Is set off recognised on insolvency?
Lending & Secured Finance
The creditor’s right to set-off, acquired prior to the opening of bankruptcy proceedings based on law or a contract, is not affected and is recognised in bankruptcy.
Set off is always prohibited:
- if the obligation of the bankruptcy creditor towards the bankruptcy estate occurred after the opening of the bankruptcy proceedings;
- if the bankruptcy creditor acquired the claim from another creditor only after the opening of bankruptcy proceedings;
- if the bankruptcy creditor acquired the claim by assignment for the last six months prior to the day of the opening of bankruptcy proceedings, i.e. if the bankruptcy proceedings were not opened for the last six months prior to the day of the opening of bankruptcy proceedings, and he knew or should have known that the debtor had become insolvent or that an application for the opening of pre-bankruptcy settlement proceedings, i.e. an application for the opening of bankruptcy proceedings, had been filed against him. By way of derogation, set-off will be permitted in the event of a claim that was assigned in connection with the fulfilment of non-fulfilled agreements or a claim the right of fulfilment of which was re-acquired by the successful challenging of the debtor’s legal transaction;
- if the bankruptcy creditor acquired the possibility of set-off by a voidable legal action.
Equal satisfaction of creditors is one of the major principles of insolvency proceedings; set offs within the bankruptcy are thus very limited.
Generally, a unilateral set off is permitted if legal prerequisites for such set off arose already before the bankruptcy ruling.
However, the set off is not possible after the declaration of insolvency if:
- The creditor did not register the claim to be set-off;
- The creditor fails pay the amount by which the debtor’s claim exceeds the creditor’s claim (if any);
- The creditor knew about the debtor´s insolvency at the time of acquiring the claim;
- The creditor acquired the claim as a result of an ineffective legal act.
In addition, set-off may be prohibited by a court by means of a preliminary injunction. Set off is also not possible within the moratorium.
Yes, as a general rule, a creditor may demand the set-off of its claims against the claims of a bankruptcy debtor. There are, however, certain limitation to this intended to prevent the misuse of the right off set-off.
Set-off is generally possible in administration proceedings on the same grounds as in bankruptcy proceedings.
If a particular right of set off existed prior to the opening of insolvency proceedings than this right of set off will continue to exist in the insolvent company's insolvency. In case a right of set off arises after the opening of insolvency proceedings, set off may be restricted.
Set-off is prohibited once the insolvency of the debtor is declared, unless the right to set-off exists before the insolvency is declared (and not, for instance, as a result of the declaration itself).
As an exception, set-off will be allowed when permitted by the law applicable to the obligation (e.g., a hedging agreement governed by a law that permits set-off after the insolvency declaration).
Notwithstanding the above, Royal decree Law 5 / 2005, of 11 March (Real Decreto Ley 5 / 2005, de 11 de mayo, de reformas urgentes para el impulso de la productividad y para la mejora de la contratacion pública ("RDL 5 / 2005")), has implemented the EU Collateral Directive and removed all formal requirements provided for the execution, validity, evidence and foreclosure of certain pledges (i.e. over shares and bank accounts). It also states that collateral governed thereunder may be directly enforced pursuant to the terms expressly agreed by the parties without being limited, restricted or affected in any manner by the opening of any insolvency proceedings, applies to such pledges.
In liquidation, if the debtor and a creditor are mutually debtor and creditor of each other, one debt shall be set off against the other, and only the balance, if any, shall be allowed in the liquidation proceedings. The rule is not clear in rehabilitation but it appears that the right of set-off may be exercised only prior to the commencement of the rehabilitation proceedings since the law provides that issuance by the court of a commencement order shall serve as the legal basis for rendering null and void any set-off after the commencement date of the rehabilitation proceedings.
Assuming set-off would be permitted outside insolvency, a creditor may use a claim against a bankrupt debtor to set-off against a claim which the bankrupt debtor had against the creditor prior to the bankruptcy order (regardless of whether the creditor’s claim is due and payable or not). It should however be noted that there are certain restrictions limiting the right of set-off in certain situations where set-off opportunities have been created for improper purposes.
