Insolvency set-off


Published by a ½Û×ÓÊÓƵ Restructuring & Insolvency expert
Practice notes
In-house

Insolvency set-off


Published by a ½Û×ÓÊÓƵ Restructuring & Insolvency expert

Practice notes
In-house
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General

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.

The Rules of administration set-off and liquidation set-off are contained in the Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024, rr 14.24 and 14.25, respectively. The rules of bankruptcy set-off are found in section 323 of the Insolvency Act 1986 (IA 1986).

Under insolvency set-off, an account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party to another shall be set-off against the sums due from the other.

Set-off affects the substantive rights of the parties and will reduce or extinguish a debt such

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Jurisdiction(s):
United Kingdom
Related legal acts:
Key definition:
Insolvency definition
What does Insolvency mean?

This can be defined by two alternative tests (Insolvency Act 1986, s 123):

• cash flow test: a company is solvent if it can pay its debts as they fall due, no matter what the state of its balance sheet (Re Patrick & Lyon Ltd [1933] Ch 786);

• balance sheet test: a company which can pay its debts as they fall due may be insolvent if, according to its balance sheet, liabilities (including contingent liabilities) exceed assets.

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