Fraudulent Transactions in Bankruptcy: How Court Tackles Artificial Debts

Selling assets before bankruptcy, assigning a claim without consideration, or acquiring questionable assets while incurring debt to a related party may all take the form of legally valid transactions. However, where the true purpose of such arrangements is to prevent creditors from recovering what they are owed, a court may find them to be fraudulent transactions. Ukrainian Supreme Court case law has developed approaches not only to challenging such transactions but also to protecting the bankruptcy estate against subsequent transfers of assets.

When a Formally Lawful Contract Becomes a Means of Evading Debt

A fraudulent transaction, referred to in Ukrainian legal practice as a fraudatory transaction, is a transaction entered into by a debtor to the detriment of creditors through the misuse of private-law mechanisms to avoid fulfilling obligations. Its danger lies in the fact that, on the surface, the transaction may be indistinguishable from ordinary commercial activity: the parties sign an agreement, prepare documentation, transfer property, or acknowledge a debt.

Yet legal form does not necessarily establish the commercial good faith of the parties.

In its case law, the Supreme Court of Ukraine looks beyond a contract's formal compliance with statutory requirements. The Court examines when the transaction took place, the debtor's financial position at the time, whether obligations to other creditors remained outstanding, the identity of the counterparty, whether the agreed price reflected market value, and whether payment was actually made.

None of these factors necessarily establishes fraudulent intent on its own. What matters is their combined evidential weight in identifying the transaction's genuine economic purpose and its consequences for creditors.

Transferring Assets Before Bankruptcy: Why the Expiry of the Suspect Period May Not Provide Protection

In case No. 904/7905/16, considered by the Bankruptcy Chamber of the Commercial Cassation Court within the Supreme Court on 2 June 2021, the dispute concerned an agreement assigning a claim without consideration. The debtor transferred a valuable contractual claim to a third party that had not even been its contractual counterparty. At the time of the assignment, obligations arising from a suretyship arrangement already existed. The transfer reduced the debtor's assets and, consequently, the pool of property available to satisfy creditors' claims.

The liquidator challenged the agreement in the bankruptcy proceedings.

A distinctive feature of the case was the timing of the transaction. The agreement had been executed outside the statutory suspect period under the applicable bankruptcy legislation, while the underlying legal relationships arose before the Ukrainian Code on Bankruptcy Procedures entered into force.

The lower courts had applied, among other provisions, Article 42 of the Code. The Supreme Court held that this approach was incorrect: the Code could not be applied retroactively to legal relationships that had arisen before it became effective.

Nevertheless, this did not place the transaction beyond judicial scrutiny.

The Bankruptcy Chamber emphasised that a contract cannot be used as an instrument for evading debt repayment or compliance with a court judgment. Even where the specific avoidance provisions of bankruptcy legislation are inapplicable, a transaction may be invalidated under the general principles of Ukrainian civil law and the prohibition on abuse of rights.

The Supreme Court also highlighted the absence of an apparent economic justification for assigning a valuable claim without consideration. Where a company has outstanding obligations to creditors, transferring an asset without receiving anything in return requires a convincing explanation.

Ultimately, the Supreme Court agreed with the finding that the agreement was fictitious and bore the characteristics of a fraudulent transaction, while amending the reasoning of the lower courts' decisions.

The case illustrates a fundamental limit on contractual freedom: an asset owner may dispose of its property, but it cannot exercise that right for the deliberate purpose of depriving creditors of the opportunity to recover their debts.

The “Friendly” Creditor: How Artificial Debt Can Shift the Balance of Power in Bankruptcy

Asset stripping is not the only way to reduce creditors' prospects of recovery. In some cases, the debtor formally retains its property but creates new obligations to a party with an interest in the outcome of the bankruptcy proceedings.

Such an arrangement was examined in case No. 925/1248/21 (925/111/22), involving a securities purchase agreement.

According to the facts established by the courts, the debtor acquired securities even though trading in such instruments was not among its principal business activities. The acquisition offered no apparent commercial benefit but resulted in increased indebtedness to another creditor.

Under ordinary commercial circumstances, purchasing securities is not inherently unlawful. However, where the purchaser already has outstanding obligations to creditors, the economic rationale for such an investment becomes particularly significant.

The Supreme Court explained that a fraudulent transaction may involve not only the transfer of assets but also the artificial accumulation of liabilities owed to a so-called “friendly” creditor.

The consequences can extend well beyond the parties to the agreement.

