Sanctions vs. Bankruptcy: Who Wins the Battle for a Debtor’s Assets?

Russia’s war against Ukraine has compelled the country to actively employ sanctions as a tool for protecting national security. At the same time, traditional bankruptcy and insolvency procedures continue to operate, aiming to ensure the fair distribution of assets among creditors. But what happens when these two legal regimes collide? Can a company or an individual undergo bankruptcy proceedings if its assets are frozen under sanctions? And ultimately, who receives the assets—the creditors or the state?

These questions are becoming increasingly important for Ukrainian businesses, insolvency practitioners, and courts alike.

Bankruptcy and Sanctions: Different Goals, the Same Assets

The Code of Bankruptcy Procedures and the Law of Ukraine “On Sanctions” pursue fundamentally different objectives. Bankruptcy law is built around the concept of collective satisfaction of creditors’ claims, restoration of a debtor’s solvency, or liquidation with the highest possible recovery for creditors. By contrast, sanctions legislation is designed to protect national security, safeguard the state’s economic interests, and counter threats posed by the aggressor state or individuals supporting its activities.

As a result, sanctions may include asset freezes, restrictions on the use or disposal of property, suspension of financial transactions, limitations on business activities, or even confiscation of assets in favor of the state. This is where the conflict arises: bankruptcy proceedings require active management of a debtor’s assets, while sanctions often make such management impossible.

Can Bankruptcy Proceedings Be Opened Against a Sanctioned Person?

At first glance, the answer appears straightforward: yes. The Code of Bankruptcy Procedures does not contain any provision expressly prohibiting the commencement of bankruptcy proceedings against a person subject to sanctions. The mere existence of sanctions is not listed among the grounds for refusing to open insolvency proceedings. In fact, sanctions themselves may be one of the causes of a debtor’s insolvency.

This approach is reflected in the position of the Commercial Cassation Court within the Supreme Court in case No. 926/5366-b/22 dated December 6, 2023. The Court essentially concluded that insolvency caused by sanctions cannot automatically deprive a person of access to bankruptcy procedures. However, opening a case is only the beginning. The most significant challenges emerge once the proceedings are already underway.

When Bankruptcy Becomes a Mere Formality

The core problem is that sanctions do not always prevent bankruptcy proceedings from being initiated, but they often deprive them of practical value. Imagine a company whose assets have been frozen and whose bank accounts are effectively blocked. Formally, the court opens bankruptcy proceedings, an insolvency practitioner assumes control, and creditors file their claims.

But what happens next? The company cannot sell its assets. Attracting investors becomes extremely difficult. Debt restructuring is virtually impossible. Obtaining new financing is equally problematic. Asset freezes undermine most of the tools on which rehabilitation and restructuring procedures are based.

As a result, the bankruptcy process continues to exist in legal terms but loses its economic purpose.

The Most Serious Conflict: When the State Takes the Assets

An even more complicated situation arises when sanctions take the form of confiscating assets for the benefit of the state. The Law of Ukraine “On Sanctions” expressly provides that arrests, pledges, other encumbrances, or even the inclusion of assets in bankruptcy proceedings do not prevent their confiscation. Once the relevant court decision becomes final, the assets are transferred to the State Property Fund, and the proceeds from their sale are directed to the state budget.

For creditors, this creates a particularly troubling outcome. They may participate in the bankruptcy process, incur legal and procedural costs, and still receive nothing if the debtor’s principal assets are ultimately confiscated under the sanctions regime. Secured creditors are especially vulnerable. Traditionally, collateral provides them with priority satisfaction of their claims. However, sanctions legislation explicitly states that even pledged assets may be confiscated by the state despite existing security interests.

Challenges for Insolvency Practitioners

The position of insolvency practitioners deserves special attention. On the one hand, the Bankruptcy Code requires them to inventory assets, form the bankruptcy estate, organize asset sales, and protect the interests of creditors. On the other hand, sanctions may prohibit virtually any transaction involving the same assets.

As a result, insolvency practitioners often find themselves caught between two legal frameworks, each imposing mandatory obligations. In such circumstances, the risk of violating the law or reaching a procedural deadlock becomes very real.

Individuals: Even More Complex Issues

The situation is no less complicated in personal insolvency cases. Formally, an individual subject to sanctions retains the right to apply for insolvency proceedings. However, if that person’s assets are frozen, implementing a restructuring plan or carrying out other rehabilitation measures becomes extremely difficult.

Moreover, sanctions imposed on individuals raise broader concerns regarding constitutional rights, access to justice, due process, and effective judicial review. These concerns have repeatedly been highlighted by the Ukrainian Bar Association and leading human rights organizations.

What Needs to Change?

At present, Ukrainian legislation provides no clear answer as to which legal regime should prevail when bankruptcy procedures conflict with sanctions measures. In practice, courts are forced to resolve such disputes on a case-by-case basis, creating uncertainty and inconsistency in judicial practice. The legislature should establish clear rules governing the interaction between the bankruptcy estate, sanctions-based asset freezes, confiscation of assets by the state, the rights of secured creditors, and the powers of insolvency practitioners.

Equally important is the creation of procedural mechanisms for coordination among commercial courts, the State Property Fund, the Ministry of Justice, insolvency practitioners, and authorities responsible for implementing sanctions policy. Only a comprehensive approach can prevent situations where bankruptcy proceedings formally exist but are incapable of achieving their intended purpose.

Conclusion

The conflict between bankruptcy law and sanctions legislation is one of the most complex—and often underestimated—legal challenges currently facing Ukraine. While sanctioned debtors may formally retain access to bankruptcy procedures, sanctions frequently deprive those procedures of any practical effectiveness. This creates a fundamental question: what should take precedence—the rights of creditors to collective and equitable recovery, or the state’s public interest in protecting national security?

Until lawmakers provide a definitive answer, Ukrainian courts will continue to search for a balance between these competing interests. The success of that balancing exercise will shape not only the effectiveness of bankruptcy proceedings but also the level of legal certainty available to businesses, investors, and creditors operating in Ukraine.