Legal Definitions - revocatory action

A revocatory action is a legal proceeding initiated by a creditor to challenge and invalidate a transaction or contract made by their debtor. The purpose of this action is to cancel an agreement that the debtor entered into, which has the effect of making it more difficult for the creditor to collect the money owed to them. This typically occurs when the debtor's transaction reduces their assets or increases their liabilities to such an extent that it impairs their ability to pay their debts, often leading to or increasing their insolvency.

Here are a few examples to illustrate this concept:

• Imagine a situation where Sarah owes her bank a significant amount of money for a business loan. Knowing she is about to default on the loan, Sarah quickly sells her valuable antique car, which is her most significant personal asset, to her brother for a mere $100. The car's actual market value is $50,000. By selling the car for a negligible amount, Sarah significantly reduces her available assets, making it much harder for the bank to recover the money she owes. In this scenario, the bank, as a creditor, could bring a revocatory action to annul the sale of the car. The bank would argue that the sale was designed to deplete Sarah's assets, increasing her insolvency and preventing them from collecting their debt, and therefore the transaction should be reversed.

• Consider a small manufacturing company, "Widgets Inc.," which is struggling financially and owes a large sum to its primary supplier, "Parts Co." Fearing an impending bankruptcy, the owner of Widgets Inc. decides to transfer the company's most valuable asset—its patented manufacturing process—to a newly formed shell company he also owns, for no consideration. This transfer leaves Widgets Inc. with virtually no assets to satisfy its creditors. "Parts Co.," as a creditor, could initiate a revocatory action to invalidate the transfer of the patent. They would contend that this transaction was made by Widgets Inc. to deliberately strip itself of assets, thereby increasing its insolvency and hindering "Parts Co.'s" ability to recover the outstanding debt.