If the newly created debt is admitted to the register of creditors' claims, it may affect how available funds are distributed among creditors. Furthermore, the amount of admitted claims determines a creditor's influence within the bankruptcy proceedings, including its voting power at creditors' meetings and on the creditors' committee.

Artificially created debt can therefore both reduce the recovery available to independent creditors and alter the balance of decision-making power in the bankruptcy process.

The Supreme Court upheld the appellate court's conclusion that the securities purchase agreement was invalid. The practical significance of this position is that investigating suspicious transactions should not be limited to tracing assets transferred out of the debtor's ownership. It is equally important to examine the origin of newly incurred liabilities, the commercial rationale for agreements, relationships between counterparties, and the effect of those obligations on other creditors' rights.

However, entering into a contract with a related party does not automatically render it invalid. The transaction's actual purpose, the circumstances in which it was concluded, and its consequences for creditors remain matters requiring proof.

Property Resold to a Third Party: Can It Be Recovered for the Bankruptcy Estate?

Even a successful challenge to a fraudulent transaction does not always bring the dispute to an end.

Following the initial transfer, an asset may pass through several owners. The liquidator then faces a more complex question: can the property be recovered from a subsequent purchaser who was not a party to the invalid agreement. The Supreme Court addressed precisely this situation in its judgment of 28 May 2026 in case No. 920/214/23 (920/1185/25).

The debtor had transferred a vehicle under an agreement subsequently declared invalid as a fraudulent transaction. The vehicle later came into the ownership of another individual who acquired it under a contract for consideration.

The liquidator sought not only to invalidate the original agreement but also to recover the vehicle for the debtor's estate.

The first-instance and appellate courts refused the recovery claim. They considered the subsequent purchaser to be a good-faith acquirer, noting that the vehicle had been purchased under a transaction involving payment.

However, the Supreme Court identified several matters that had not been properly examined.

First, the lower courts had failed to establish whether the contractual purchase price corresponded to the vehicle's actual market value. A substantially undervalued price, without a reasonable explanation, could indicate circumstances that should have caused the purchaser to question the legitimacy of the transaction.

Second, the courts had not adequately verified whether payment had actually been made. They relied on a written receipt without properly investigating the movement of funds, the purchaser's financial capacity, or the origin of the money.

The Supreme Court stressed that the mere fact that a contract involves consideration does not, by itself, establish the purchaser's good faith.

A buyer acquiring property under objectively suspicious circumstances is expected to exercise reasonable diligence. Relevant factors may include the price, the history of previous ownership transfers, information about the seller, and other facts that could reveal concerns about the acquisition.

The Supreme Court partially upheld the liquidator's cassation appeal, set aside the lower courts' decisions insofar as they had rejected the claim to recover the vehicle, and remitted that part of the case for a new hearing.

What These Decisions Mean for Asset Protection and Creditors' Rights

The cases demonstrate that the risks associated with fraudulent transactions extend beyond the obvious example of selling property at an undervalue shortly before bankruptcy.

Bad-faith conduct may take the form of transferring valuable claims without consideration, creating commercially unjustified liabilities, or repeatedly reselling assets in ways that complicate their recovery.

For creditors, these judicial positions provide additional avenues for protecting their interests. Transactions entered into within the statutory suspect period are not the only ones potentially open to challenge. Other arrangements may also be invalidated where appropriate grounds exist under general civil law.

Effective protection, however, requires substantial evidential work: examining the debtor's financial position, the economic purpose of transactions, relationships between counterparties, whether payment was genuine, and the subsequent movement of assets.

For businesses, the Supreme Court's conclusions highlight the need to assess legal risks before entering into agreements. The existence of outstanding debt does not deprive a company of its right to conduct business, but transactions that reduce its solvency without a credible commercial justification may be challenged in court.

Particular scrutiny should be given to related-party agreements, transfers of assets without consideration, investments outside the company's usual business activities, and arrangements creating substantial new liabilities without a genuine commercial benefit.

Purchasers of assets also face distinct risks. Where property has passed through a questionable chain of transfers, a sale agreement and a receipt acknowledging payment may not be sufficient to establish that the acquisition was made in good faith.

The Supreme Court's case law consistently demonstrates that the legal form of an agreement cannot protect transactions whose real purpose is to prejudice creditors. Equally, an allegation that a transaction is fraudulent cannot rest on speculation alone.

In bankruptcy proceedings, what matters is not merely who formally owns an asset or to whom a debt is owed, but also how, when, and for what purpose those legal relationships arose.