Insolvency set-off—the position under the Insolvency (England and Wales) Rules 2016
Produced in partnership with South Square and BDO LLP
Insolvency set-off—the position under the Insolvency (England and Wales) Rules 2016

The following Restructuring & Insolvency guidance note Produced in partnership with South Square and BDO LLP provides comprehensive and up to date legal information covering:

  • Insolvency set-off—the position under the Insolvency (England and Wales) Rules 2016
  • Introduction
  • Claims must be due
  • Claims must be commensurable
  • Claims must be mutual
  • Exceptions to set-off

Introduction

Set-off refers to claims that may be set-off against other claims. A set-off is the right of one party, Party A, who is owed money by another party, Party B, to ensure payment by setting off the amount owed through a reduction of Party A’s liability to Party B under a separate dealing. Thus, where a creditor and a debtor have had mutual dealings, the creditor is entitled to set-off against the debt which they are owed any sum which they owe to the debtor.

In insolvency law, set-off is a commercially significant (if complex) subject. The consequence of insolvency set-off is to relieve the insolvent company/individual, Party A, from paying a dividend to a creditor, Party B, and to allow Party B to be paid in full out of a debt which it owes to Party A. The creditor will recover in full to the extent of the set-off. This puts them in a better position than they would otherwise have been, ie they do not rank pari passu to the extent that they recover in full through the set-off. This means that insolvency set-off operates as a distinct exception to the pari passu principle. In effect, it allows the creditor to use their indebtedness to the insolvent estate as a form of security.

The justification for insolvency set-off