The Invalidity of a Fraudulent Transaction Is Not Enough to Recover Property

Recovering assets into the bankruptcy estate has traditionally been regarded as one of the principal mechanisms for protecting creditors in insolvency proceedings. For many years, disputes of this nature primarily focused on proving the invalidity of transactions through which debtors had transferred assets beyond the reach of creditors. However, the latest case law of the Supreme Court demonstrates that this is no longer sufficient.

Whereas the establishment of a fraudulent transaction once largely determined the prospects of recovering an asset, courts are now increasingly examining a different set of issues: whether the property left the owner's possession against its will, whether the ultimate acquirer acted in good faith, and whether interference with that person's property rights would be proportionate. In effect, the Supreme Court is gradually reshaping the very philosophy of resolving such disputes.

Fraudulent Transactions and Vindication Are No Longer Synonymous

A fraudulent transaction has long been an integral part of insolvency litigation. Although Ukrainian legislation does not expressly define this legal concept, judicial practice has developed clear criteria for identifying such transactions. These are situations in which a debtor formally acts within the framework of civil law, while the true purpose of the transaction is to place assets beyond the reach of creditors or otherwise frustrate the satisfaction of their claims.

Recent Supreme Court decisions, however, demonstrate that establishing these circumstances alone no longer automatically leads to the recovery of the property.

A landmark example is the Supreme Court's judgment of 22 May 2024 in case No. 924/408/21 (924/287/23).

In that decision, the Court drew a fundamental distinction between the invalidity of a transaction and the legal grounds for vindication under Article 388 of the Civil Code of Ukraine.

In other words, even if a transaction is declared invalid because of its fraudulent nature, this does not necessarily mean that the property left the owner's possession against his or her will.

Yet this very element is decisive for the application of vindication.

This marks a significant shift in legal reasoning. The invalidity of a transaction can no longer replace a separate legal analysis of whether the statutory requirements for recovering property are satisfied.

The Good-Faith Purchaser Has Become the Central Figure in the Dispute

Only a few years ago, judicial scrutiny focused primarily on the debtor and the debtor's immediate counterparty. Today, the situation has changed considerably. The courts increasingly concentrate on the legal position of the person who ultimately acquired the property.

The Supreme Court has expressly stated that where an acquirer had no connection with the debtor and neither knew nor should have known about the fraudulent nature of the earlier transaction, that person should not bear the consequences of someone else's dishonest conduct. In practical terms, this means that good faith has evolved from a secondary argument into an independent issue requiring proof. It is no longer sufficient for creditors to demonstrate that assets were transferred through a fraudulent scheme. They must also establish why the final purchaser should not benefit from the legal protection afforded to a bona fide owner.

As a result, courts now examine a much broader range of circumstances, including the purchaser's relationship with the debtor, knowledge of the asset's history, the conditions under which the acquisition took place, the commercial nature of the transaction, the purchase price, and any other facts that may indicate either good or bad faith.

The Principle of Proportionality Has Become an Additional Test for Vindication

Another notable development is the Supreme Court's increasing reliance on Article 1 of Protocol No. 1 to the ECHR. In its judgment of 29 May 2024 in case No. 910/5808/20, the Court acknowledged that protecting creditors' interests and preserving the bankruptcy estate constitute legitimate grounds for interfering with property rights.

At the same time, it emphasized that this objective does not automatically justify every interference with the rights of a good-faith purchaser. Instead, courts must determine whether ordering the recovery of property would impose an excessive or disproportionate burden on that individual. The principle of proportionality has therefore become an additional filter in vindication disputes.

Accordingly, courts no longer limit themselves to verifying the formal legal requirements for recovering property. They must also evaluate the broader factual context, including the duration of ownership, the nature of the asset, the timeliness of legal action, the economic consequences of recovery, and the balance between private and public interests.

What This Means for Insolvency Practice

For insolvency practitioners and creditors, this evolving case law significantly raises the standard of proof. Establishing that a transaction was fraudulent or invalid is no longer enough.

Claimants must also demonstrate that the legal requirements of Article 388 of the Civil Code are satisfied, rebut the good-faith status of the purchaser where appropriate, and justify why recovery of the asset would constitute a proportionate interference with property rights.

Equally important is the need for timely action. The longer an asset remains in the possession of a subsequent owner before legal proceedings are initiated, the more difficult it may become to demonstrate that its recovery satisfies the principle of proportionality. For investors and businesses, however, these developments provide greater legal certainty.

The Supreme Court has consistently demonstrated its willingness to protect parties who acquired property honestly and were not involved in schemes designed to strip debtors of their assets. This contributes to greater stability in commercial transactions and strengthens confidence in the security of property rights.

Conclusion

The latest decisions of the Supreme Court illustrate a gradual transformation in the legal approach to asset recovery within insolvency proceedings. Although fraudulent transactions remain an important element of these disputes, they no longer determine the outcome automatically. Success increasingly depends on establishing a broader set of legally significant circumstances: the manner in which the property left the owner's possession, the status of the good-faith purchaser, the statutory grounds for vindication, and whether interference with property rights satisfies the principle of proportionality.

In my view, this represents a more balanced approach. It does not weaken the protection afforded to creditors, but neither does it allow insolvency proceedings to become a mechanism for automatic interference with the property rights of individuals who played no role in the debtor's wrongful conduct. This trend is likely to shape the future development of Ukrainian insolvency litigation and the judicial practice governing the recovery of assets into the bankruptcy estate.