Asset Stripping in Bankruptcy: Risks for Owners and Directors

The bankruptcy framework in Ukraine is based on a balance between the debtor’s right to dispose of its property and the creditors’ right to satisfaction of their claims. Until insolvency proceedings are formally opened, a business entity retains full discretion over its assets. At the same time, this period gives rise to the largest number of disputes related to asset disposals that are later challenged as fraudulent transactions.

Judicial practice in 2024–2025 demonstrates a clear shift in the approach of commercial courts to the assessment of such transactions. Formal compliance with statutory requirements is no longer considered sufficient to confirm the validity of a transaction. Increasing weight is given to the analysis of economic substance, timing, the identity of the parties, and the impact on the liquidation estate.

1. Corporate Veil and Subsidiary Liability

Article 96 of the Civil Code of Ukraine establishes the principle of limited liability of participants in a legal entity. However, this principle is subject to significant limitations in bankruptcy proceedings. Articles 50 and 61 of the Bankruptcy Code of Ukraine provide for the possibility of holding controlling persons subsidiarily liable where the debtor has been brought to insolvency through unlawful actions.

A key element is the presumption of fault once the insufficiency of the debtor’s assets has been established. The burden of proving that insolvency occurred for reasons beyond their control lies with the controlling persons. This approach is justified by the fact that owners and directors have full access to management information and exercise effective control over the company’s financial decisions.

2. Gifts and Gratuitous Transactions During the “Suspect Period”

A representative example is the ruling of the South-Western Commercial Court of Appeal dated 5 November 2025 in case No. 916/3130/21 (916/3786/24). The company’s founder, against whom an application for subsidiary liability had already been filed, executed gift agreements transferring real estate to family members.

The courts emphasized that gifting as such is not unlawful. However, in the context of bankruptcy, gratuitous transfers to related parties are assessed based on their actual economic consequences. The transfer of assets to relatives does not result in the loss of effective control and does not generate any compensation that could be used to satisfy creditors’ claims.

The timing of the transactions was decisive: they were concluded after an objective risk of enforcement had arisen. The court held that under such circumstances the respondent must have been aware of the legal consequences of his actions. The existence of other assets was rejected as a defense, as each asset must remain potentially available to creditors regardless of the overall financial position of the person concerned.

3. Pseudo-Commercial Transactions and Abuse of Rights

A different but equally important approach is illustrated by the decision of the Northern Commercial Court of Appeal dated 24 September 2025 in case No. 911/2999/21, which concerned agreements for non-repayable financial assistance executed several years before the opening of bankruptcy proceedings.

The court applied Article 13 of the Civil Code of Ukraine, which prohibits abuse of civil rights. It was established that at the time the agreements were concluded, the debtor was in a state of persistent financial distress, had substantial tax arrears, and failed to submit statutory financial reports. The transfer of funds without any compensation or corporate benefit lacked a reasonable business purpose.

As a result, the court concluded that even a formally lawful agreement may be declared invalid if it was concluded in bad faith and aimed at removing assets from potential enforcement by creditors.

4. Limitation Periods and Concealment of Information

Courts pay particular attention to limitation periods in bankruptcy-related disputes. In such cases, the limitation period is calculated not from the date of the transaction but from the moment when the liquidator or creditors actually obtained the ability to discover it.

The concealment of documents, failure to submit financial statements, or refusal to transfer accounting records to new management are recognized as valid grounds for restoring missed limitation periods. Judicial practice consistently follows the principle that no person may benefit from their own unlawful conduct.

5. Criteria Applied by Courts in Practice

An analysis of case law allows the identification of key indicators used by courts when assessing a debtor’s transactions:

• timing of the transaction relative to the emergence of insolvency indicators;
• affiliation between the parties;
• absence of economic justification;
• reduction of the liquidation estate;
• lack of adequate consideration;
• concealment of information or documentation.

The presence of several of these factors significantly increases the risk of invalidation of the transaction and the imposition of liability on controlling persons.

6. Lawful Alternatives: Asset Substitution

Article 55 of the Bankruptcy Code of Ukraine provides for a lawful mechanism of asset substitution within rehabilitation (sanation) proceedings. Unlike fraudulent asset stripping, this procedure is carried out transparently, with creditor approval and under court supervision. It enables the preservation of the business as a going concern while safeguarding creditors’ rights.

Conclusions

Recent bankruptcy case law demonstrates a growing willingness of courts to impose liability on owners and directors for actions that reduce the debtor’s asset base. Formal legality of a transaction no longer guarantees its resilience in court.

For controlling persons, this necessitates careful documentation of business purpose and economic rationale for each transaction, particularly during periods of financial distress. For creditors, it underscores the importance of an active procedural stance and timely response to suspicious conduct by the debtor.

The Ukrainian bankruptcy framework is increasingly guided by principles of good faith and economic substance, significantly reshaping approaches to asset protection and managerial liability.