Joint Liability of a Director in Bankruptcy: How Creditor Harm Is Calculated

The issues of joint and subsidiary liability of directors in insolvency proceedings have long ceased to be niche. They directly determine whether creditors will receive real compensation and whether bankruptcy will function as a mechanism for fair loss allocation—or, conversely, as a tool that legitimizes the gap between debts and assets.

Recent judicial practice reveals a clear trend: the application of joint and subsidiary liability is effectively “tied” to the completion of the liquidation procedure. Put simply, even where a director’s violation appears evident, courts often deem it premature to determine the amount of liability until it becomes clear what portion of creditors’ claims remains unpaid after the liquidation estate has been realized.

This approach fuels debate across professional forums—from roundtables to conferences of insolvency practitioners. Yet it currently sets the framework: a director’s liability is not a “penalty” for the mere fact of a violation, but tort-based compensation for harm, which must be calculated and proven.

1. Director’s Liability: “For the Creditors” or “In Favor of the Debtor”?

One of the key ideas increasingly emphasized by courts is that claims for joint liability under Part 6 of Article 34 of the Bankruptcy Procedures Code of Ukraine (the KUzPB), as well as for subsidiary liability under Part 2 of Article 61 KUzPB, should not be viewed as a direct “creditor versus director” instrument.

By their legal nature, these mechanisms align with tort compensation (Part 1 of Article 1166 of the Civil Code of Ukraine). Accordingly, the logic is as follows:

• funds recovered from the director/management bodies must replenish the liquidation estate;
• creditors become the actual beneficiaries, but through an increase in the debtor’s asset pool;
• the insolvency practitioner acts on behalf of the debtor and protects the debtor’s interests, while creditors’ interests are realized indirectly—through fair distribution of the liquidation estate.

This is why practice has consolidated the thesis that creditors are not “creditors of the culpable person.” Their interest is derivative; the core subject of the dispute is the losses caused to the debtor and, consequently, to its creditors.

2. Why Courts Insist on Waiting for Liquidation: The Central Issue Is the Amount of Harm

A tort-based model requires mandatory proof of harm and its amount. This is precisely where the tension arises between creditors’ expectations and judicial logic.

Courts increasingly proceed from the following premises:

• it is incorrect to automatically equate joint liability with the total amount of creditors’ claims entered in the register;
• a director must be liable not for the entire debt, but for the portion that actually remained unpaid and constitutes the “negative consequence” of the unlawful conduct;
• if the liquidation estate proves sufficient for full settlement, there is no harm, and therefore no grounds for tort liability.

This explains a practical conclusion: applications to impose joint liability before the liquidation estate has been realized are often considered premature, because the court does not yet know the final deficit—if any.

3. Two “Offenses” in Part 6 of Article 34 KUzPB: What Exactly Is Prohibited

Part 6 of Article 34 KUzPB effectively contains two independent models of violation that may lead to joint liability of management bodies.

3.1. Preference of One Creditor to the Detriment of Others (Selective Payment)

The first model concerns situations where:

• the debtor is insolvent;
• the director satisfies the claims of one or several creditors;
• as a result, it becomes impossible to satisfy obligations to other creditors in full.

The legal idea is straightforward: in insolvency, a debtor may not “choose favorite creditors.” The purpose of bankruptcy is to preserve the estate, impose a moratorium, and distribute assets according to procedural rules.

Under this model, harm is measured not by the total debt, but by the extent to which the estate was unlawfully reduced, thereby creating an additional shortfall for other creditors.

3.2. Liabilities Exceed Assets and Failure to File for Bankruptcy

The second model arises when:

• the amount of due monetary obligations exceeds the value of assets;
• the debtor fails to file for bankruptcy within the statutory time limit;
• proceedings are opened upon a creditor’s application.

Here, the tort lies not only in inaction but also in the violation of a key preventive mechanism—the moratorium, which protects the estate and ensures creditor equality.

4. How Harm Is Calculated: Two Numerical Examples That Change the Perspective

To understand judicial reasoning, it is enough to look at how losses are calculated.

Example 1: Selective Payment to One Creditor

Debtor’s assets: UAH 1,000,000 Total creditor claims: UAH 1,100,000

If the debtor pays one creditor UAH 400,000, the remaining assets drop to UAH 600,000. Crucially, in a deficit scenario, distribution must be proportional. If, proportionally, that creditor should have received, say, UAH 363,000 but actually received UAH 400,000, then the overpayment of UAH 37,000 constitutes the additional harm to other creditors caused by the unlawful preference. Accordingly, the director’s liability in this model is not UAH 400,000 or UAH 1,100,000, but precisely UAH 37,000, which must be returned to the liquidation estate.

Example 2: Liabilities Exceed Assets

Assets: UAH 1,000,000 Due liabilities: UAH 1,100,000

Here, harm is measured by the difference: UAH 100,000. This deficit represents the uncovered portion of creditors’ claims and corresponds to the tort logic.

Again, this explains why the amount recorded in the creditors’ register cannot automatically become the amount of liability—otherwise an obviously unfair result may follow: imposing liability exceeding the actual harm, or even liability where no harm exists.

5. What Changes After the Repeal of the Commercial Code: “Persistent Insolvency” and a New Lens

Following the repeal of the Commercial Code of Ukraine as of 28 August 2025, practice faces another challenge: a number of KUzPB provisions that were previously muted by established approaches are moving to the foreground. In particular, for understanding concealment of bankruptcy, attention should be paid to the concept of persistent financial insolvency and situations where proceedings are opened on a creditor’s application.

Conclusion

Judicial practice in disputes over a director’s joint liability (Part 6 of Article 34 KUzPB) is moving toward a tort-based approach: liability only for harm, and only in its proven amount. This is why courts often “tie” the determination of liability to the completion of the liquidation procedure—when the actual difference between the total claims and the real liquidation estate becomes clear. For creditors, this means the need for careful procedural planning: not only to prove the director’s violation, but also to substantiate the amount of unpaid claims as harm.