Asset Stripping and Fictitious Bankruptcy: How to Detect It

Asset stripping ahead of a staged bankruptcy rarely looks like outright theft. It is a chain of outwardly lawful transactions through which property quietly flows to related parties, leaving the creditor holding nothing but an empty shell. Yet every such scheme leaves a trail — in the documents, the prices and the dates. Below is how to recognise the warning signs, which rules bring the property back, and where creditors most often lose precious time.

What asset stripping under a staged bankruptcy actually is

The classic design is simple. A company accumulates debt while, in parallel, it disposes of everything liquid — real estate, vehicles, equipment, inventory, receivables. By the time the creditor reaches court, there is nothing left to enforce against. Formally this is not theft: there are contracts, acceptance acts, payment orders. The task of anyone protecting their interest is to show that behind these papers there was no genuine economic purpose — only one goal: to shield the assets from recovery.

In my expert practice, these schemes almost always share three traits — undervalued sales, artificial debt, and business “cloning.” Let us look at each.

Selling property to related parties below value

The most common move. A liquid asset is sold to a “friendly” company or individual at a price noticeably below market — sometimes for a token sum, or “in settlement” of a debt that never existed. What to look for:

• the transaction price is materially below the market, appraised or book value;
• the buyer is an interested party in relation to the debtor (a relative of the director, a co-founder, a controlled firm);
• payment never genuinely arrived, or circulated “in a loop” between related accounts;
• the property physically stayed at the same address and in the same use.

Artificial accounts payable

The second element is the creation of “friendly” creditors. Loan, supply or service contracts are drawn up after the fact and presented as unpaid. The purpose is twofold: to dilute the real creditors in the register of claims, and to secure a voting majority in the creditors’ committee in order to control the procedure from within. Tell-tale signs: an absence of primary documents confirming that the operation was real, atypical terms (interest-free multimillion loans, deferrals stretching over years), and a “creditor” who appears only on the eve of bankruptcy.

Transferring the business to a “clone” company

The third step is a new entity with a similar name, the same employees, clients, website and contracts. The old company is left with the debts, while the cash flows and staff migrate to the clone. This is the hardest element to disprove on paper, but it is precisely where an affiliation analysis delivers the strongest result.

The rules that recover stripped property

Voiding the transactions

The key instrument inside a bankruptcy case is Article 42 of the Bankruptcy Code of Ukraine (Kodeks Ukrainy z protsedur bankrutstva, KUzPB). It allows the court to void the debtor’s transactions concluded after the opening of proceedings or within the three years before it, where — among other grounds — the property was alienated at an undervalue, free of charge, in favour of an interested party, or to the detriment of creditors. This is the so-called “suspect” (or suspicious) period: the mere fact that a deal falls within those three years and bears one of the listed features is already a ground to challenge it.

Beyond, or in parallel with, bankruptcy, there is Article 234 of the Civil Code of Ukraine (Tsyvilnyi kodeks, TsK) — the fictitious transaction, meaning a transaction concluded without any intention to create real legal consequences. If the parties merely “sketched” a sale while nothing actually changed, the court may declare it void.

Criterion	Art. 42 KUzPB	Art. 234 TsK (fictitious transaction)
When it applies	within a bankruptcy case	in any dispute, including outside bankruptcy
Who may challenge	insolvency practitioner, creditor	a party, creditor, prosecutor
Period covered	transactions in the 3 years before proceedings open	no special period; general limitation applies
What must be proved	undervalue / relatedness / gratuitousness / harm	absence of intent to create legal consequences

In practice these grounds are often pleaded together — that raises the chance that at least one will “fit” the specific circumstances of the deal.

Subsidiary liability of founders and the director

When the property can no longer be recovered and there are not enough assets to satisfy creditors, Article 61 KUzPB comes into play. It allows subsidiary (additional) liability for the debtor’s obligations to be placed on its founders, director or other persons whose actions drove the company into bankruptcy. This shifts recovery from the empty shell onto the real beneficiaries of the scheme — onto their personal assets. Proving the causal link between their decisions and the bankruptcy is not easy, and this is where documentary and economic analysis becomes decisive.

