Date of publication: 1 May 2025
Andrii Konoplia, Attorney at Law, Counsel, Insolvency Receiver, Co-Head of Dispute Resolution Practice, Co-Head of Insolvency and Financial Restructuring
Vadym Kizlenko, Attorney at Law, Counsel, Insolvency Receiver, Co-Head of Insolvency and Financial Restructuring
Source: Client’s Choice 2025: TOP-100 Lawyers of Ukraine
The year 2024 marked a significant stage in the evolution of bankruptcy practice in Ukraine. Courts continued to shape new approaches to dispute resolution in this area, as well as to adapt the application of the law to new economic challenges. Particular attention was devoted to the integrity of debtors and creditors, efficiency of rehabilitation procedures, as well as the balance between protecting the rights of parties and ensuring market stability.
Let us examine the key trends that influenced the practice in 2024 and analyze the most important court decisions and their impact on the further development of Ukraine’s bankruptcy framework.
The preventive restructuring mechanism as a way to prevent bankruptcy
One of the key developments in bankruptcy practice in 2024 was the introduction of preventive restructuring. In our opinion, the preventive restructuring procedure is a kind of social benefit from the state to businesses. The state presumes that businesses will act in good faith and will use the new procedure properly.
Preventive restructuring can be initiated only by the debtor; creditors have no such right. As a result, the debtors may use the procedure to avoid creditor claims, while creditors, in turn, are unable to “catch up” with the debtor using the same procedure.
In the hands of a bona fide debtor, preventive restructuring can serve as a tool to prompt creditors to come to the negotiating table and seek equally favourable solutions for the financial recovery of the enterprise.
In this case, everything is more or less straightforward – the debtor initiates the procedure, prepares a restructuring plan, coordinates it with creditors, seeks court approval, and restores solvency.
However, the law provides scope for manipulation on the part of unscrupulous debtors, who may use the preventive restructuring procedure to delay settlements with creditors and later initiate controlled bankruptcy proceedings.
Preventive restructuring planning
To initiate the procedure, the debtor needs to file a preventive restructuring plan with the court. In some cases, a draft of such a plan, subject to simplified legal requirements, will suffice.
At this stage, neither a preventive restructuring plan nor its draft requires prior approval from the creditors. To initiate the court procedure, it is sufficient for the debtor to outline a certain algorithm of actions which, in his opinion, will allow him to overcome the financial crisis.
If the application for opening the procedure complies with the law, the court opens the restructuring procedure.
Where there is a risk of asset loss (including mortgaged property), the court may impose protective measures on the debtor, such as prohibiting enforcement of funds from the debtor on the basis of enforcement documents and a prohibition of foreclosure on mortgaged assets.
The pledge creditor may disagree with the debtor and initiate foreclosure, but the debtor can lawfully block this process for at least six months through the preventive restructuring procedure. The limitation period for debtor protection measures is limited to six months and cannot be extended. At the same time, the law does not prohibit the application of new measures to protect the debtor’s property after the expiration of the six-month period.
Risks of abuse of the preventive restructuring procedure
Simultaneously, unscrupulous debtors may exploit the procedure of preventive restructuring as a springboard to “controlled” bankruptcy.
Thus, a debtor in the preventive restructuring procedure may receive financing from third parties, and in case of further bankruptcy of the debtor, transactions involving such financing received may not be recognized by the court as invalid on the grounds provided for by Article 42 of the Bankruptcy Code of Ukraine or fiduciary transactions.
Creditors who provided such financing are entitled to priority satisfaction in bankruptcy proceedings. Claims arising from transactions that ensure the preventive restructuring procedure (consultations, property lease, services of auditors, lawyers, and other specialists) are also satisfied first in bankruptcy proceedings.
Thus, during restructuring, the debtor may lawfully create “friendly” debts for further “controlled” bankruptcy proceedings.
Preventive restructuring provides for a fairly debtor-friendly procedure for approving a plan for the procedure. For the preparation and approval of the plan, creditors are divided into classes. The debtor independently determines the criteria according to which creditors are or are not involved in the preventive restructuring plan and how they are classified.
