Three years before bankruptcy: which debtor transactions may be declared invalid

Bankruptcy proceedings have one distinctive feature: within a relatively short period of time, a community of creditors effectively forms around a single debtor. Each creditor has their own claims and expectations, but their goal is the same — to obtain the maximum possible satisfaction of their monetary claims. In the worst-case scenario, creditors still hope to recover at least part of the debt from the debtor’s remaining assets.

This is why it is critically important for creditors that, at the moment bankruptcy proceedings are opened, the debtor still possesses as many assets as possible. In practice, however, the situation is often quite different. Even at the initial stage of analyzing the debtor’s financial condition, it may become clear that very few assets remain. At the same time, shortly before the bankruptcy procedure begins, a number of suspicious transactions may come to light: commercial real estate sold for symbolic prices, assets transferred to affiliated companies, debts repaid selectively to “friendly” creditors, or even the waiver of valuable claims.

What Are Fraudulent (Fraudulent) Transactions?

In Ukrainian court practice, such operations are commonly referred to as fraudulent transactions (fraudulent conveyances). These are transactions that result in the unjustified reduction of the debtor’s assets and thereby complicate the satisfaction of creditors’ claims.

The Supreme Court has repeatedly emphasized that a fraudulent transaction may be either gratuitous or onerous. In the case of onerous agreements, courts usually assess a combination of circumstances: the timing of the transaction, the identity of the counterparty, whether the price corresponds to market value, and whether the payment was actually made.

For example, in the Supreme Court decision of 8 October 2025 in case No. 902/90/21 (902/1350/24), the court noted that a transaction may be considered fraudulent when several factors coincide — such as a relationship between the parties, a non-market price, and the timing of the agreement shortly before bankruptcy proceedings.

At the same time, the Supreme Court clarified in its decision of 19 January 2023 in case No. 925/1248/21 (925/111/22) that the grounds for declaring such transactions invalid may arise both from special provisions of the Bankruptcy Code of Ukraine and from general principles of civil law, including the requirement of good faith (Article 3 of the Civil Code of Ukraine) and the prohibition of abuse of rights.

Importantly, case law clearly distinguishes fraudulent transactions from fictitious ones. In its decision of 14 November 2024 in case No. 922/5110/21 (922/4755/23), the Supreme Court explained that a fictitious transaction is one where the parties never intended to create legal consequences. A fraudulent transaction, by contrast, formally produces legal effects but has a concealed purpose — to obstruct the satisfaction of creditors’ claims.

Article 42 of the Bankruptcy Code as the Main Instrument

The main legal tool for challenging such transactions is Article 42 of the Bankruptcy Code. This provision sets out the indicators that may point to a fraudulent transaction and serve as grounds for declaring it invalid.

In particular, courts evaluate the economic rationale of a transaction. If the debtor sells assets at a clearly undervalued price, prematurely fulfills obligations to selected creditors, or enters into agreements that make it impossible to meet other financial obligations, such actions may constitute grounds for invalidating the transaction.

Judicial practice provides several illustrative examples. In one case, a debtor transferred a significant amount of movable property to a creditor in settlement of a debt. However, the contract did not specify the value of the transferred assets. Moreover, after the transaction was concluded, the assets remained in the debtor’s possession under a symbolic lease agreement. The courts interpreted this arrangement as an attempt to remove assets from the debtor’s estate and ordered their return to the bankruptcy estate.

Another example involved the sale of a vehicle for 1,000 hryvnias. The court concluded that such a transaction, carried out during a period of financial instability, was economically unreasonable and demonstrated bad faith on the part of the parties.

In another case, the courts examined lease agreements that effectively created artificial creditor claims. The debtor leased real estate at a price of less than one kopeck per square meter, while simultaneously agreeing to pay the tenant for security services at market rates. In reality, the services were never provided. The court found that the purpose of these contracts was to create a “friendly” creditor capable of influencing the bankruptcy procedure.

The Suspicious Period

A key feature of Article 42 is that it applies only to transactions carried out within the so-called suspicious period — three years prior to the opening of bankruptcy proceedings.

However, this does not mean that earlier transactions cannot be challenged. In such cases, creditors may rely on the general provisions of civil law concerning invalid transactions, particularly violations of the principles of good faith and the prohibition of abuse of rights.

There is a notable case where a debtor purchased a claim against a fictitious legal entity at a price one thousand times higher than its market value. Despite holding this claim, the debtor never attempted to enforce it in court during the entire limitation period and even attempted to conceal it from shareholders and auditors in financial statements. The court concluded that the fact that the transaction occurred outside the suspicious period did not prevent it from being challenged, as it was clearly aimed at harming creditors.

Why Courts Sometimes Reject Such Claims

Not all lawsuits challenging fraudulent transactions end in success for creditors. One of the most common reasons for rejection is the creditor’s failure to demonstrate a legitimate legal interest in invalidating the transaction.

The Supreme Court has noted that a transaction cannot be considered fraudulent if it does not actually affect the creditors’ legal position. For example, if the debtor received real economic value or if the transaction was part of ordinary business activity and produced a positive financial result, the court may refuse to invalidate it.

What Result Do Creditors Seek?

The ultimate goal of creditors is not merely to obtain a court ruling declaring a transaction invalid. The real objective is to return assets to the bankruptcy estate or eliminate the influence of artificially created creditors on the bankruptcy process.

The Bankruptcy Code provides several possible consequences of invalidating a transaction: the return of property to the debtor, compensation for its value if the property is no longer available, or the recovery of property from third parties if it has been transferred multiple times.

However, even a successful court decision does not always guarantee an effective outcome. In some cases, the property may have already been hidden or physically removed. For this reason, creditors should conduct a thorough analysis of the counterparty’s financial condition and verify the actual existence of the assets before initiating litigation.