How it is proven: the role of economic expertise

Legal qualification rests on facts, and in these cases the facts are numerical. Forensic economic examination (specialisms 11.1 — accounting, tax accounting and reporting records; 11.2 — records of economic activity; 11.3 — financial and credit operations) answers questions put to the expert by the court under the Criminal Procedure Code (KPK), the Commercial Procedure Code (Hospodarskyi protsesualnyi kodeks, HPK) or the Civil Procedure Code, and the specialist law on forensic examination. The main lines of work are:

1. Tracing the chain of operations. Following the movement of a specific asset and of the money: who transferred what, to whom, when and on what terms; whether payment was real; and whether the funds travelled “in a loop.”
2. Testing whether prices were at market. Comparing the transaction price with market, appraised and book value on the date of the deal — to demonstrate the undervalue and its scale.
3. Establishing affiliation. Shared founders and beneficiaries, family ties, common addresses, employees, IP addresses and counterparties — everything that proves the parties were not independent.

The evidentiary base is built from open and requested sources: the Unified State Register (Yedynyi derzhavnyi reyestr, YeDR), the Unified State Register of Court Decisions (YeDRSR), data from the State Tax Service (DPS), materials of the State Financial Monitoring Service (Derzhfinmonitorynh), bank statements and primary documents. On the criminal side, economic crimes are investigated by the Bureau of Economic Security (Byuro ekonomichnoi bezpeky, BEB); in corporate and insolvency disputes the very same factual material is used in the commercial process.

Who acts in the procedure: the insolvency practitioner and the creditors’ committee

The central figure in a bankruptcy case is the insolvency practitioner (arbitrazhnyi keruyuchyi) — acting as property administrator, rehabilitation manager or liquidator. It is he who is empowered to challenge suspicious transactions under Article 42 KUzPB, to form the liquidation estate and to recover the stripped property. But his activity depends heavily on who controls the creditors’ committee. If the majority in the committee are “friendly” creditors with artificial debts, the practitioner risks acting in their interest — or doing nothing at all.

A genuine creditor should therefore: file and substantiate its claims for the register as early as possible; actively contest the claims of dubious creditors; insist on an analysis of suspicious transactions; and, where necessary, initiate the challenge itself. A passive “the practitioner will handle everything” stance is almost always a losing one in these cases.

Deadlines, the limitation period and the main mistake

On the deadlines

It is important not to confuse two different periods. The suspect period of Article 42 KUzPB is the three years before proceedings open, within which deals can be questioned at all. The limitation period is the time within which a claim may be brought; the general one is three years (Article 257 TsK) and, as a rule, runs from the day the person learned, or could have learned, of the violation. In bankruptcy, the moment the practitioner or creditor discovered a suspicious deal often shifts that start date — but relying on this is risky. The rule is simple: act as soon as suspicions arise, not when the deadline is already running out.

The typical error — missing interim relief

The costliest mistake I regularly see is a creditor buying time to assemble “perfect” evidence and failing to file, in time, an application for interim measures / securing the claim (zabezpechennya pozovu) — an asset freeze, a ban on registration actions. While the preparation drags on, the asset is resold to a “good-faith” third party — and recovering it becomes almost impossible. Interim measures under the Commercial Procedure Code must be sought at the earliest stage, in parallel with gathering evidence, not after it. Frozen property will not go anywhere; unfrozen property will disappear.

In brief: what a creditor or co-owner should do

• Fix the assets today — extract the debtor’s entire property from the registers and monitor registration actions.
• Put the freeze ahead of the evidence — interim relief must outrun any alienation.
• Request the primary documents — contracts, acceptance acts, payment orders and appraisals as of the date of each suspicious deal.
• File your claims and watch the register — do not let artificial creditors seize the committee.
• Commission an economic examination — testing prices against the market and mapping the movement of assets turns suspicion into proof.
• Do not stall on the deadlines — both the suspect period and the limitation period work against whoever delays.

Asset stripping always looks convincing on paper — and it almost always falls apart under a focused analysis of prices, dates and the ties between the parties. If you suspect that property is being drained from your debtor or your shared business, it is worth assessing the situation professionally while the assets can still be brought back. I would be glad to help with an expert analysis of the operations and with preparing the evidentiary base for court.