What-is-Set-Off-in-a-liquidation-process

Learn how set-off can impact the amount you owe your creditors on liquidation

When a company goes into liquidation, whether it’s voluntary or compulsory, all creditors have specific rights. One of these rights is to claim any money owed to them by the company being liquidated (the debtor).

Nevertheless, this process works both ways. The company undergoing liquidation can also lodge claims against its creditors for money it is owed. If a claim is substantiated, the money owed can be used to balance the debt owed to its creditor. This procedure is termed as set-off.

 

Set-off in liquidation: Here is an example

When the right of set-off arises, it can effectively nullify part or all of a creditor’s claim.

For instance, if Company A goes into liquidation owing £50,000 to Company B, but Company B also owes £20,000 to Company A, the remaining balance owed to Company B upon liquidation is £30,000. Whether Company B receives the £30,000 it’s owed, either partially or entirely, depends on various factors. 

These include whether it’s a secured or unsecured creditor and if it holds a fixed charge on a company asset.

 

When does set-off apply in a company liquidation process?

As per the Insolvency Rules (England and Wales) 2016, an insolvent company can employ the right of set-off against a creditor if the following three conditions are met:

    •  The claims are substantiated and quantifiable.

    • The debt was accrued before the company became insolvent. 

    • There have been mutual transactions between the creditor and the insolvent company.

In the final scenario, if the creditor was informed of the debtor company’s insolvency before the debt was accrued (for instance, via a winding-up application or a notice to appoint an administrator), set-off will not be applicable. 

Consequently, any funds owed by the insolvent company to the creditor will not be considered during liquidation.

 

Who is responsible for set-off in liquidation proceedings?

When a company and a creditor have engaged in mutual transactions before the company enters liquidation, the right of set-off comes into effect. The amount owed from the insolvent company to its creditor, and vice versa, must be considered, and the amounts should be set off against each other.

If there is still an outstanding amount owed to the creditor after the set-off, the creditor can assert a claim for that sum as part of the liquidation proceedings.

Conversely, if the creditor owes money to the insolvent company following set-off, the creditor is obligated to settle the debt to the liquidator. This ensures that the amount can be included in the assets of the liquidated company, benefiting its other creditors.


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Need Professional Help?

If you’re uncertain about how set-off could affect your insolvent company or if you’re concerned about overwhelming debts, please reach out to us for a complimentary consultation. 

We speak with company directors like you regularly and can offer the confidential assistance and guidance you require.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.