A trading company based in Kyiv owes a foreign supplier EUR 2 million for goods delivered six months ago. The same foreign supplier owes the Ukrainian company EUR 1.8 million under a separate distribution contract. Insolvency proceedings open. The foreign creditor assumes the two debts will cancel each other out. They do not – at least not automatically. What follows is a collision between contractual expectations and the hard rules of Ukrainian insolvency legislation.
Set-off rights in Ukrainian insolvency proceedings are governed by the intersection of civil legislation and the country's dedicated body of insolvency law. The general principle permits mutual debts between counterparties to be offset, but insolvency proceedings impose a statutory stay that suspends unilateral enforcement – including netting – from the date proceedings commence. A creditor wishing to rely on set-off must engage the proof of debt process, raise the set-off argument before the appointed administrator, and, if disputed, seek resolution before the commercial court supervising the case.
This analysis covers the doctrinal foundation of set-off under Ukrainian law, the competing court interpretations that create practical uncertainty. The gap between what the statute appears to permit and what courts actually apply, cross-border implications for CIS-region creditors. Additionally, the strategic steps that protect set-off value in a restructuring context.
Doctrinal foundations: set-off under Ukrainian civil and insolvency legislation
Ukrainian civil legislation recognises set-off – zalík (offset of counterclaims) – as a standard mechanism for extinguishing mutual obligations. The conditions are well-established: the claims must be mutual, of the same kind, both due and payable, and neither subject to a statutory bar. When all four conditions are satisfied, one party's unilateral notice suffices to extinguish both obligations up to the lesser amount. This is the civil-law baseline, and it applies comfortably in ordinary commercial relationships.
The difficulty begins when a debtor enters insolvency proceedings. Ukrainian insolvency legislation – a distinct and self-contained body of law – establishes a moratorium on the satisfaction of creditor claims from the moment insolvency proceedings are opened. The moratorium is broad. It suspends enforcement actions, prohibits the transfer of assets outside the ordinary course of business, and – critically – restricts unilateral acts by creditors that would reduce the asset pool available for collective distribution.
Courts in Ukraine have consistently treated a unilateral notice of set-off, served after the opening of insolvency proceedings, as an enforcement action caught by the moratorium. The rationale is straightforward: if a creditor could unilaterally extinguish a debt owed to the insolvent estate, it would effectively recover ahead of other creditors and outside the statutory priority order. This would undermine the par condicio creditorum (equal treatment of creditors) principle that underpins the collective insolvency process.
Pre-insolvency set-off presents a different picture. Where a valid set-off notice was served and effective before the date of the insolvency order. or before the opening of the formal proceedings. Ukrainian courts have generally treated the mutual obligations as already extinguished. The estate cannot revive a debt that no longer existed at the moment proceedings commenced. This distinction between pre-insolvency and post-commencement set-off is fundamental, and it drives much of the strategic planning discussed later in this analysis.
Competing court interpretations and the gap between statute and practice
The statute is not, on its face, ambiguous. The moratorium provision is broadly worded. Yet Ukrainian commercial court practice reveals a persistent tension between two interpretive approaches, and the outcome for a given creditor can depend substantially on which approach the supervising court adopts.
The first approach – which may be characterised as the strict moratorium view – holds that no set-off is permissible after the opening of insolvency proceedings, regardless of the pre-existing contractual arrangement between the parties. Under this reading, even a netting clause expressly agreed in a master agreement does not survive the moratorium. The creditor's remedy is to file a proof of debt for the full amount owed, accept its position in the priority waterfall, and receive whatever distribution the restructuring plan or liquidation produces. This view reflects a strong collective-proceeding philosophy and has been applied in cases involving financial institutions and large trade creditors.
The second approach – the qualified contractual set-off view – accepts that certain pre-agreed netting arrangements. Particularly those embedded in financial contracts or supply agreements with automatic termination and netting provisions, operate as a matter of contract law rather than unilateral creditor action. Under this reading, the moratorium stays enforcement acts but does not retroactively void a contractual mechanism that extinguishes obligations automatically upon a trigger event such as insolvency. A small but meaningful strand of commercial court decisions has accepted this argument, particularly where the netting provision was drafted with sufficient clarity and the trigger event preceded the formal insolvency order.
The gap between these two positions is significant in practice. A creditor holding a claim of EUR 2 million against an insolvent estate, but also owing EUR 1.8 million to that estate, faces dramatically different outcomes depending on which view prevails. Under the strict moratorium view, it must pay EUR 1.8 million into the estate and then receive a pro-rata distribution on its EUR 2 million proof of debt. which. In a typical Ukrainian restructuring, may yield cents on the euro. Under the qualified contractual view, it nets EUR 0.2 million net exposure, pays nothing, and retains the residual EUR 0.2 million position as an unsecured claim.
