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What is Set-Off in a liquidation process?
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Learn how set-off can impact the amount you owe your creditors on liquidation
When a company enters liquidation, whether it’s a voluntary or compulsory process, all creditors have certain rights. One of those rights is to submit a claim for any money they’re owed by the company being liquidated (the debtor).
However, this process is a two-way street. The company being liquidated can also make claims against its creditors for money it is owed. And, if a claim is proven, the money it’s owed can be used to offset the debt to its creditor. This process is known as set-off.
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When the right of set-off arises, it can effectively cancel out part or all of a creditor’s claim.
For example, if business A enters liquidation owing £50,000 to creditor business B, but business B also owes £20,000 to business A, the balance owing to business B on liquidation is £30,000.
Whether business B receives the £30,000 it’s owed in part or in full depends on several factors, such as whether it’s a secured or unsecured creditor and whether it has a fixed charge on a company asset.
According to the Insolvency Rules (England and Wales) 2016, an insolvent company can use the right of set-off against a creditor if the following three conditions apply:
- There have been mutual dealings between the creditor and the insolvent company; and
- The claims are proven and quantifiable; and
- The debt was incurred before the company was insolvent.
Regarding the final point, if the creditor received notice that the debtor company was insolvent before the debt was incurred (for example, through an application to wind the company up or a notice to appoint an administrator), set-off will not apply. In this case, any money owed by the insolvent company to the creditor will not be taken into account on liquidation.
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If there have been mutual dealings between a company and a creditor before that company goes into liquidation, the right of set-off applies. The amount owing from the insolvent company to its creditor and vice versa must be taken into account and the amounts must be set-off against each other.
- If money is still owing to the creditor after set-off then the creditor can make a claim for that amount as part of the liquidation process;
- On the other hand, if the creditor owes money to the insolvent company after set-off, the creditor must pay the debt to the liquidator so it can be added to the liquidated company’s assets for the benefit of its other creditors.
If you’re unsure how set-off might apply to your insolvent company or you’re worried about unmanageable debts, please get in touch for a free consultation. We speak to company directors like you every day and can provide the confidential help and advice you need.
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