Fraudulent Transactions: 5 Mistakes Creditors Make

In disputes involving fraudulent transactions, the greatest risk for a creditor does not always lie in the difficulty of proving the debtor's bad faith. Even if a court establishes that property was transferred to the detriment of creditors, this will not necessarily result in its return to the bankruptcy estate. The legal grounds for challenging the transaction, the actual movement of assets, the status of the acquirer, and the choice of judicial remedy are decisive. These issues increasingly determine the outcome of disputes in bankruptcy proceedings.

Mistake One: Challenging a Contract Without Defining the Desired Outcome for Creditors

In bankruptcy practice, declaring a contract invalid is often treated as an end in itself. However, what matters to creditors is not merely the formal invalidation of a transaction, but the restoration of the debtor's financial position so that their claims can be satisfied. This distinction is fundamental.

If a debtor enters into a contract that merely creates an unjustified obligation, but no money or property has yet been transferred, declaring the contract invalid may be sufficient to eliminate its legal consequences.

The situation is different when the contract has already been performed: real estate has been transferred, funds have been paid, or a receivable has been assigned to a third party. In such circumstances, a judgment declaring the contract invalid does not, by itself, recover the assets.

In its judgment of 22 May 2024 in Case No. 924/408/21 (924/287/23), the Supreme Court of Ukraine distinguished between these situations. The Court emphasized the need to combine challenges to performed fraudulent transactions with legal mechanisms capable of genuinely restoring the debtor's financial position.

Therefore, before initiating proceedings, it is necessary to determine the specific economic outcome the claim is intended to achieve: the return of property, recovery of its value, elimination of an unjustified obligation, or another means of restoring the infringed right.

Mistake Two: Assuming That Every Sale to a Related Party Is Automatically Invalid

The sale of company assets to shareholders, executives, or affiliated businesses naturally attracts creditors' attention. However, the mere existence of a corporate relationship between the parties does not, without further analysis, justify declaring every such contract invalid.

Proper legal qualification requires distinguishing between the general civil-law grounds for challenging transactions and the special grounds provided by Article 42 of the Code of Ukraine on Bankruptcy Procedures.

Part One of this Article links the invalidation of a transaction to an infringement of the rights of the debtor or creditors, provided that the statutory conditions are met.

Part Two, by contrast, establishes independent special grounds, including the conclusion of a contract with an interested party. For these grounds, the law does not require proof of an infringement of rights in the same manner as under Part One.

The Supreme Court confirmed this distinction in its judgment of 11 December 2025 in Case No. 917/503/24 (917/713/25), which concerned a challenge to a contract for the sale of the debtor's property. For creditors, this means that choosing the wrong legal grounds may significantly complicate the evidentiary process. At the same time, applying a special statutory provision requires establishing all its conditions, including the relevant time limits and the counterparty's legal status.

Mistake Three: Alleging That a Contract Is Suspicious Without Examining the Financial Context

A transaction cannot be classified as fraudulent solely because it was concluded shortly before bankruptcy. An illustrative example is the judgment of the Bankruptcy Chamber of the Commercial Cassation Court within the Supreme Court of Ukraine, dated 2 June 2021, in Case No. 904/7905/16.

The Supreme Court identified a combination of circumstances that may indicate that a contract was concluded to the detriment of creditors: the timing of the transaction, the relationship between the parties, the price of the property, and whether payment was actually made.

However, a persuasive legal argument cannot be built by considering these indicators in isolation. For example, selling real estate below market value may have different economic explanations depending on its condition, existing encumbrances, the urgency of the sale, and the company's financial circumstances. It is therefore necessary to examine not only the contract and its price, but also financial statements, the structure of assets and liabilities, cash flows, outstanding creditor claims, and changes in solvency following the transaction.

Comparing these factors makes it possible to assess whether the transaction served a genuine business purpose or instead impaired the debtor's ability to satisfy creditors' claims.

Mistake Four: Failing to Establish Who Owns the Property When the Claim Is Filed

The most complex situations arise when an asset has been resold several times after its initial transfer. In such cases, it is necessary to distinguish between the bad faith of the original contracting parties and the good faith of the subsequent acquirer.

In Case No. 924/408/21 (924/287/23), the Supreme Court observed that the transfer of property under a fraudulent transaction, despite the debtor's improper purpose, constitutes a deliberate expression of the owner's will.

Accordingly, such a transfer cannot automatically be treated as property leaving the owner's possession against their will for the purposes of Article 388 of the Civil Code of Ukraine.

This distinction directly affects the possibility of recovering property from a good-faith acquirer. Where an asset has passed to a person who acquired it in good faith, recovery will depend on the conditions established by law. A finding that an earlier contract was fraudulent does not automatically remove the protection afforded to a good-faith acquirer.

In these circumstances, the creditor or liquidator must assess alternative remedies for restoring the debtor's financial position, including a claim against the appropriate defendant for compensation equivalent to the value of the transferred property.

Mistake Five: Focusing Exclusively on Assets While Ignoring Liabilities

A debtor's financial position may deteriorate not only because property has been transferred away. The creation of liabilities without a genuine economic basis can be equally damaging.

For example, a company approaching insolvency enters into a consultancy agreement with an affiliated entity. Service completion certificates and a substantial payable are formally recorded, even though the actual provision of services is not supported by sufficient evidence. In bankruptcy proceedings, such liabilities may affect not only the distribution of funds but also the balance of voting power among creditors.

Assessing these transactions requires examining whether the contract was actually performed, its economic rationale, the availability of primary accounting documents, the actual results of the services, and the relationships between the parties.

Importantly, the mere fact that a contract was concluded with an affiliated company, or that it was commercially unprofitable, does not establish that the services were fictitious. The decisive issue remains the proper determination of the underlying facts.

Accordingly, the analysis of suspicious transactions must cover both sides of the debtor's balance sheet: assets that have been transferred and liabilities that have been created.

Litigation Strategy Should Begin With an Assessment of Whether the Judgment Can Be Enforced

Challenging transactions in bankruptcy proceedings requires not only accurate legal qualification but also a preliminary assessment of whether the future judgment can produce a meaningful result. Before filing a claim, it is necessary to establish the location of the property, its current owner, the nature of subsequent transfers, the possibility of recovering the asset, and the financial position of those against whom claims may be brought.

It is equally important to determine whether the chosen remedy will require additional litigation. If a favourable judgment merely creates the conditions for another lengthy legal process, the effectiveness of that strategy is questionable. Time is particularly valuable in bankruptcy proceedings: delays in recovering assets reduce the prospects of satisfying creditors' claims and increase the costs of the proceedings.

An effective strategy must therefore combine an analysis of the transaction, evidence of its legal defects, and the selection of a mechanism capable of genuinely restoring the debtor's financial position.

Key conclusion: the success of a challenge to a fraudulent transaction is determined not by the number of indicators of bad faith established, but by whether the chosen remedy effectively restores creditors' infringed rights.