Even if the plan is not agreed upon by the creditors, the debtor has the right to petition the court for cross-class approval of the preventive restructuring plan, upon review of which the court may determine whether to approve the plan.
A preventive restructuring plan can provide for installments, deferral, or forgiveness of tax debts. This can be done even without the consent of the tax office.
A clear advantage for the debtor is that once the restructuring plan is approved, the court, at the request of the insolvency trustee or the debtor, lifts arrests of the debtor’s property and other restrictions, including those imposed as part of criminal proceedings.
In our view, preventive restructuring grants the debtor broad legal means to compel creditors to negotiate on terms primarily favourable to the debtor.
Case law 2024
Given the novelty of the preventive restructuring procedure and the entry into force of the Law of Ukraine No. 3985-ІХ only on 01 January 2025, it is obvious that the Supreme Court has not yet developed a body of practice on the matter.
However, the Commercial Court of Cassation made many significant findings when reviewing bankruptcy court decisions last year. Let us highlight some of the decisions adopted in 2024 by the Supreme Court in the chamber for review of bankruptcy cases of the Commercial Court of Cassation, which deserve attention.
Confirmation of tax debt and the possibility for the tax authority to pursue monetary claims against the debtor depend on the tax audit performed
In particular, on 16 May 2023 in case No. 908/2504/22 the Main Department of the State Tax Service in Zaporizhzhia region (Main Department of the State Tax Service) motioned the Commercial Court of Zaporizhzhia region to oblige the liquidator to analyze the financial position of the debtor, close accounts, and provide records such as bank accounts, liquidation balance sheet, results of the inventory of fixed assets, etc.
The motion was based on the company’s absence at its legal address, inability to conduct an unscheduled documentary audit, lack of primary documents, and doubts at the State Tax Service about the reality of the creditor’s claims, as well as the wish to assist in the analysis of the debtor’s financial and economic activities.
Practically at the same time, on 22 May 2023, the liquidator submitted the report and liquidation balance sheet to the Commercial Court of Zaporizhzhia region. Therefore, the Ruling of the Commercial Court of Zaporizhzhia region dated 08 June 2023, which was left unchanged by the Ruling of the Central Commercial Court of Appeal dated 19 October 2023, Main Department of the State Tax Service was denied the petition, as well as approved the report of the liquidator and liquidation balance sheet, liquidation of the bankrupt.
The Supreme Court, considering the cassation appeal of the State Tax Service, in its Ruling dated 04 September 2024, concluded that the first-instance court, by considering the liquidator’s report and the bankrupt’s liquidation balance sheet together with the motion of the State Tax Service in the final court session (which generally concludes the proceedings), restricted the supervisory authority in exercising its right to form and submit justified monetary claims in the bankruptcy case (since the proceedings are closed) and prevented the authority from filing a liquidation claim in the bankruptcy case.
However, in our opinion, the court did not pay attention to a controversial issue: whether the actions of the State Tax Service should be considered in good faith from the standpoint of procedural law, since the controlling authority had the right to apply to the court much earlier, in particular, at the stage of property disposal.
Given the brief duration of proceedings in case No. 908/2504/22 (the proceedings were opened on 02 January 2023, and the liquidator’s report and liquidation balance sheet were approved on 08 June 2023), the cassation-instance court was guided more by the “spirit” over the “letter” of the law. However, in our opinion, the appeal of the tax authority to the court with a corresponding motion at the stage of liquidation contradicts the requirements of the Bankruptcy Code of Ukraine, because the analysis of the financial and economic condition of the debtor, inventory of property, etc. the property manager is obliged to carry out at the stage of property disposal.
The Supreme Court concluded that consideration and recognition of monetary claims of tax authorities in bankruptcy proceedings is carried out by the courts taking into account the peculiarities of arising (termination) of tax liabilities of the debtor under the requirements of the Tax Code of Ukraine, which are special rules of law regulating these issues, if such liabilities arise before the opening of bankruptcy proceedings. Therefore, the ultimate goal of the controlling authority’s inspection following 78(1)(7) of the Tax Code of Ukraine is, in particular, the complete and accurate formation of monetary claims of the tax authorities against the debtor in respect of which bankruptcy proceedings have been opened.
So, the Supreme Court has made the existence of a tax debt and, as a consequence, the filing of creditor claims by the tax authority solely dependent on a tax audit.
However, in the decision of 17 January 2024 in case No. 903/51/20, the Supreme Court in the Chamber for bankruptcy cases of the Commercial Court of Cassation concluded that if the taxpayer fails to submit declarations within the prescribed time limits or the data of inspections indicate understatement or overstatement of the amount of its tax liabilities, the controlling authority must independently determine the amount of monetary obligations and send the taxpayer a tax notice-decision on the obligation of the taxpayer to pay the amount of money.
It should be noted that in this ruling, the judicial chamber for consideration of bankruptcy cases of the Commercial Court of Cassation, addressing the issue of consideration of monetary claims of the tax authority to the debtor, concluded that it is necessary to deviate from the previously stated conclusions. In particular, in this ruling it follows that to consider monetary claims of the tax authority against the debtor in a bankruptcy case and qualify them as bankruptcy or current, the moment when monetary claims of the tax authority arise within the meaning of the Bankruptcy Code of Ukraine should be considered the first day of non-payment of tax by the debtor following the last day of the relevant deadline provided by the Tax Code of Ukraine for submission of a tax return for the relevant tax.
Initiating the commencement of bankruptcy proceedings cannot be considered an abuse of right
When considering case No. 911/1005/23, in our opinion, the court chamber for bankruptcy cases of the Commercial Court of Cassation investigated key legal questions: can a creditor filing a claim with the court to open bankruptcy proceedings against the debtor be considered a proper way to protect its violated rights and can such a claim be considered an abuse of the procedural rights available to the creditor to the detriment of others?
Responding to them, the court concluded that in case of lack of proper fulfilment of economic monetary obligations, the creditor, in addition to filing a lawsuit against the debtor, also has the right to initiate against such debtor the procedures provided for by the Bankruptcy Code of Ukraine. Application of such procedures to satisfy its creditor claims is possible when there is no dispute about the right to be resolved by way of claim proceedings.
A creditor’s application to open bankruptcy proceedings in the presence of appropriate grounds provided for by the norms of the Bankruptcy Code of Ukraine cannot in itself be considered a violation of the rights or interests of other persons (in particular, creditors of the debtor in obligatory relations), since such application is the realization by the creditor of its right to judicial protection of its rights if such right is violated due to improper fulfilment or non-fulfilment of obligations undertaken by the debtor. The Procedural Law does not link the return of an application to open or refuse to open bankruptcy proceedings to the presence or absence of a claim proceeding in which the parties to the dispute are the debtor and third parties, rather than the debtor and the initiating creditor.
Given that both debt collection and bankruptcy proceedings are aimed at repaying the debtor’s debts to creditors, the initiation of such cases cannot in itself be considered an abuse of right, and the court must take into account the specifics, substantive and procedural consequences of such cases not only for the individual creditor or debtor, but also for all other participants in these proceedings.
In addition, the Supreme Court emphasized that the provisions of the Bankruptcy Code do not list abuse by the debtor or the initiating creditor of their right to open the relevant proceedings as a separate ground for refusal to open bankruptcy proceedings.
Conclusions
Preventive restructuring has the potential to become an effective tool for restoring a company’s financial stability. It expands opportunities for debtors to engage with creditors and craft a flexible plan to overcome the financial crisis. At the same time, the procedure presents significant risks for creditors, as it creates ample room for manipulation by debtors.
The absence of a requirement to obtain creditor consent before the commencement of the procedure, the possibility of suspending enforcement actions, and the ability to generate “friendly” debt for use in subsequent controlled bankruptcies pose serious threats of abuse.
Meanwhile, the conclusions of the Supreme Court, as reflected in the bankruptcy chamber of the Commercial Court of Cassation in case No. 908/2504/22, may offer tax authorities an instrument for delaying bankruptcy proceedings. Importantly, initiating bankruptcy proceedings by a creditor is a legitimate method of protecting rights and cannot be regarded as an abuse of procedural mechanisms available to creditors.
