Related Articles. Creditor’s claim is reduced or canceled by the amount of the debtor’s claim against the creditor.
What is the purpose of set-off?
By subtracting the lesser need from the larger one, a set-off can be used to balance the two demands, or, if they are equal, to extinguish them both altogether. The term “set-off” is often used to refer to the practice of deducting a set-off amount from a cross-demand. A set-off clause is commonly used in loan agreements between lenders and borrowers, but it can appear in any contract. They are also utilized in situations where there is a possibility of non-payment of a debt. The set-off provision is frequently used by one of the parties to reduce or mitigate its own responsibility to the other party. Parties can mutually settle their debts by setting off their claims against one another under a set-off clause.
Equitable set-off and legal set-off are two types of set-off in Indian law. Lawful set-offs are contemplated by Order VIII Rule 6 of the 1908 Code of Civil Procedure “CPM”). Certain requirements must be met before a lawful set-off of claims can occur under the Rule. To begin, the claim sought to be set-off must be lawfully recoverable by the claimant in a lawsuit for recovery of money As a second step, the exact amount of money needed must be determined. To put it another way, the plaintiff and defendant must have the same character when it comes to the claims they are attempting to set-off in the defendant’s suit. Finally, the amount sought to be recouped should not exceed the Court’s financial jurisdiction. As well as in the Indian Contract Act of 1872 (ICA), the concept of set-off is mentioned “As it pertains to ‘right to lien,’ the ICA
Banks, factors, wharfingers, attorneys, and insurance brokers can all utilize their right to lien under the ICA’s Section 171. In the absence of a contract to the contrary, the aforementioned categories of persons have the right to retain any goods bailed to them as security. In a case, the Punjab High Court ruled that the right to lien and the right to set-off were distinct “For example, a bank’s lien is the right to retain possession of another’s property until a debt is repaid, while a banker’s right to set-off means a customer can combine multiple bank accounts when the debtor has defaulted on making payments.
However, equitable set-off is not subject to the laws of the land. From the foundational principles of fairness, justice and good conscience. Any claim for equitable set-off is based solely on the Court’s discretion and cannot be guaranteed as a matter of law.
In the 2010 case of Geldof Metaalconstructice v. Simon Carves Ltd., the English Court of Appeal reviewed the scope of set-off in an agreement that did not clearly provide for it. Simon Carves, the defendant in the Geldof case, was a contractor who purchased and installed pressure vessels and storage tanks. To the extent that Geldof offered both services, a supply contract (with a right to set-off) and an installation contract (without a right to set-off) were entered into by the parties. In the aftermath of Simon Carves’ accusation that he had breached the installation contract, Geldof refused to pay Carves under the supply contract. Due to non-payment on an earlier supply contract, Geldof then refused to complete work on the installation contract.
Court of Appeal was debating whether or not “Under the supply contract, a set-off is also available under the installation contract. When Simon Carves sought an equitable set-off for his counterclaim under the installation contract, he could do so since the supply contract’s set-off clause stated that “any other monies lawfully payable” might be used to offset the counterclaim. Using the supply contract’s set-off clause, the Court ruled that Simon Carves was entitled to its counterclaim against the supplier. Even if there was not a set-off clause in the supply contract, they were nonetheless entitled to the claim because of the principle of equitable set-off, according to the court.
Lord Denning discussed the position of equitable set-off prior to the Geldof case in Federal Commerce & Navigation Co. Ltd v Molena Alpha Inc (famously known as The Nanfri), which held that the right to equitable set-off stems from two closely related transactions and that there must be a common connection between the two.
The law of equitable set-off can be utilized to assist parties to the contract even if there is no clear contractual provision, but whether such set-off is relevant would still be determined on the facts of the case.
When it comes to M&A and PE transactions, set-off and counterclaim provisions are often hotly disputed.
Where there is an acquisition or an investment made in tranches, meaning that all of the funds due are not paid in full at once, they are of particular importance. It is standard practice for sellers in M&A and PE deals to offer representations and indemnities to protect buyers against the purchase price.
If the purchaser or investor has a multi-million-dollar indemnity claim against the sellers, what happens if the purchasers/investors also have a payment due to be made to the sellers at the same time, for the next tranche? As a result, no buyer or investor would like to be seen making a substantial indemnification claim while simultaneously paying for the next tranche in full. It’s almost incomprehensible. Even if an indemnity claim is not yet solidified, the sellers would argue that the mere raising of an indemnity claim should not deprive the sellers of their next tranche payment that is legitimately due to them. They frequently come to an impasse at this point. Both parties are correct.