The right of set-off in the context of company reorganization is similar to that in bankruptcy. In general, a creditor may use a claim against the debtor, which arose prior to the company reorganisation proceedings were applied for, to set-off against a claim which the debtor then had against the creditor (regardless of whether the creditor’s claim is due and payable or not).
Under Turkish law, the right of set-off can be exercised before, on or after the insolvency or bankruptcy of the counterparty. However, pursuant to the Enforcement and Bankruptcy Law (Law No. 2004), set-off shall not be enforced after a party's bankruptcy if:
(a) a debtor of the bankrupt person becomes a creditor of the bankrupt person after its bankruptcy (but not the insolvency) if declared by a competent Turkish court; or
(b) a creditor of the bankrupt person becomes the debtor of the bankrupt person or the bankruptcy estate after bankruptcy;
(c) the debts of the creditors are evidenced by a negotiable instrument (i.e. promissory note or bill of exchange) after the debtor is declared bankrupt, regardless of such negotiable instrument being issued before, on or after the bankruptcy.
Yes, but with limitations. The Bankruptcy Code does not create a right of setoff but recognises such right(s) if valid under applicable non-bankruptcy law. The underlying debt must be mutual as between the debtor and the entity seeking setoff and must arise before the commencement of a bankruptcy case to be enforceable. Because a creditor’s right to setoff is automatically stayed upon filing of a bankruptcy petition (pursuant to the automatic stay), creditors must seek permission from the court to lift the automatic stay to effect a setoff. Additionally, certain setoffs effectuated within the 90 days prior to the filing of a bankruptcy petition may be voided, depending on the circumstances (including whether the setoff relates to a financial transaction that is safe-harbored under the Bankruptcy Code).
In principle, a creditor can exercise a right of set-off with respect to a claim a bankrupt debtor has against it. The right of set-off is, however, excluded in the following cases:
a. if a debtor of the bankrupt became a creditor only after the opening of the bankruptcy proceeding (except if such a debtor only fulfils an obligation which was pre-existing at the time of the opening of the bankruptcy or if debts of the bankrupt are satisfied by using collateral made available by such a third-party debtor);
b. if a creditor of the bankrupt became a debtor of the bankrupt debtor or the bankrupt estate only after the declaration of bankruptcy; or
c. if the claim to be set off results from unpaid capital contributions.
Set-off against claims generally arises where the creditor establishes that the rights were acquired bona fide prior to the adjudication of bankruptcy. The set-off is voidable where the debtor of a bankrupt debtor has acquired, prior to the opening of bankruptcy but knowing its creditor is insolvent, a claim against him or her, with a view to procure for itself or a third person, by way of set-off, an advantage to the prejudice of the assets in bankruptcy.
The same rules apply to composition proceedings.
Mutual debts can and must be set off in the event of insolvency or administration. Contractual set-off arrangements are generally enforceable on insolvency insofar as they are consistent with the mandatory set-off regime but not further or otherwise.
The Insolvency Rules 2016 impose a mandatory insolvency set-off regime when a company goes into liquidation, or is in administration once the administrator has given notice of an intention to make a distribution to creditors.
Specifically, Rule 14.25 stipulates that account shall be taken of what is due from each party to the other in respect of the mutual dealings (e.g. mutual credits and mutual debts) and sums due from one party shall be set off against those sums due from the other.
Jersey law provides for contractual and non contractual set off.
Contractual Set Off. The Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005 (the 2005 Law) provides that despite any enactment or rule of law to the contrary, any set off provision in a finance document is enforceable in accordance with its terms against a Jersey company despite the bankruptcy (which will include any procedure analogous to bankruptcy (as defined in Article 8 of the Interpretation (Jersey) Law 1954) or any similar procedure under any applicable law) of a party to the agreement or of any other person, or the lack of mutuality of obligations between a party to the agreement and any other person.
Non Contractual Set Off. Prior to the insolvency of a party to any finance documents, Jersey customary law contains the concept of compensation, being a non contractual set off. For compensation to be available, the debts must be certain and due which will not be the case if a debt is not admitted or not capable of being readily proved without material litigation.
In the case of the insolvency of a party to any finance documents (where that insolvency is one in respect of which the Jersey courts have jurisdiction), the issue of set off will be determined in accordance with the Bankruptcy(Désastre) (Jersey) Law 1990 which requires that, where there have been mutual credits, mutual debts or other mutual dealings between the debtor and a creditor, an account shall be taken of what is due from one party to the other as at the date of the declaration of désastre in respect of such mutual dealings, and that the sum due from one party shall be set off against any sum due from the other party and that the balance shall be claimed or paid on either side respectively.
Netting. The 2005 Law provides that despite any enactment or rule of law to the contrary, any close out netting provision in a finance document is enforceable in accordance with its terms against a Jersey company despite the bankruptcy (which will include any procedure analogous to bankruptcy (as defined in Article 8 of the Interpretation (Jersey) Law 1954) or any similar procedure under any applicable law) of a party to the agreement or of any other person, or the lack of mutuality of obligations between a party to the agreement and any other person.
It should be noted that none of the provisions of the 2005 Law referred to in this paragraph will affect the application of any enactment or rule of law that renders a set off provision or close out netting provision unenforceable on the grounds of fraud or misrepresentation or the enforceability of any provision of an agreement that provides that a set off provision or close out netting provision shall be void in the event of fraud or misrepresentation.
There must be mutuality for a set-off of debts to apply in insolvency, for example:
- Mutual credit;
- Mutual debt; and
- Other mutual dealings between mutual parties.
The application of insolvency set-off is mandatory with few exceptions. If a creditor has both ordinary and preferential claims, the set-off must be conducted proportionately with respect to each category of claim. Similarly, if a creditor has both secured and unsecured claims, the creditor must elect to either:
- Surrender his security and prove in the liquidation; or
- Set-off only against the unsecured claims.
In general, a set-off is possible in the course of insolvency proceedings. The general offsetting requirements of the Austrian General Civil Code – modified by specific provisions of the insolvency act – apply.
According to the Austrian Insolvency Act a set off is not admissible in case a creditor has become debtor after the opening of insolvency proceedings or acquired the claim against the debtor after the opening of the proceedings. Further, a set-off is not admissible in case a third party acquired his claim in the last 6 months prior to the opening of the insolvency proceedings and if the third party knew or should have known that the debtor is insolvent.
On the other hand, a set-off is admissible even if the claim of the debtor or creditor is either conditional or payable at a future date or the creditor’s claim is not for legal tender (on the date of the opening of the insolvency proceedings will be converted into cash receivables).
Yes, under the Bankruptcy Law set-off is permitted upon delivery of the court's judgment and provided it was agreed among debtor and qualified creditors under the corresponding settlement agreements.
Bosnia & Herzegovina
Yes, set-off is possible if the creditor had prescribed right to set-off with the debtor stipulated in the agreement or in cases where set-off is enforced by the law.
Insolvency laws provide for specific cases when set-off is not allowed by law. For example, in the FBH, the set-off of claims shall not be permissible if:
- insolvency creditor has become indebted to the insolvency estate after the opening of the insolvency proceedings;
- insolvency creditor acquired its claim from any other creditor after the opening of the proceedings;
- insolvency creditor obtained the right to set-off through a disputable transaction;
- creditor, whose claim must be satisfied from the assets of the insolvency debtor that are not part of the insolvency estate, is in debt to the insolvency estate;
- the creditor is a related party, against whom the insolvency debtor has claim that arose or became due during six months before filing of the application for the opening of the insolvency proceedings, if the creditor fails to prove that it was unaware (at the time of the establishment of the set-off possibility) of the insolvency debtor’s imminent or current inability to pay its debts when due.