Artificial debts before bankruptcy: how a creditor can challenge 'friendly' claims
A 'friendly' creditor with an artificial debt can gain votes at the creditors' meeting and a share of the debtor's assets at the expense of genuine creditors. Here is how to spot and filter out such claims.
The problem
Bankruptcy cases often feature creditors related to the debtor: loans 'from our own people', debts under contracts without real economic sense, claims bought for next to nothing just before proceedings open. The aim is simple: to gain control of the creditors' meeting and part of the proceeds from selling assets.
What the Supreme Court says
In a recent ruling in case No. 925/1248/21(925/111/22) the Supreme Court confirmed that not only moving assets out but also artificially creating a debt can be fraudulent. A debtor with large debts bought illiquid shares for UAH 9 million and never paid, and the claim later ended up with a financial company. The contract was declared void.
In its review of practice on abuse in bankruptcy cases the court stressed that a formal check of documents is not enough. It must be established whether the debt actually exists, how it arose and whether the creditor could actually provide the funds.
What a creditor should look at
- Source of money. Whether the 'creditor' could actually lend the money or pay for the goods.
- Related parties. Common founders, managers, addresses, family ties.
- Economic sense. Why the deal made sense for a debtor that already had debts.
- Movement of money and property. Whether funds were actually received, whether property was transferred and where it went.
- Timing of the debt. A debt or assignment shortly before proceedings opened is a warning sign.
Tools and deadlines
Objections to the creditor's claims, appeals against the ruling recognising them, and a claim to void the contract within the bankruptcy case. Object right after the claims are published: missed deadlines narrow the options.
This is my professional position, not individual advice: details depend on the circumstances of the proceedings.