Settlement Agreements in Bankruptcy Proceedings: New Opportunities and Old Risks

For a long time, settlement agreements were effectively outside the scope of bankruptcy proceedings governed by the Code of Ukraine on Bankruptcy Procedures (CUBP). However, the situation changed dramatically following the entry into force of Law No. 2971-IX of 20 March 2023.

Today, Paragraph 12 of Part 1 of Article 90 of the CUBP expressly provides that the conclusion of a settlement agreement between the debtor and creditors in accordance with Article 192 of the Commercial Procedural Code of Ukraine constitutes an independent ground for closing bankruptcy proceedings. Moreover, pursuant to Part 2 of Article 90 of the CUBP, such closure is possible at any stage of the proceedings, including after the debtor has been declared bankrupt.

In essence, the legislator has restored an important instrument that allows businesses to preserve their operations and resolve conflicts between debtors and creditors without completing the liquidation process.

Settlement Agreements Have Returned to Bankruptcy Proceedings

In practice, this means that the parties may agree on:

• a deferral of obligations;
• an installment payment schedule;
• a partial debt write-off;
• an alternative mechanism for satisfying creditors' claims; or
• the continuation of business operations without selling all of the debtor's assets.

This mechanism has become particularly relevant during wartime, when many enterprises are facing temporary financial difficulties rather than structural insolvency.

The Main Problem: The CUBP Lacks Detailed Regulation

Although settlement agreements have been reintroduced into the Bankruptcy Code, the legislator has not established a comprehensive mechanism governing their implementation.

The CUBP does not regulate:

• the consequences of non-performance of a settlement agreement;
• the procedure for termination of such an agreement;
• the grounds for declaring it invalid;
• the status of unfiled creditors' claims; or
• the procedure for reopening bankruptcy proceedings if the agreement is breached.

For proceedings initiated under the former Law of Ukraine "On Restoring Debtor Solvency or Declaring a Debtor Bankrupt," these issues were governed by Articles 79–82 of that Law. Under the current legislative framework, however, such regulation is largely absent. As a result, the content of the settlement agreement itself has become critically important.

The Supreme Court Has Changed Its Approach

A landmark example is the Supreme Court's judgment of 5 March 2026 in Case No. 902/1352/23.

The Court effectively established a new standard for reviewing settlement agreements in bankruptcy proceedings. Courts are now required to assess not only the formal existence of signatures but also:

• the good faith of the parties;
• the existence of corporate and other claims known to the court;
• the proportionality between the debtor's assets and its liabilities;
• the realistic prospects of implementing the agreement; and
• the absence of any circumvention of third-party rights.

In other words, the Supreme Court has moved beyond a purely procedural approach and now treats settlement agreements as economic instruments that must ensure a fair balance of interests among all stakeholders.

Case Law Demonstrates That Formal Approval Is Not Enough

The Supreme Court had previously emphasized the importance of maintaining an equitable balance among creditors. For example, in its judgment of 10 April 2018 in Case No. 5015/2298/11, the Court refused to approve a settlement agreement that provided for the write-off of approximately 98% of the debt without proper evidence of satisfaction of first- and second-priority creditors' claims. The Court expressly stated that a settlement agreement simultaneously possesses the characteristics of both a civil-law transaction and a special judicial procedure.

Similarly, in its judgment of 9 July 2020 in Case No. 910/26972/14, the Supreme Court held that debt forgiveness cannot be presumed and requires the clear expression of intent by each creditor whose rights are affected by the terms of the agreement.

What Should Be Included in a Settlement Agreement Today?

Given the existing legislative gaps, the parties should address in detail:

• the procedure and timetable for debt repayment;
• the conditions for debt forgiveness;
• the status of security interests and collateral;
• the treatment of current and unfiled claims;
• the allocation of legal costs;
• the remuneration of the insolvency practitioner;
• the consequences of default; and
• mechanisms for monitoring compliance with the agreement.

From a practical standpoint, parties should also consider incorporating additional safeguards, including:

• pledges over assets;
• third-party guarantees;
• escrow arrangements;
• an acceleration clause, allowing creditors to demand immediate repayment of the entire debt upon default; and
• information covenants granting creditors the right to monitor the debtor's financial condition.

Conclusions

The return of settlement agreements to the Bankruptcy Code is undoubtedly a positive development. This mechanism may serve as an effective tool for financial restructuring and may help preserve businesses that still possess economic potential. At the same time, the current legal framework remains fragmented, shifting a significant portion of the risks to the parties themselves.

The recent case law of the Supreme Court demonstrates a clear trend toward a more thorough assessment of the parties' good faith and the economic substance of settlement agreements. Consequently, a settlement agreement in bankruptcy proceedings should no longer be viewed merely as a means of closing a case. It is a sophisticated legal mechanism for debt restructuring that requires careful legal drafting and professional support.