- The next tranche should be held in escrow until the indemnity claim has been resolved. Neither the seller nor the buyer/investor gain from the escrowed money in this manner. In order to prevent a buyer/investor from filing a frivolous indemnification claim, this policy has been put in place.
- Make an effort to draw attention to yourself. A reasonable interest rate should be imposed on the buyer or investment if the seller wins the indemnity claim.
- Once a specific indemnity has been established or the liability has been established, set-offs are permitted. While this is a win-win situation for the seller, the buyer or investor may feel uneasy, and in that case, it becomes a matter of weighing the risks.
- Set-off any claims against future tranches owed to sellers by keeping an open right of set-off in place. This is the best possible scenario. However, the sellers are unlikely to agree.
- Ensure that you retain the right to set-off in the areas where you anticipate the most liability. Set-off rights may be limited to tax claims if your target is in the financial services industry. The right to set-off for non-compliance with licenses and malpractice claims may be a consideration if your target is a medical services or pharmaceutical corporation.
- Set the parameters for a set-off. Nobody wants to get involved in a dispute over trivial matters. If the claim is big enough to keep the buyer or investor awake at night, the right to set-off will apply.
- Assess the dangers. Talk to your mentors and go back to the drawing board. Are there any substantial non-compliances that could lead to heavy liabilities that you discovered during your legal, financial, or other technical due diligence? As long as the target is clean and professional, you may be allowed to waive your right of access. Make sure to keep in mind that even if your agreement does not explicitly mention set-off, you may still be able to claim an equitable or legal set-off provided you meet the relevant conditions. Despite the fact that this may not be the ideal situation, it is still a right.
Identifying measures to safeguard the interests of both the seller and the buyer/investor are becoming increasingly important as the number of M&A and PE transactions rises. A set-off mechanism may be necessary in high-value transactions to protect the interests of the buyer/investor.
Disclaimer: This text is for informational purposes only and does not profess to be any kind of legal advice or opinion. This post is not an attempt by Pioneer Legal to promote its own legal services.
What does a set-off mean in court?
Debtor’s right to remove money owed in the other direction from the debt. 2. A defendant’s demand for money from the plaintiff for an unconnected injury. The laws of business.
Is a set-off a payment?
Contractual set-off. Where payments are due from both parties to a transaction, the parties may agree that, instead of both parties making separate payments, the party due to make the bigger payment should pay the difference between the two sums due.
How does a set-off work in law?
Debtors’ deposits can be taken from them when they default on their loans under the terms of a set-off clause. Creditors and debtors can resolve their mutual debts by offsetting transaction claims, which is another type of set-off clause.
What is the right of set-off?
It is also known as the right of combination of accounts. A bank has the right to set off a customer’s debt against his own debt.
What is set-off example?
- His inability to remember to bring his school supplies greatly irritates me.
- Keep the football game out of the conversation. It’s going to rile up my father. You’ll never be able to get him to shut up.
- At twelve o’clock in the morning, the manager went to check on the night shift workers to see how they were doing.
What are the condition of set-off?
Mujtaba v Yasin, 2020 ONSC 2554 was a case in which Justice Emery discussed the two types of setoff: legal and equitable.
“In an action for payment, the defendant may by way of defense assert the right of set-off against the plaintiff’s claim the obligation owing by the plaintiff to the defendant,” reads Section 111 of the Courts of Justice Act.
When parties to a lawsuit establish competing obligations against one another, legal set-off necessitates the fulfillment of two conditions. Firstly, both obligations must be debts, so that the claims are liquidated. In addition, both debts must have mutual cross-obligations in order for this to work.
When a claim for money is either liquidated or unliquidated, an equitable set-off is available. Mutuality is not required. As long as it can be shown that the damages came from a similar contract or series of circumstances, an equitable set-off can be used to reduce a claim’s value by the same amount.
The defendant must show that the two commitments are so intertwined that it would be unconscionable for the court to deny set-off for non-debtor obligations, such as unliquidated claims, against the sums at issue in the action in order for equitable set-off to succeed as a defense.
Defendants who desire to use a set-off defense must do so in their statement of defense.
When set-off can be claimed?
Order 8, Rule 6 of the Code deals with the right to set-off, which is referred to as a legal set-off. Legal set-off can only be claimed under this rule in relation to a legally recoverable sum of money emanating from two separate transactions by the defendant.
What is set-off under CPC?
Claims by the defendant against the plaintiff, as well as defenses that the defendant can use, are known as set-offs. It is a claim made by both parties in the suit to recover money. When two people are mutually indebted to each other, it is called a debt cancellation.