Practitioners in Ukraine note that the uncertainty is compounded by the administrator's role. The administrator (arbytrazhnyy keruiuchyi – insolvency administrator) has statutory authority to challenge transactions that reduce the estate. This includes set-off arrangements completed in the period immediately before the insolvency opening. Where the administrator determines that a pre-insolvency set-off was effected at a time when the debtor was already insolvent, it may be challenged as a preferential transaction. The window for such challenges under Ukrainian insolvency legislation covers a defined pre-insolvency period. Additionally. Courts have not been reluctant to unwind arrangements that appear designed to benefit one creditor at the expense of the collective.
For international creditors, this doctrinal uncertainty creates a category of risk that is easily underestimated at contract stage. A governing-law clause selecting English or German law does not resolve the problem if the insolvent debtor is a Ukrainian entity and the insolvency proceedings are conducted in Ukraine. The lex concursus – the law of the insolvency proceedings – governs the treatment of claims within those proceedings, and that law is Ukrainian insolvency legislation, regardless of what the underlying contract says.
For a detailed assessment of the interplay between Ukrainian insolvency law and corporate dispute resolution, the firm's dedicated service coverage of corporate disputes in Ukraine provides further context on the procedural environment.
The proof of debt process and the administrator's gatekeeping role
Understanding the proof of debt process is essential for any creditor seeking to preserve set-off value in Ukrainian insolvency proceedings. Once proceedings open, the commercial court publishes a notice establishing the claims registration period. Creditors must file their proofs of debt within this window. Failure to file on time carries serious consequences: late claims are typically admitted to a subordinated class or excluded entirely, depending on the stage of the proceedings.
A creditor with a genuine set-off argument has two options at the proof of debt stage. The first is to file a proof of debt for the net amount. that is, after applying the set-off. and include in the submission a detailed explanation of the mutual claim. The basis for set-off. Additionally, the contractual or statutory provision relied upon. The second is to file for the gross amount owed and raise set-off as a defence to any claim the estate brings to recover the cross-debt. Each approach carries different procedural risks.
Filing for the net amount is cleaner but exposes the creditor to challenge if the administrator does not accept the set-off. The administrator may reject the proof of debt as understated, forcing the creditor into contested proceedings before the commercial court. The creditor then carries the burden of establishing that the set-off was valid and effective.
Filing for the gross amount and raising set-off as a defence is procedurally safer in one respect: it preserves the creditor's position in the claims register at full value. However, it creates an obligation to pay the cross-debt into the estate if the court ultimately rules that the moratorium bars set-off. In practice, the administrator will demand payment of the cross-debt as a condition of any distribution. A creditor that has filed gross but not yet paid its cross-debt may find its distribution withheld.
The creditors meeting (zbory kredytoriv – general meeting of creditors) also plays a role. Ukrainian insolvency legislation gives the creditors meeting significant powers, including the ability to approve or reject a proposed restructuring plan. A creditor whose set-off argument is pending may face a strategic choice: support a restructuring plan that accelerates distributions, or oppose the plan in hopes of a better outcome in liquidation. Where set-off value represents a substantial portion of recovery, this choice is not straightforward.
The liquidator (likvidator), appointed when the proceedings move to the liquidation phase, has comparable powers to the administrator in respect of challenging transactions. The liquidator is expressly authorised under insolvency legislation to bring claims to recover assets transferred in the pre-insolvency period, and this authority extends to set-off arrangements that are characterised as preferences. International creditors should note that the liquidator's challenge window may be longer than comparable periods in other CIS jurisdictions, and the evidentiary threshold for establishing a preference is not always predictable.
For creditors already engaged in Ukrainian insolvency proceedings, the firm's dedicated practice page on insolvency and restructuring in Ukraine sets out the full procedural environment and available advisory support.
Cross-border implications for CIS-region creditors
The set-off problem is particularly acute for creditors based in other CIS jurisdictions. Trade and investment relationships within the CIS region frequently involve reciprocal supply, distribution, or financing arrangements where mutual debts are common. When a Ukrainian counterparty enters insolvency proceedings, a creditor based in Kazakhstan, Georgia. Alternatively. Belarus faces the question of whether it can rely on set-off or whether it must participate in the Ukrainian insolvency process as an ordinary unsecured creditor.
The short answer is that participation in the Ukrainian insolvency process is unavoidable if the creditor wishes to recover anything. Ukrainian insolvency legislation does not recognise a foreign creditor's right to apply set-off unilaterally outside the proceedings. A Kazakh or Belarusian creditor that serves a set-off notice under its domestic law and considers the matter closed will be in for an unpleasant correction when the Ukrainian administrator demands payment of the cross-debt and refuses to acknowledge the offset.
