Fraudulent Transactions in Insolvency Proceedings: Supreme Court

The Supreme Court of Ukraine continues to develop its approach to identifying and qualifying fraudulent transactions (“fraudatorni pravochyny”) within insolvency proceedings. Such transactions are declared invalid when a debtor enters into them to avoid meeting obligations or to grant advantages to “friendly” creditors.

Under Article 42 of the Code of Ukraine on Bankruptcy Procedures (CUIP), a commercial court may invalidate transactions concluded by the debtor within three years before the case was opened if these actions infringe upon creditors’ rights — for example, when the debtor gratuitously transfers assets, contracts with an affiliated party, or assumes obligations that directly led to insolvency.

Key Conclusions from the Grand Chamber and the Commercial Cassation Court

In its ruling of 7 September 2022 in case No. 910/16579/20, the Grand Chamber emphasized that a fraudulent transaction is one concluded to the detriment of creditors — even when it appears to be a legitimate, compensated contract. The Court stated that the parties’ conduct must comply with the principle of good faith, and any actions aimed at asset withdrawal or granting selective advantages contradict the core values of civil law.

A similar position was reaffirmed by the Supreme Court in its decision of 18 December 2024 (case No. 916/379/23), noting that the use of civil-law instruments to harm other participants in legal relations constitutes an abuse of rights and is a valid ground for declaring such agreements void

Typical Situations Where Transactions Are Deemed Fraudulent

1. Gratuitous Assignment of Claims. The Court annulled an agreement concluded during the “suspect period” — three months before insolvency — between affiliated parties, under which the debtor transferred claims without payment. The Court viewed this as a deliberate reduction of assets and a breach of good faith.
2. Debtor’s Waiver of Its Own Claims. In the decision of 16 February 2023 (case No. 903/877/20), the Supreme Court held that a debtor’s waiver of the right to collect debt, inflation charges, or interest constitutes a fraudulent act, as it reduces the liquidation mass and infringes upon creditors’ collective interests.
3. Artificial Increase of Liabilities. The Commercial Cassation Court in its 1 August 2024 ruling (case No. 922/2154/22) found that contracts for fictitious services or transfers of non-performing receivables are methods of creating preferential conditions for affiliated creditors, thus breaching the principle of pari passu among creditors.
4. Sale of Assets Below Market Value. In case No. 927/531/18 (ruling of 15 July 2021), the Court declared void a purchase agreement concluded less than a year before the insolvency proceedings, as the asset was sold at a significantly undervalued price, which harmed creditors’ interests.

The Legal Nature of Fraudulent Transactions

Unlike fictitious transactions, fraudulent ones are real and executed, but with a concealed wrongful purpose. The Court highlights that the defining element of such transactions is abuse of rights — when a debtor deliberately disposes of assets to reduce the bankruptcy estate and infringe upon creditors’ rights.

Conclusion

The Supreme Court’s practice draws a clear line between the legitimate exercise of property rights and the abuse of such rights. Any actions by a debtor that reduce assets or grant selective advantages to certain creditors may be deemed fraudulent. For lawyers and insolvency practitioners, this underlines the need for meticulous analysis of all transactions concluded during the “suspect period” and active application of Article 42 of the Bankruptcy Code to safeguard creditors’ interests.