Set-Off of Mutual Claims in Bankruptcy: The Limits of Permissibility

The Supreme Court's ruling of 14 April 2026 in case No. 903/25/25 (903/686/25) has become one of the most significant recent decisions concerning the avoidance of debtor transactions in insolvency proceedings. The Court effectively confirmed that even a lawful civil-law mechanism may be considered impermissible if its use contradicts the objectives of bankruptcy proceedings and disrupts the balance of creditors' interests.

Background of the Dispute

The debtor company, represented by its liquidator, challenged an agreement on the set-off of mutual homogeneous claims concluded at the end of 2023. As a result of the set-off, the parties' reciprocal obligations amounting to more than UAH 27 million were terminated. These obligations arose from agreements for the sale and purchase of corporate rights.

At the time the agreement was concluded, however, the debtor already had substantial outstanding liabilities to other creditors. Courts of all three instances found that the disputed transaction effectively resulted in the withdrawal of assets in favour of a related party and provided that party with an advantage over other creditors.

Why This Decision Matters

Article 601 of the Civil Code of Ukraine permits the termination of obligations through the set-off of mutual homogeneous claims. Traditionally, this mechanism has been viewed as a technical and relatively safe method of extinguishing reciprocal debts.

The Supreme Court, however, emphasized that the legality of a legal mechanism does not, by itself, eliminate the need to assess its consequences within insolvency proceedings. According to the Court, any transaction entered into by a debtor must be assessed not only for its formal compliance with the law but also in light of its economic substance, the good faith of the parties, and its impact on the ability to satisfy the claims of all creditors.

The Principle of Equality of Creditors Prevails

The decision reaffirms one of the fundamental principles of insolvency law — the principle of equality of creditors (par condicio creditorum). Where a debtor's assets are insufficient, and one creditor obtains satisfaction of its claims outside the statutory insolvency framework, this creates selective treatment of creditors and runs contrary to the very nature and objectives of bankruptcy proceedings.

Accordingly, a set-off arrangement may be regarded as an instrument of unfair redistribution of assets and may therefore be declared invalid.

Factors to Be Considered by Courts

The Supreme Court indicated that, when assessing whether a transaction is fraudulent, courts should pay particular attention to:

• the timing of the transaction;
• the existence of outstanding debts to other creditors;
• the insufficiency of the debtor's assets;
• whether the parties are related entities;
• the economic rationale of the transaction; and
• the transaction's consequences for the insolvency estate and the ability to satisfy creditors' claims.

The decisive criterion is not the legal form of the transaction but its actual economic effect.

Formal Validity Does Not Guarantee Protection

Particularly noteworthy is the Court's conclusion that even the actual performance of commercial transactions does not preclude them from being challenged in bankruptcy proceedings. In practice, parties often mistakenly assume that if a transaction has been fully performed, payments have been made, and documentation has been properly executed, the risk of avoidance is eliminated. The Supreme Court expressly rejected this approach.

If a transaction is used to withdraw assets, provide concealed satisfaction of claims, or create unjustified preferences for certain parties, it may be characterised as a fraudulent transaction irrespective of its formal compliance with civil-law requirements.

Practical Significance of the Decision

The ruling of 14 April 2026 substantially expands the tools available to insolvency practitioners and creditors in bankruptcy cases. Agreements on the set-off of mutual homogeneous claims can no longer be viewed merely as neutral technical mechanisms for terminating obligations. Instead, they are subject to comprehensive scrutiny with regard to good faith, economic purpose, and their impact on the rights of other creditors.

This legal position once again demonstrates that, in insolvency proceedings, priority is given not to the formal application of civil-law mechanisms but to achieving the principal objectives of the Bankruptcy Procedures Code of Ukraine: the fair and proportionate satisfaction of creditors' claims while preserving the principle of equality among creditors and, where possible, restoring the debtor's solvency.