Recognition of foreign insolvency proceedings is a related but distinct issue. Ukraine is not a party to the UNCITRAL Model Law on Cross-Border Insolvency in the same way as many EU member states or common law jurisdictions. The result is that a foreign insolvency proceeding concerning a parent or related entity does not automatically stay actions in Ukraine or require Ukrainian courts to defer to a foreign administrator's determination of set-off rights. Each Ukrainian proceeding is treated as a standalone process, and the Ukrainian commercial court applies Ukrainian insolvency legislation to all claims, regardless of where the creditor is based or what its domestic law says.
For creditors structured through holding companies in EU jurisdictions – a common arrangement for investors with Ukrainian operating subsidiaries – the EU dimension adds a further layer. EU insolvency regulation provides an automatic recognition mechanism for proceedings opened in EU member states, but this mechanism does not extend to Ukraine. A creditor seeking to enforce set-off rights arising from a contract governed by, say, German or Dutch law must nonetheless submit a proof of debt and argue the set-off question before the Ukrainian commercial court. The foreign law of the contract may be relevant to the validity of the underlying obligations, but it does not displace Ukrainian insolvency legislation as the lex concursus.
Practitioners in the CIS region note that one of the most consistent errors made by foreign creditors is to treat the governing-law clause in a commercial contract as a shield against Ukrainian insolvency rules. It is not. The governing law determines how the contractual obligations are interpreted and enforced in ordinary litigation. In insolvency, the lex concursus takes over as the governing regime for the treatment of claims and the availability of set-off. This distinction is well-established in European private international law and applies equally in the Ukrainian context, even absent a formal treaty framework.
A comparative perspective is also instructive. Analysis of insolvency set-off rights in Russia reveals both structural similarities and meaningful doctrinal differences that CIS-region creditors should understand when managing exposure across multiple jurisdictions simultaneously.
Strategic recommendations for creditors in Ukrainian restructuring proceedings
Given the doctrinal uncertainty and the asymmetric risks outlined above, creditors with potential set-off positions in Ukrainian insolvency proceedings should approach the matter through a structured strategy rather than relying on contractual provisions alone.
Before insolvency proceedings open, the most effective protective step is to ensure that any available set-off is exercised and documented while both parties remain solvent. This means serving a formal set-off notice as soon as the conditions are met. mutuality, same kind, due and payable – and retaining clear evidence of the notice, the mutual debts, and the effective date. A set-off that is complete before insolvency is far more defensible than one attempted after the moratorium attaches.
Where automatic netting provisions exist in a master agreement, counsel should review whether those provisions will be characterised as a unilateral enforcement action or as a contractual mechanism operating independently of the moratorium. This is not a question that can be resolved by reading the contract alone. It requires an assessment of current Ukrainian commercial court practice, which, as described above, is not uniform. Engaging a law firm in Ukraine with active insolvency experience before the debtor's financial position deteriorates is essential.
Once insolvency proceedings are opened, the creditor faces a set of time-critical decisions. Missing the proof of debt registration window is an irreversible error. The creditor should file promptly, with the most conservative proof of debt amount that adequately preserves its position, and immediately engage with the administrator to present the set-off argument in writing. A well-documented submission to the administrator. including the contractual basis, the mutual claim schedule, and the applicable legislative provisions – creates a record that supports the creditor's position if the matter proceeds to judicial resolution.
At the creditors meeting, the creditor holding a set-off argument should consider the collective dynamics of the proceeding. If a restructuring plan is proposed, the creditor must assess whether the plan adequately addresses its net claim position. A plan that distributes value to creditors without accounting for set-off may effectively subordinate the creditor's recovery by ignoring the cross-debt dynamic. Voting against a restructuring plan is a significant step, but it may be the appropriate one where the plan's treatment of set-off claims is inadequate.
If the proceedings move to full liquidation and a liquidator is appointed, the creditor should monitor whether the liquidator intends to pursue a preference challenge against any pre-insolvency set-off. Engaging proactively with the liquidator – providing documentation of the set-off's timing and the business rationale for it – is more effective than waiting for a formal challenge. Where a challenge is brought. The creditor will need to demonstrate that the set-off was effected at a time when both parties were solvent and that it was not designed to extract preferential value from a failing debtor.
For international creditors operating across the CIS region, the Ukrainian set-off question should feed back into contract design. Master agreements with Ukrainian counterparties should include clear automatic termination and netting provisions, with an explicit clause addressing the insolvency scenario. Whether those provisions will be fully honoured in Ukrainian insolvency proceedings remains uncertain, but a well-drafted clause at least creates a credible argument before the commercial court. Counsel familiar with both the governing law of the contract and Ukrainian insolvency legislation should review these provisions at the contract negotiation stage, not after a restructuring event occurs.
To discuss how set-off rights and proof of debt strategy apply to your specific creditor position in Ukrainian insolvency proceedings, contact us at info@ferrazwhitmore.com.
