In a situation where a creditor of a company subject to bankruptcy proceedings also has a debt towards the bankrupt debtor, the question arises whether their mutual claims may be set off in bankruptcy proceedings.
The answer is affirmative, but only upon fulfillment of certain conditions, which will be discussed below.
General Conditions for Set-off
The general conditions for set-off are prescribed by the Law on Obligations.
For two mutual claims to be set off, it is necessary that both claims relate to money or other fungible items of the same type and quality, and that both are due.
However, set-off does not occur automatically once the conditions are met; one party must declare to the other that it is setting off, and after the given set-off declaration, it is considered that the set-off took effect at the moment when the conditions were met.
Conditions for Set-off in Bankruptcy Proceedings
According to the Bankruptcy Law, a creditor who, prior to filing the petition for initiation of bankruptcy proceedings, acquired the right to set off its claim against the debtor’s claim towards it, does not lose the right to set-off upon the opening of bankruptcy proceedings.
This practically means that all the above-mentioned general conditions for set-off must be fulfilled before the date of filing the bankruptcy petition.
The bankruptcy creditor must declare its intention to set off by procedural action – submitting to the court both the claim filing for the full amount of the claim and the set-off declaration.
These actions must be taken within the deadline for filing claims; otherwise, the right to set-off is lost.
Regardless of the fulfillment of the aforementioned conditions, set-off will not be allowed if the bankruptcy creditor acquired the claim within six months prior to the filing of the bankruptcy petition, and knew or ought to have known that the debtor was insolvent or overindebted.
The debtor’s insolvency awareness of the creditor at the moment of acquiring the claim is assessed by the bankruptcy administrator based on the circumstances of the specific case.
Set-off will nevertheless be permitted if the claim was acquired in connection with the completion of unfulfilled contracts or if the claim was reinstated through the successful avoidance of a legal transaction or other legal act of the debtor.
Set-off will also not be permitted if the conditions for it were met through a legal transaction or other legal act subject to avoidance.
Acts of ordinary satisfaction of creditors may be avoided if undertaken within six months prior to filing the bankruptcy petition and if, at the time they were undertaken, the debtor was insolvent and the creditor knew or ought to have known of the debtor’s insolvency.
Acts of extraordinary satisfaction of creditors may be avoided if undertaken within twelve months prior to filing the bankruptcy petition.
Conclusion
The provisions of the Bankruptcy Law allow a creditor who acquired the right to set-off prior to the filing of the bankruptcy petition to exercise that right after the opening of bankruptcy proceedings, but subject to the restrictions prescribed to prevent prejudice to other creditors.
This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.
By Vuk Preradovic, Junior Associate, PR Legal
