Fictitious Bankruptcy and the Limits of Insolvency

The introduction of Article 9-1 into the Code of Ukraine on Bankruptcy Procedures did not merely formalize the concept of fictitious bankruptcy; it also brought to the forefront the problem of distinguishing it from genuine insolvency, since the mere existence of a statutory definition does not ensure uniformity in judicial application.

Under Part 2 of Article 9-1 of the Code, fictitious bankruptcy is defined as a knowingly false statement by a debtor regarding the inability to perform monetary obligations, which requires establishing two interrelated elements: the debtor’s actual solvency at the time of filing and the awareness of the falsity of such a statement. At the same time, judicial practice demonstrates the absence of a universal test for identifying these elements, leading courts to apply a комплексний (comprehensive) approach that combines financial analysis with an assessment of the debtor’s conduct.

Financial criterion: the ratio of assets to liabilities

The regulatory framework, in particular the Procedure for analyzing the financial and economic condition of enterprises approved by Order of the Ministry of Justice No. 3105/5 dated 10 September 2020, предусматривает (provides for) the assessment of solvency through the ratio of assets to liabilities, expressed in the coverage ratio of obligations by assets. Where this ratio exceeds one, the debtor’s assets are sufficient to fully satisfy creditors’ claims, which, in the absence of other негативных факторов (adverse factors), indicates the lack of objective признаки (signs) of insolvency and, consequently, calls into question the good faith of initiating bankruptcy proceedings.

Thus, the financial condition of the debtor serves as the primary, but not the sole, criterion.

Behavioral criterion: the relevance of management conduct

Judicial practice further demonstrates that identifying fictitious bankruptcy is not limited to financial indicators but extends to the analysis of the debtor’s conduct, particularly managerial decisions and actions vis-à-vis creditors.

In the decision of the Commercial Court of Kyiv Region dated 4 September 2025 in case No. 911/743/24 (911/278/25), the court found that the submission of inaccurate financial statements, failure to reflect creditor indebtedness, and managerial inaction in addressing debts collectively indicate признаки (signs) of fictitious bankruptcy, as such conduct is incompatible with good faith behavior. Accordingly, the court evaluates not only whether the debtor is capable of performing obligations, but also how the debtor behaves in the context of indebtedness.

Approach of the Supreme Court: insolvency as a mandatory condition

In its decision dated 18 May 2023 in case No. 923/954/20, the Supreme Court articulated a key legal position: bankruptcy proceedings are permissible only where insolvency is duly established, i.e., where the debtor is unable to satisfy creditors’ claims due to insufficiency of assets. The absence of such a condition precludes the application of bankruptcy procedures and constitutes grounds for termination of the proceedings, thereby confirming the priority of substantive financial reality over the formal act of filing.

This position aligns with the logic of Article 9-1 of the Code and provides its practical judicial interpretation.

Legal consequences: procedural and proprietary dimensions

The establishment of fictitious bankruptcy entails both procedural and имущественные (proprietary) consequences. On the one hand, it leads to the termination of bankruptcy proceedings. On the other, it triggers the debtor’s obligation to compensate creditors for damages caused by the delay in fulfilling monetary obligations, as well as the imposition of administrative liability under Article 166-17 of the Code of Ukraine on Administrative Offenses. Thus, fictitious bankruptcy acquires the characteristics of a legal wrongdoing with independent имущественные consequences.

Conclusion

Judicial practice indicates that fictitious bankruptcy is not determined by formal признаки of filing, but rather through a comprehensive assessment of the debtor’s financial condition and conduct, reflecting a transition from a formalistic legal approach to a substantive analysis. In this context, legal strategy in bankruptcy cases must rely not only on formal compliance, but also on the ability to demonstrate the actual economic condition of the debtor and the good faith nature of its actions in relations with creditors.