When a Debt Acknowledgment Does Not Establish a Loan: Legal Risks and Case Law

A written debt acknowledgment is traditionally regarded as a straightforward and relatively reliable means of documenting a financial obligation. In practice, however, the same document may give rise to fundamentally different legal interpretations, particularly where the transfer of money is connected with the acquisition of property, the performance of other arrangements, or several interrelated obligations.

In such disputes, the decisive issue is not merely the wording of the document but the actual legal nature of the parties' relationship. This determines whether the money must be repaid as a loan or whether the parties entered into a different arrangement.

Why the Name of a Document Does Not Determine the Nature of an Obligation

Under Article 1046 of the Civil Code of Ukraine, a loan agreement is deemed concluded when money or other fungible property is transferred to the borrower. Consequently, the actual transfer of funds is essential to the creation of a loan obligation. A written debt acknowledgment may serve as evidence of the conclusion of a loan agreement, receipt of funds, and agreed repayment terms. However, its legal significance depends on its contents and the circumstances in which it was executed.

For example, two parties may agree on the purchase of a vehicle through installment payments but document their arrangement through two separate written acknowledgments instead of a properly drafted agreement. Under the first document, the prospective buyer purportedly acknowledges receiving a loan. Under the second, the seller undertakes to transfer ownership of the vehicle once the corresponding amount has been paid.

If the arrangement breaks down, a fundamental question arises: must the buyer repay a loan that may never have been advanced, or does the dispute concern unfulfilled obligations relating to the acquisition of the vehicle?

In these circumstances, the court must examine not only the wording of an individual document but also the overall arrangement, the parties' conduct, and the actual transfer of money and property. The mere existence of interrelated documents does not, in itself, establish that either constitutes a disguised transaction.

When Does a Transaction Qualify as a Disguised Transaction?

Article 235 of the Civil Code of Ukraine defines a disguised transaction as one entered into by the parties to conceal another transaction they actually intended to conclude.

Its defining characteristic is a deliberate discrepancy between the outward expression of the parties' intentions and their actual agreement. Importantly, both parties must share the intention to conceal another transaction. This distinction is essential. Not every complex or unusually documented arrangement constitutes a disguised transaction.

Parties may lawfully use installment payments, preliminary arrangements, security mechanisms, or the replacement of one obligation with another. In particular, Article 1053 of the Civil Code of Ukraine permits a debt arising from a sale and purchase agreement, a lease, or another legal basis to be replaced by a loan obligation. Such an arrangement does not, by itself, establish unlawful conduct.

Therefore, applying Article 235 requires more than demonstrating that the parties had other financial arrangements in addition to the documented loan. It must be established that one transaction was deliberately used to conceal another.

Furthermore, classifying a transaction as disguised does not automatically release the parties from their obligations. The court must identify the transaction actually concluded and apply the legal provisions governing it.

What Ukrainian Case Law Demonstrates

An illustrative example is case No. 523/13382/21, considered by the Joint Chamber of the Civil Cassation Court within the Supreme Court of Ukraine. The dispute concerned two written acknowledgments executed on the same date.

Under the first, one party acknowledged receiving UAH 170,000 as a loan, repayable in installments. Under the second, the creditor undertook to transfer ownership of a vehicle after the corresponding amount had been paid.

The court of first instance granted the claim for debt recovery. The appellate court, however, concluded that the parties had actually agreed on a future sale of the vehicle rather than a loan.

The Supreme Court emphasized the need to distinguish an arrangement for the future transfer of property from a transaction deliberately designed to conceal another transaction. Since the undertaking to transfer the vehicle had been expressly recorded in a separate document, that fact alone did not establish that a sale and purchase agreement had been concealed behind a loan.

Ultimately, the Supreme Court found no proven grounds for applying Article 235 of the Civil Code and reinstated the first-instance judgment.

Which Evidence Matters Most?

Disputes involving debt acknowledgments often focus primarily on the written document itself. However, effective protection of property interests requires a broader assessment of the available evidence. Particularly relevant evidence may include proof of the actual transfer of funds, the circumstances in which the obligation arose, correspondence between the parties, bank records, and other materials demonstrating the purpose of their arrangement.

Where a debt acknowledgment is connected with a prospective property acquisition, it is important to establish whether the parties agreed on the property's essential characteristics, price, payment arrangements, and conditions for transferring ownership. The parties' subsequent conduct may also be significant. Actual use of the property, partial payments, demands for repayment, and attempts to register a transfer of ownership may help clarify the legal nature of their relationship.

Nevertheless, none of these circumstances should be assessed in isolation.

A party disputing the existence of a loan cannot rely solely on an assertion that no money was transferred. A coherent evidentiary position is required to challenge the contents of the debt acknowledgment. Similarly, a party alleging that a transaction was disguised must establish both the existence of another transaction and the parties' shared intention to conceal it.

How to Minimize Risks When Documenting Financial Arrangements

The most effective way to prevent such disputes is to ensure that legal documents accurately reflect the economic substance of the parties' arrangement. Where the parties intend to enter into a loan, the documentation should clearly establish the transfer of funds, the amount advanced, and the repayment schedule and conditions. Where the actual objective is to purchase property through installment payments, the parties should execute an appropriate agreement rather than rely on debt acknowledgments that could misrepresent the nature of their obligations.

If an existing debt is to be replaced by a loan obligation, the parties should expressly identify the original obligation, its legal basis, and the new obligations arising from the replacement. Particular care is required for transactions involving substantial amounts, corporate assets, or property subject to specific statutory formalities.