Outlook: regulatory trajectory and what creditors should monitor
Ukraine's insolvency legislative regime has been subject to ongoing reform pressure, driven in part by the country's integration aspirations with the EU and by the practical demands of post-conflict economic reconstruction. The body of insolvency law has been modernised in recent years, moving away from older Soviet-era structures toward a more market-oriented insolvency system. However, the treatment of set-off rights has not been the primary focus of these reforms, and the doctrinal uncertainty described in this analysis has not been legislatively resolved.
Several reform directions are relevant to creditors monitoring the legislative environment. First, there is discussion in Ukrainian legal circles about adopting elements of the UNCITRAL Model Law on Cross-Border Insolvency. If adopted, this would create a more predictable framework for foreign creditors, including rules on the treatment of claims arising under foreign-law contracts. It would not, however, automatically resolve the set-off question – UNCITRAL model provisions on this point are not prescriptive, and domestic implementing legislation would determine the outcome.
Second, the role of the administrator in contested claim situations is likely to become more prominent as the volume of insolvency proceedings increases in the post-conflict period. An administrator operating under resource constraints may be less willing to engage in extended set-off disputes and more likely to accept a settlement approach. Creditors who understand this dynamic can use it to negotiate a pragmatic resolution rather than pursuing full judicial determination.
Third, the Ukrainian commercial court system is developing a more consistent body of practice on insolvency matters. Courts in major commercial centres have accumulated significant case experience. Additionally, while individual decisions cannot be cited for authority. Practitioners observe that the general direction of practice is toward a more structured application of the moratorium principle. This trend is likely to reinforce the strict moratorium view over time, making pre-insolvency set-off strategy increasingly important for creditors with Ukrainian counterparty exposure.
Creditors should also monitor the evolving treatment of insolvency proceedings in the context of Ukraine's reconstruction financing. International financial institutions and bilateral donors are involved in structuring financing arrangements for Ukrainian borrowers, and some of these arrangements include netting and set-off provisions that may test the boundaries of current court practice. The outcomes in these higher-profile proceedings are likely to provide useful signals about where the courts are heading on the set-off question.
For a tailored strategy on set-off and claims management in Ukrainian insolvency proceedings, reach out to info@ferrazwhitmore.com.
Frequently asked questions
Q: Can a creditor exercise set-off rights after insolvency proceedings have been opened in Ukraine?
A: The position under Ukrainian insolvency legislation is restrictive. Once insolvency proceedings are formally opened, the general rule prohibits unilateral set-off by creditors outside the statutory claims process. A creditor seeking to rely on mutual debts must file a proof of debt and raise the set-off argument before the administrator or the court supervising the proceedings. Pre-insolvency set-off arrangements structured under civil legislation may survive, but their enforceability is subject to challenge if they are seen as preferential transactions.
Q: How long does it typically take to have a proof of debt admitted in Ukrainian insolvency proceedings?
A: The statutory window for filing a proof of debt runs from the date of public notice of insolvency proceedings. Creditors who miss this window face significant risk of having their claims relegated to a lower priority class or excluded entirely. In practice, the administrator reviews submitted claims within weeks of the filing deadline, but contested proofs of debt – particularly those involving set-off arguments – can take several months to resolve before the commercial court.
Q: Is it a misconception that contractual netting clauses automatically survive Ukrainian insolvency?
A: Yes, this is one of the most common misconceptions among international creditors. Contractual netting or set-off clauses that appear enforceable under general civil legislation do not automatically carry over into insolvency proceedings. Ukrainian insolvency legislation imposes a stay on individual enforcement actions, which courts have interpreted to include unilateral netting. A creditor relying solely on a contractual clause, without engaging the proof of debt process, risks losing the benefit of set-off entirely. Engaging a lawyer in Ukraine with restructuring experience before proceedings commence is the most effective way to preserve these rights.
About Ferraz & Whitmore
Ferraz & Whitmore is an international law firm based in Lisbon, advising business clients across 46 jurisdictions. Our team supports creditors, administrators, and restructuring parties in insolvency and restructuring matters across CIS and emerging-market jurisdictions, including Ukraine. The firm combines Portuguese civil law expertise with English common law tradition. Giving clients access to advisers who understand both the doctrinal underpinnings of post-Soviet insolvency systems and the cross-border enforcement strategies available in common law jurisdictions. Our insolvency and restructuring practice covers 15 practice areas across Europe, the Americas, Asia, the Middle East, and the CIS. The firm's attorneys have advised on set-off, claims management, and restructuring plan negotiations in proceedings before commercial courts and arbitral bodies across the region. As an international law firm serving CIS-region clients, Ferraz & Whitmore offers practical, results-oriented counsel to international entrepreneurs, institutional creditors, and in-house legal teams managing multi-jurisdictional insolvency exposure. To discuss your situation, contact us at info@ferrazwhitmore.com.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.