Subsidiary Liability of Shareholders: What the Latest Case Law Shows

Civil legislation is based on a fundamental principle: a legal entity is liable for its own obligations, and its participants do not bear the company’s debts. Exceptions are possible only when expressly provided by law or by the company’s founding documents. At first glance, this rule acts as a reliable shield separating business assets from the personal assets of its owners. However, in bankruptcy proceedings this protection can disappear — and this is where the most important developments begin.

When the debtor’s liquidation estate has been formed and sold but remains insufficient to satisfy all creditors’ claims, the difference between available assets and outstanding debts may be imposed on the company’s founders and directors. This is subsidiary liability — one of the most powerful instruments for protecting creditors, enabling them to recover losses from those whose actions (or inaction) drove the enterprise into insolvency.

Modern case law clearly demonstrates what commercial courts focus on: not the formal appearance of contracts, not the superficial “correctness” of accounting records, but the true substance, good faith, and economic logic of the debtor’s actions. Two recent appellate rulings are vivid examples of how courts assess the conduct of founders and management attempting to evade liability.

In case No. 916/3130/21 (916/3786/24), reviewed by the South-Western Commercial Court of Appeal on 5 November 2025, a company founder already held subsidiarily liable attempted to shield his assets by “gifting” a land plot and two apartments to his wife and daughter. This transfer occurred after the liquidator had filed a motion on subsidiary liability. The court paid particular attention to the nature of these transactions. Gratuitous transfers between family members at a time when the debtor is aware of a real risk of enforcement are not merely suspicious — they effectively deprive creditors of any chance of recovery.

The court highlighted the absence of any economic purpose in such donations: the family continues to use the property even after the transfer, meaning the transaction is not a transfer but an act of concealment. The founder’s argument that he owned other assets — corporate rights or trademarks — failed because he provided no evidence of their value. The court stressed that the mere existence of other assets does not affect the invalidity of a specific transaction if it is clearly aimed at evading obligations.

Another significant aspect of subsidiary liability is illustrated by the ruling of the Northern Commercial Court of Appeal dated 24 September 2025 in case No. 911/2999/21 (911/1069/24). The dispute centered on agreements for non-repayable financial assistance executed back in 2016. At that time, LLC “Finagro” already had substantial tax debts, failed to file financial reports, and concealed documents. Nevertheless, its management transferred more than UAH 663,000 to another company as “assistance,” without any rational connection to ordinary business practice or the company’s financial state. The court clearly distinguished between regular commercial transactions and actions aimed at asset stripping. Even a contract that is formally compliant with all legal requirements cannot survive scrutiny if its economic essence demonstrates an abuse of rights. The court conclusively established that transactions executed while the company was effectively in crisis, and while it concealed its true state, cannot be deemed bona fide.

Importantly, the court restored the limitation period even though the transactions occurred eight years earlier. The decisive factor was the conduct of the company’s management: documents were hidden, not transferred to the liquidator, and no financial reports had been filed, making the discovery of such transactions objectively impossible. In other words, the actions of company officials themselves became the legal grounds for restoring the limitation period — another sign that abusing procedural rights is becoming increasingly ineffective.

The overall conclusion from these cases is clear: in matters of subsidiary liability, the key factor is the debtor’s behavior and intent. Courts assess not only the legal form of transactions but the entire context: the company's financial condition, the chronology of actions, the timing of specific operations, the existence of conflicts with creditors, and the overall economic logic of the contracts. Any attempt to remove assets from enforcement or complicate the liquidator’s work is treated as an abuse of rights and grounds for invalidating the transaction.