The State Owns the Debtor: What This Changes for Creditors

If a company fails to meet its financial obligations and conventional debt recovery measures prove ineffective, a creditor may consider bankruptcy proceedings as the next instrument for recovering the debt. However, where the debtor is a state-owned enterprise or a company in which the State holds more than 50% of the shares or equity interests, the standard logic of bankruptcy proceedings changes considerably.

The existence of a debt, and even substantial assets owned or used by such an enterprise, does not necessarily mean that a creditor will be able to satisfy its claims through their sale. The debtor’s legal status, the origin and legal regime of its assets, the position of the state property management authority, possible privatisation procedures and, during martial law, special statutory restrictions all have to be taken into account.

Therefore, before filing a bankruptcy petition against a state-controlled debtor, a creditor should first answer the key question: what economic result can the bankruptcy proceedings realistically produce?

State Ownership Changes the Bankruptcy Rules

The specific rules governing the bankruptcy of state-owned enterprises and companies in which the State holds more than 50% of the shares or equity interests are established by Article 96 of the Code of Ukraine on Bankruptcy Procedures.

This is not a separate type of bankruptcy proceeding. The general mechanisms of the Bankruptcy Code apply to such debtors, but they are supplemented by special rules concerning state participation, rehabilitation, management and disposal of property, and the sale of assets.

Accordingly, the first step for a creditor is to establish the exact legal status of the debtor and its ownership structure. The company’s name or the mere presence of the State among its shareholders is not sufficient. At the same time, the special regime under Article 96 cannot automatically be extended to municipal enterprises: part ten of this Article expressly excludes enterprises owned by territorial communities and the Autonomous Republic of Crimea from its scope.

This distinction should be made before proceedings are initiated, since the debtor’s status will affect the creditor’s entire strategy.

Assets on the Balance Sheet Do Not Necessarily Mean They Can Be Used to Repay Debts

One of the most dangerous mistakes when assessing the prospects of bankruptcy is to rely exclusively on the company’s balance sheet. For example, a creditor may see that the debtor operates real estate, equipment, production facilities or other valuable assets. At first glance, their value may appear sufficient to cover the outstanding debt. In bankruptcy proceedings, however, what matters is the debtor’s legal title to the property, rather than its physical possession or inclusion in the company’s accounting records.

Under Arti/ 62 of the Code on Bankruptcy, the liquidation estate generally includes assets owned by the bankrupt entity or held by it under the right of economic management. At the same time, individually identified property held by the debtor under other proprietary rights is not included in the liquidation estate. Property in respect of which the debtor is merely a user, balance-sheet holder or custodian must be returned to its owner. An even more important rule applies to state property which, during privatisation or corporatisation, was not transferred to the company’s authorised capital but remained on its balance sheet. Such property is also excluded from the liquidation estate.

What Does This Mean for the Creditor?

Before initiating bankruptcy proceedings, it is not enough to establish that the debtor “has a factory”, “owns buildings” or “uses expensive equipment”.

It is necessary to determine:

• who legally owns the principal assets;
• on what legal basis the debtor holds them;
• whether they were transferred to the company’s authorised capital;
• whether special restrictions apply to their disposal;
• which assets can actually form part of the liquidation estate.

Such an assessment may radically change the economic outlook of the case. In April 2026, the Commercial Cassation Court within the Supreme Court, in case No. 907/551/14 (907/268/22), also addressed the distinction between assets that may be included in the liquidation estate and property in respect of which the bankrupt entity is merely a user, balance-sheet holder or custodian. The Court separately referred to the rules governing state property that had not been transferred to a company’s authorised capital during privatisation or corporatisation.

The State Remains Involved in the Proceedings

Another important distinction concerns the role of the authority authorised to manage state property. The court involves representatives of this authority in the bankruptcy case, while the authority itself may participate in creditors’ meetings and meetings of the creditors’ committee with an advisory vote. The opening of bankruptcy proceedings upon the debtor’s application does not, in itself, terminate the authority’s powers to manage the relevant state-owned asset. The State’s role becomes particularly significant during rehabilitation proceedings.

A rehabilitation plan for a state-owned enterprise or a company with a state share exceeding 50% must be submitted to creditors only after it has been approved by the authority authorised to manage state property. During rehabilitation, real estate belonging to such a debtor may be disposed of only where this is provided for in the rehabilitation plan. Creditors therefore cannot view the proceedings exclusively as a relationship between themselves, the debtor and the insolvency practitioner.

Martial Law May Completely Block the Bankruptcy Route

Before analysing the debtor’s assets, a creditor should determine whether bankruptcy proceedings against the particular company can be opened at all. During martial law and for two years following its termination or cancellation, a special restriction applies to companies that simultaneously meet three criteria: they are critical infrastructure operators; their shares, equity interests or units were compulsorily transferred during martial law; and the State directly or indirectly owns more than 50% of their corporate rights. Where all these conditions are met, bankruptcy proceedings cannot be opened. If proceedings have already been initiated, they must be terminated at any stage, including after the debtor has been declared bankrupt.

In its judgment of 11 November 2025 in case No. 917/814/16, the Supreme Court emphasised the mandatory nature of these provisions. Where the statutory conditions are satisfied, the court does not have discretion to determine whether continuing the proceedings would be appropriate: the law provides grounds for their termination. For a creditor, this means that the debtor’s special legal status should be analysed before resources are spent preparing and filing a bankruptcy petition.

How Is the Property of a State-Owned Bankrupt Entity Sold?

Even where liquidation is legally possible and the debtor has assets that may be sold, special rules apply to their disposal. The property of state-owned enterprises and companies with a state share exceeding 50% must first be offered for sale as a single property complex. Such a complex may include land plots, buildings, structures, equipment, inventory, rights to trademarks and other assets. Only if the second repeated auction for the sale of the single property complex ends without a successful bidder may the assets subsequently be sold as separate lots. In addition, the terms of sale must be agreed by the insolvency practitioner with the authority authorised to manage state property. For creditors, this means that converting the debtor’s assets into funds available for distribution may be more complicated and time-consuming than in an ordinary liquidation procedure.

Bankruptcy May Intersect With Privatisation

Another important feature is the interaction between two procedures pursuing different objectives: privatisation of a state-owned asset and satisfaction of creditors’ claims through bankruptcy. Article 96 of the Code on Bankruptcy expressly provides for circumstances in which, following an unsuccessful privatisation auction, the state privatisation authority may, where the grounds stipulated by the Code exist, terminate the privatisation procedure and apply to the commercial court for the opening of bankruptcy proceedings. A creditor of a state-owned enterprise should therefore monitor not only court and enforcement proceedings involving the debtor, but also its privatisation status.

What Should a Creditor Check Before Going to Court?

Before initiating bankruptcy proceedings against a company with state participation, it is advisable to conduct a legal assessment of the prospective proceedings.

First, the creditor should establish the debtor’s exact ownership structure and the State’s share, and check whether the company has any special status or is subject to martial-law restrictions. The next step is to analyse its assets: not merely to identify them, but to determine the legal title to each significant asset and whether it may be included in the liquidation estate. The creditor should also examine the company’s privatisation status, encumbrances over its assets, existing enforcement and court proceedings, other major creditors, and the priority applicable to potential distributions.