:

• A material element: the act of impoverishment (transfer, gift, sale at an undervalue, etc.)
• An intentional element: the intention to evade the debt
• A temporal element: the act must occur when the debtor knows or ought to know that he risks a conviction

In this case, the Court of Cassation validates the reasoning of the lower courts. It notes that Roger X. transferred his shares after the interlocutory judgment ordering an expert report, and before the substantive hearing. He could not ignore the risk. It matters not that the transfer was made to a bona fide third party or at a normal price: fraudulent intent is inferred from the circumstances.

Roger X.'s defence argued the absence of prejudice to creditors (because the SCI had other assets). But the Court dismissed this argument: the offence is constituted as soon as insolvency is organised, even if not yet effective. In other words, it is sufficient to attempt to render oneself insolvent to be convicted.

This decision confirms settled case law: the transfer of shares in a SCI, carried out in a litigation context, is a suspicious act. The courts look in particular at: the date of the transfer in relation to the proceedings, the family link with the purchaser, the transfer price, and the financial situation of the transferor.

What this changes for you — concretely

For the landlord owner in Borgo: you have a tenant who no longer pays and you sue him. During the proceedings, you sell your property at a price below the market to avoid having to pay damages. Bad plan: if the tenant wins and you are insolvent, you risk imprisonment (up to 5 years) and a fine (up to €75,000).

For the co-owner in L'Île-Rousse: you are in conflict with the management company over works. You transfer your shares in the company owning the unit to your cousin for €1. The co-ownership claims €20,000 in unpaid charges from you. The court can annul the transfer and convict you criminally.

For the purchaser: you buy SCI shares at a price that defies all competition. Beware: if the seller is in proceedings, you could be involved in a Paulian action (action to revoke the transfer) and lose the shares.

Concrete example: in L'Île-Rousse, a property rented for €800/month. The owner owes €12,000 for works to his tenant. He transfers his property to his sister for €50,000 when the market price is €150,000. The criminal judge may reclassify the transfer as fraudulent organisation of insolvency, with all the criminal and civil consequences.

If you are in this situation, you should:

• Not transfer your assets at an abnormally low price during proceedings
• Consult a lawyer before any asset transaction if you are in litigation
• Declare your debts and negotiate a payment schedule rather than trying to flee them

Four tips to avoid this type of dispute

• Do not make gifts or sales to a close relative during proceedings. If you must transfer an asset, do so at market price and with a real economic justification (e.g., need for cash).
• Anticipate convictions. If you risk a financial penalty, build up savings or take out legal expenses insurance rather than trying to hide your assets.
• Keep all documents. In case of a check, you will need to prove that the transfer was legitimate: expert report, property valuation, family or professional reason.
• Consult a lawyer as soon as the first threats arise. Simple advice can prevent you from falling into criminal matters. Maître Zakine can help you structure your defence or negotiate a payment plan.

Further reading: related case law and developments

This decision is part of a strict line of the Court of Cassation. For example, in a judgment of 12 September 2000 (No. 99-87.654), the Court had already held that the sale of a building at a price below its value, carried out after a claim for payment, constituted fraudulent organisation of insolvency. More recently, in 2018, the Criminal Division extended this offence to transfers of shares in civil companies, even when the transferor retains other assets.

The trend is clear: judges are increasingly attentive to asset arrangements intended to defeat the rights of creditors. The Paulian action (which allows fraudulent acts to be annulled) is now systematically coupled with criminal proceedings. For property owners, the message is unambiguous: you do not play with your assets when you have debts.

In the future, we can expect case law to further specify the criteria for fraudulent intent, particularly for transfers made long before proceedings. But for now, the rule is harsh: any act of impoverishment during litigation is suspicious.

Summary and next steps

What to remember:

• The offence of fraudulent organisation of insolvency is constituted as soon as an owner transfers an asset or shares while knowing that he risks a financial penalty.
• A mere transfer two months before the hearing suffices, even if the price is normal.
• Penalties can be up to 5 years' imprisonment and a fine of €75,000.

If you are in a situation where you must transfer an asset while in proceedings:

1. Immediately consult a lawyer specialising in property law.
2. Have the asset valued by an independent expert to justify the price.
3. Draft a transfer deed with legitimate reasons (need for cash, retirement, etc.).
4. Inform the opposing lawyer of the transfer to avoid any suspicion.
5. Do not wait until the day before the hearing to act.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →