The following Restructuring & Insolvency practice note Produced in partnership with South Square and BDO LLP provides comprehensive and up to date legal information covering:
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 is policy-based, eg that it would
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