Suspicious Transactions in Bankruptcy

Suspicious transactions of the debtor. Case law. Minimising risk. Challenging transactions. A debtor's transactions may be challenged on general grounds of invalidity and on the special grounds provided by the Insolvency (Bankruptcy) Law. In particular, the Law provides special grounds for challenging the debtor's suspicious transactions. Such transactions may be made not only by the debtor, but also by others at the debtor's expense — a set-off on a creditor's application, a bank's direct debit from the debtor's account, a creditor keeping the debtor's property in enforcement proceedings, and so on.

The two special grounds

A debtor's transaction may be challenged as suspicious if:

• Unequal consideration. It is a transaction with unequal counter-performance, made after the court accepted the bankruptcy petition or within one year before that date.

• Harm to creditors. It caused property harm to creditors' rights and was made after the court accepted the petition or within three years before that date.

Unequal-consideration transactions

Case law treats as unequal-consideration transactions:

• Transactions whose price or other terms differ materially to the debtor's detriment — the debtor received substantially less than it gave the counterparty.

• Transactions formally on market terms, where the debtor knew in advance that the counterparty would not perform, having insufficient assets for equivalent counter-performance.

Example. A debtor disposed of real estate under three sale contracts totalling 404 million roubles, after a creditor had applied to declare it bankrupt but before that application was examined. Each contract stated that payment had been made before signing. The financial manager challenged the transactions, not disputing the price but arguing that payment had not in fact been made. The courts found that the buyer's financial position did not permit payment, and the cassation court upheld the finding that the transactions were gratuitous, without equivalent counter-performance, and invalid — recovering into the estate the value of the disposed property, 404 million roubles (Ruling of the Central District Commercial Court of 20.01.2021 in case No. А36-7135/2018).

Harm-causing transactions

Transactions causing property harm are those made with the aim of harming creditors, where: the value of the debtor's property decreased; property was disposed of; the size of property claims against the debtor increased; or other consequences arose that led, or could lead, to creditors losing the possibility of satisfying their claims.

To challenge such a transaction, one must prove the aim of harming creditors' property rights and that this aim was achieved, and that the counterparty knew or should have known of the aim when the transaction was made. The counterparty's awareness is presumed if it is an interested (affiliated) person, or knew of signs of insolvency or insufficiency of the debtor's property, or knew or should have known of the harm to creditors' interests. Notably, once a bankruptcy procedure is introduced, any person is presumed to know of the signs of insolvency, since that information is subject to publication.

What this means for creditors and counterparties

For creditors, challenging suspicious transactions is a core tool for clawing diverted assets back into the estate — especially pre-bankruptcy sales at undervalue or to affiliated parties. For counterparties, the risk is real: a transaction with a company that later goes bankrupt can be unwound years later, with the value recovered from you. Due diligence on the counterparty's solvency, market-rate terms, and documented genuine payment are the practical defences.

Related materials

• Bankruptcy of legal entities

• Subordination of claims in bankruptcy