Fraudulent Transactions in Bankruptcy Proceedings: The Boundaries of Good Faith

Bankruptcy proceedings in Ukrainian law have long evolved beyond a mere mechanism for distributing assets. Today, they serve as an instrument for restoring fairness among all participants, where the key factor is the debtor’s conduct during the period of financial distress. Whether the debtor acted honestly, attempted to preserve assets for creditor settlements, or, conversely, diverted them to affiliated parties—this is what courts now examine most closely.

For this reason, the mechanism for invalidating transactions has become one of the central tools in bankruptcy cases. The law allows an insolvency practitioner or a creditor to challenge transactions executed before or during the proceedings if such actions violate the principle of equal treatment of creditors or worsen the debtor’s financial position. Courts may invalidate transactions executed within three years prior to the opening of the bankruptcy case if they affected the debtor’s ability to satisfy monetary obligations or reduced the liquidation estate.

In modern judicial practice, particular attention is given to the so-called “suspect period.” This is the time when the debtor already knew or should have known about their insolvency but continued to carry out transactions that appeared legally correct on their face yet harmed creditors in substance. Transactions executed during this period are the ones most frequently deemed inconsistent with the principle of good faith, even if they do not formally violate any imperative norms.

In its landmark ruling of 7 September 2022 in case No. 910/16579/20, the Grand Chamber of the Supreme Court of Ukraine articulated a critical principle: transactions executed after a debtor’s obligation to a creditor has arisen must be assessed with a presumption of their fraudulent (fraudatory) nature. Put differently, any disposal of assets undertaken after the obligation has arisen is subject to heightened scrutiny, as such actions often aim to avoid enforcement. The Court emphasised that the legal order cannot ignore actions that formally comply with the law but in fact constitute an abuse of rights and are carried out to the detriment of creditors.

When analysing such transactions, courts examine not only the legal form but also the underlying relationships between the debtor and the counterparty. If the recipient of the asset is an affiliated party, the likelihood of a dishonest intention increases dramatically. Debtors often transfer assets to companies within the same group, maintaining de facto control over the property even after its “sale.” Such operations are scrutinised with particular care, and any lack of transparency or economic logic only reinforces suspicions of fraudulent intent.

Pricing is another crucial indicator. Undervalued, non-market, or inadequately substantiated prices are among the most common red flags. Even if the parties provide explanations, courts assess the real economic outcome: whether the transaction improved the debtor’s financial position or, conversely, stripped them of key assets and impaired the ability to satisfy creditor claims.

It is not uncommon for a transaction to appear flawless on paper while its economic content suggests the opposite. For this reason, courts closely analyse the movement of funds, related actions taken by the debtor, financial dynamics before and after the transaction, and the overall context of solvency. At the centre of this analysis lies a single question: was the transaction intended to achieve a legitimate economic result, or was its true purpose the avoidance of obligations?

However, to invalidate a transaction it is not enough merely to point out that it appears suspicious. The applicant must prove a causal link between the transaction and the deterioration of the creditor’s position—how exactly the transaction led to an inability to repay the debt or created preferential treatment for one creditor over others. If the insolvency practitioner or creditor can demonstrate the transaction’s impact on the debtor’s estate, courts generally rule in their favour.

The evolving practice of the Supreme Court, based on the principles of good faith and the presumption of fraudulent intent in critical periods, now provides clear and stringent guidelines for evaluating a debtor’s behaviour. Formal legality no longer protects a transaction from invalidation if its economic substance conflicts with creditor interests. This shift has significantly strengthened the effectiveness of challenges to manipulative transactions and deepened the overall analysis of the debtor’s financial conduct.

Conclusion

The mechanism for invalidating transactions in bankruptcy is not a formality—it is an effective tool for preserving the balance of interests between the debtor and creditors. Its successful application depends on the quality of evidence and the applicant’s ability to demonstrate the real economic effect of the disputed transaction. Logical presentation of facts, thorough financial analysis, and a clear demonstration of negative consequences for creditors are essential for a successful challenge in court.

As judicial practice continues to evolve, good faith is becoming the central criterion for assessing a debtor’s behaviour, and any actions taken during the suspect period require heightened scrutiny and comprehensive review.