Snapshot: A Pauline Action – a timeless Jersey tool for creditors in the context of insolvency

The Pauline Action is a legal mechanism that allows creditors to apply to the Royal Court of Jersey to set aside transactions undertaken by a debtor to defraud or otherwise prejudice them.

Emirates NBD Bank PJSC v Almakhawi and Others [2024] JRC 256 is the most recent case from the Royal Court to affirm that the Pauline Action, which has its origins in Roman law, remains an effective debt recovery tool for creditors in Jersey.

Purpose of the Pauline Action

The Pauline Action's purpose is to restore the position, as far as possible, to what it would have been had the transaction under attack not taken place.

Criteria for a Pauline Action

For a creditor to succeed with a Pauline Action, they must be able to identify the transactions to be set aside and establish that:

1. they were a creditor of the debtor at the time of the transaction(s)
2. the debtor was insolvent at the time of each transaction or rendered insolvent by it
3. that the transaction was carried out with the substantial intention of defeating the creditor's claim

Emirates NBD Bank PJSC v Almakhawi

The substantive proceedings in this case took place in Dubai between January 2017 and July 2019. The case went through every level of appeal until the highest court of appeal in Dubai found in favour of Emirates NBD Bank PJSC (Emirates) against Rashad Abdulaziz Almakhawi (RAM).

On 15 January 2017, the Dubai Court of First Instance entered judgment in favour of Emirates in the sum of AED142,303,349.42.

Before the matter reached the highest appellate court of Dubai, RAM took a number of steps, including the establishment of two Jersey law trusts which owned shares in two underlying companies. RAM then transferred ownership of a New York apartment (valued at approximately US$2 million) and US$20 million of cash and other assets, to the companies owned by the two trusts.

The matter then came before the Royal Court which was satisfied that Emirates was a creditor of RAM at the time of each of the various transfers ultimately to the trusts and found that RAM had failed to establish that he was solvent at the time of those transfers.

In relation to RAM's intention, the Royal Court noted RAM's arguments that the various transfers had been made for the purpose of estate planning but held that it merely needed to be satisfied that one of the substantial purposes of his actions was protection against his creditors. The Royal Court held that on the balance of probabilities, RAM was seeking to protect his cash and assets for himself and his family.  RAM was, in the Royal Court's judgment, seeking to put those assets beyond the reach of his creditors.

The Royal Court was satisfied that the requirements for the Pauline Action had been met and ordered that the transfers in issue were void and set aside.

Why the Pauline Action is so effective

The Pauline Action is a tool for creditors because:

• the debtor does not need to be the subject of separate insolvency proceedings in order for a Pauline Action to be brought by a creditor
• it allows a ten-year prescription period for claims
• the creditor need only establish that the debtor is insolvent or was rendered insolvent by the transaction on a balance sheet basis (i.e. with reference to all of the debtor's assets and liabilities in the usual way)
• it shifts the burden of proof to the debtor once the creditor has established that the debtor was insolvent at the time of each transaction or rendered insolvent by it
• it does not require the debtor's intention to defeat the creditor's claim to be the dominant purpose of the transaction; where there is more than one purpose, it is sufficient if the substantial purpose is to defeat creditors

The Royal Court in ENBD has highlighted the importance of the Pauline Action as an indispensable tool for creditors in Jersey.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice