Times of Financial and Political Instability and the Development of Bankruptcy Practice

Times of financial and political instability are always conducive to the development of bankruptcy practices, which is why Russia’s full-scale invasion of Ukraine provided a significant boost to the development of this practice in Ukraine. 

Legislative Changes in 2024

In response to the challenges posed by economic instability and the need to improve the efficiency of bankruptcy procedures, a number of significant legislative changes were introduced aimed at enhancing the legal regulation in this area. Ukrainian bankruptcy legislation is currently at an active stage of development, driven both by internal reform processes and the need to align legal approaches with European standards.

Ban on Bankruptcy Procedures During Martial Law (Law of 07.02.2024 No. 3577-IX and 22.05.2024 No. 3723-IX)

The Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Regarding the Operation of Critical Infrastructure Entities During Martial Law of 22 May 2024 No. 3723-IX establishes a ban on initiating bankruptcy proceedings against business entities that meet the following criteria:

• They are operators of critical infrastructure;
• The shares (stocks, participatory interests) of the business entity were forcibly transferred during martial law;
• The state directly or indirectly holds more than 50% of the shares (stocks, participatory interests) in the business entity, except in cases where liquidation is decided by the owner.

The introduced prohibition on bankruptcy procedures for critical infrastructure entities controlled by the state is aimed at ensuring the continuity of their operations during martial law and minimizing the risks of halting critically important functions. This approach reflects the priority of protecting public interests and the stability of strategic sectors of the economy under emergency conditions.

Another normative act limiting the application of bankruptcy procedures to certain enterprises is the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine Regarding the Restoration of the Solvency of Certain State Enterprises in the Energy Sector in Critical Condition of 7 February 2024 No. 3577-IX.
A moratorium on the initiation of bankruptcy proceedings is temporary (until 1 January 2026) and applies to debtors—operators of distribution systems that distribute electrical energy in territories where military actions were conducted as of 31 December 2023 or in territories temporarily occupied by the Russian Federation as of 31 December 2023, in accordance with a list approved by the central executive authority responsible for forming and implementing state policy concerning the temporarily occupied territories of Ukraine.

This limitation is aimed at preventing the bankruptcy of critically important energy companies operating in high-risk zones, ensuring energy security and the stability of energy supply for the state.

Preventive Restructuring Instead of Pre-Bankruptcy Rehabilitation

The Law of Ukraine On Amendments to the Bankruptcy Procedures Code and Certain Other Legislative Acts of Ukraine Regarding the Implementation of European Parliament and Council Directive 2019/1023 and the Introduction of Preventive Restructuring Procedures of 19 September 2024 No. 3985-IX came into force on 1 January 2025. This regulatory act represents an important step towards European integration and the modernization of insolvency law in Ukraine.
The goal of this Law is to implement European standards for early response to the financial difficulties of debtors by introducing an effective procedure—preventive restructuring, which replaces pre-bankruptcy rehabilitation. The innovation is designed to allow the debtor to restore solvency before a formal state of insolvency arises, thereby preserving the business, jobs, and ensuring the satisfaction of creditors’ claims.

Among the benefits of preventive restructuring are:

• A preventive restructuring case may only be opened upon the debtor’s application (the creditor may ask the debtor to initiate the procedure);
• A six-month period for preventive restructuring (which may be extended up to twelve months in complex cases);
• Protection of the debtor’s interests through special measures (a ban on opening bankruptcy proceedings, a moratorium on creditors’ claims, a ban on enforcement actions against secured property, etc.);
• Involvement of the debtor, the insolvency administrator, and creditors in negotiations to determine the terms of debt repayment as defined in the plan;
• Approval of the preventive restructuring plan by creditors and its confirmation by the court. 

II Litigation Practice in Bankruptcy Cases in 2024

Along with significant legislative changes in bankruptcy procedures, there is a trend towards forming a more coherent and predictable litigation practice, indicating the gradual development of legal application in the area of insolvency. It is necessary to highlight some of the most significant and current legal positions of the Supreme Court adopted in 2024:

Application of Special Prohibitions on Refusing to Open Bankruptcy Proceedings

According to Paragraph 9, Item 1-6 of the Final and Transitional Provisions of the Bankruptcy Procedures Code, the commercial court will refuse to open bankruptcy proceedings upon a creditor’s application if the debtor demonstrates to the court before the preparatory hearing that they are listed in the electronic registry of participants in the selection and execution of state contracts (agreements) and have a valid contract with state defense contractors, or if the creditor’s claims are not satisfied due to the armed aggression against Ukraine, including through the debtor’s property being located in territories where military actions were (or are being) conducted or in territories temporarily occupied by the Russian Federation as per a list approved by the central executive body.

The Supreme Court, in its decision of 7 March 2024 in case No. 920/971/23, concluded that the provision outlined in Paragraph 9, Item 1-6 of the Final and Transitional Provisions of the Bankruptcy Procedures Code provides specific grounds for refusing to open bankruptcy proceedings upon a creditor’s application, including when the debtor proves that they have a valid contract with state defense contractors.

Doctrine of “Lifting the Corporate Veil” in Bankruptcy Cases

The institution of legal personality and the principle of separation between the entity’s assets and those of its participants form the basis of modern corporate law. Along with limited liability, this principle enables effective business activity but may also be used for abuse. In bankruptcy practice, there is an increasing need to lift the so-called “corporate veil”—the legal construct that protects members of the company from liability for its debts.

The doctrine of “lifting the corporate veil” is widely applied in common law systems, unlike the countries of the Roman-Germanic legal family, including Ukraine. However, this mechanism, which allows placing responsibility on participants (founders, owners) and managers of a legal entity for its obligations, has found its reflection in the subsidiary liability institution in bankruptcy (Part 2 of Article 61 of the Bankruptcy Procedures Code).
According to Part 2 of Article 61 of the Bankruptcy Procedures Code, while exercising their powers, the liquidator or creditor may assert claims against third parties who are legally liable for the debtor’s obligations related to its bankruptcy. The amount of such claims is determined by the difference between the total claims of creditors and the liquidation estate.