The right to set-off claims and obligations
in insolvency proceedings is an important tool for creditors in
order to protect themselves against the insolvency risk of a
contractual counterparty. This article gives a short overview of
the rules for set-off in insolvency proceedings in Austria and
certain CEE jurisdictions not taking into account special
provisions for close-out netting and similar transactions.
Austria
Set-off in insolvency proceedings
Austrian law allows creditors to set-off obligations owed by them
to an insolvent debtor, against their claims against the relevant
insolvency estate. This right to set-off claims in insolvency
proceedings provides creditors of insolvent debtors with de facto
security. As long as the creditors' obligations towards the
insolvent debtor are at least equal to their claims against the
insolvent debtor, they are protected from any loss in insolvency
proceedings. However, a recent decision of the Austrian Supreme
Court (OGH) sets an expiration date to this right.
Other than outside of insolvency proceedings, set-off is also
possible if the relevant claims and obligations (i) have not yet
fallen due; (ii) are contingent; or (iii) in the case of a
creditor's claims, are not monetary claims. This is due to the
provision that all claims against the insolvent debtor, but not
claims of the insolvent debtor, are converted into monetary claims
and become due upon the opening of insolvency proceedings.
A creditor does not even have to file the claims he wants to
set-off against his obligations against the insolvent debtor during
insolvency proceedings. Thus, even if insolvency proceedings are
opened with regard to a creditor's debtor, the creditor does
not have to participate in the insolvency proceedings at all.
Restriction on set-off
The law, however, restricts set-off of claims obtained or
obligations which arose prior to the opening of insolvency
proceedings, against obligations which arose or claims obtained
after the opening of such proceedings. The restriction applies in
particular to claims acquired and obligations assumed by the
relevant creditor from a third party. In addition, a creditor may
not set-off claims obtained in the last six months prior to opening
of insolvency proceedings if, at the time of the acquisition, he
knew or ought to have known of the debtor's insolvency. The aim
of this provision is to protect creditors dealing with a later
insolvent debtor and relying, in good faith, on their right to
set-off while preventing the right to set-off being abused
depleting the insolvency estate.
Especially where different members of a group deal with one
counterparty, this restriction has to be borne in mind. In the
event of the insolvency of the counterparty, the group may be left
with claims and obligations which they are unable to set off
because claims are owned and obligations are owed by different
members of the group. Careful structuring of the contractual
relationship may help to mitigate this risk.
Security with an expiration date
Until recently it was unclear whether a creditor could also rely
on its right to set-off, in the case where a restructuring plan
(Sanierungsplan) had been accepted and confirmed by the
court. If a restructuring plan becomes effective, unsecured claims
are reduced to the quota provided for in the restructuring plan.
For a creditor who also has obligations towards the insolvent
debtor, this poses a crucial question: can he still set-off his
entire claim against his obligations, or is his claim reduced in
line with the quota for purposes of set-off?
Past decisions by the Supreme Court were not coherent on this
question. While in some cases the Supreme Court argued that it
would be unjust to deprive the creditor of his right to full
set-off, in other cases it was held that creditors could set-off
their obligations against the entire claim prior to the
effectiveness of a restructuring plan but only against the quota
after effectiveness of such plan.
In its decision 6 Ob 179/14p, the Supreme Court, by way of a
reinforced senate decision, ruled that an effective restructuring
plan reduces claims for purposes of a later declared set-off. This
means that where a creditor waits too long with declaring set-off,
he may find himself in a position where he cannot set-off against
his whole claim anymore but against a quota only.
Thus, creditors intending to declare set-off can no longer just
lean back and ignore the insolvency proceedings. From now on, they
will have to take care not to wait until it is too late if they
want to avoid paying in full but receiving only a quota.
...and beyond
Croatia
In Croatian insolvency proceedings, claims can generally be
set-off if the Civil law requirements for set-off are met. Only
claims acquired and obligations incurred before the opening of
insolvency proceedings may be set-off against each other. Set-off
is not possible if the relevant claim has been acquired in the last
six months preceding the opening of the insolvency proceedings, if
the creditor knew or ought to have known that the debtor was unable
to make payments, or that an application for insolvency had been
filed. Claims resulting from a voidable legal act cannot be used
for set-off.
Czech Republic
Creditors are generally also permitted to set-off claims during
insolvency proceedings if the Civil law requirements for set-off
were met prior to the opening of the proceedings. In addition, the
creditor may only declare set-off if he has registered his claim,
the claim has been obtained by valid and enforceable legal action,
and most importantly, the creditor had not been aware of the
debtor's insolvency when acquiring the claim. The court may
order further limitations on set-off.
Set-off is generally not permitted during a moratorium or in
reorganisation proceedings.
Hungary
Set-off is not allowed during a moratorium in reorganisations.
During liquidation, only claims that have been recognised by the
liquidation administrator may be set-off. Further, only claims and
obligations existing and owned at the time of opening of
liquidation may be set-off against each other. Finally, a creditor
cannot set-off if he participates in the sale of the assets of the
debtor as buyer.
Poland
Creditors in Polish bankruptcy proceedings may set-off their
claims with their obligations against the debtor provided such
claims and obligations existed prior to the opening of the
bankruptcy proceedings. Set-off is facilitated in bankruptcy
proceedings as all claims against the insolvent debtor are
converted into monetary claims, and all such claims become due upon
the opening of bankruptcy proceedings.
Set-off is not permitted if the creditor incurred its obligation
against the insolvent debtor after the opening of insolvency
proceedings. Furthermore, set-off is not permitted where a claim
against the insolvent debtor has been acquired by means of
assignment or endorsement subsequent to the declaration of
bankruptcy, or acquired during the last year before the date of the
declaration of bankruptcy if the acquirer was aware of the
existence of a ground for the declaration of bankruptcy.
Serbia
Set-off is generally allowed in Serbian insolvency proceedings if
Civil law requirements for set-off are fulfilled.
All creditors' claims will be deemed due, and all non-monetary
claims are converted into monetary claims upon the opening of
insolvency proceedings. Set-off is thus facilitated in insolvency
proceedings. Generally, set-off may only be declared if the
requirements for set-off have been met prior to filing of the
petition for insolvency. Set-off is not permitted where the
creditor acquired or became entitled to the relevant claim within
six months prior to filing of the petition for insolvency
proceedings, if the creditor knew or ought to have known that the
debtor was insolvent or over-indebted, and if the creditor acquired
the right to set-off through a voidable preferential
transaction.
However, in practice, set-off is not used regularly in Serbian
proceedings.
Slovakia
While set-off is not permitted in restructuring proceedings,
claims can be set-off in bankruptcy proceedings if the Civil law
requirements for set-off are met. Set-off is facilitated somewhat
as all receivables and obligations of the debtor become due upon
the opening of insolvency proceedings.
Claims obtained, including by way of acquisition after the opening
of insolvency proceedings, cannot be set-off against obligations
which arose before such proceedings were opened. Receivables have
to be registered with the insolvency administrator before set-off
can be declared. Claims resulting from a voidable legal act cannot
be used for set-off.
Slovenia
Slovenian law distinguishes between compulsory
settlement proceedings and bankruptcy proceedings.
In compulsory settlement proceedings, all non-monetary claims
against the insolvent debtor are automatically converted into
monetary claims denominated in EUR. Where the insolvent debtor has
a counterclaim, set-off is declared ex lege. This also
applies if claims have not yet fallen due. Automatic set-off does
not apply to secured or priority claims.
In bankruptcy proceedings the same principles apply in general,
however, claims against the insolvent debtor acquired after opening
of bankruptcy proceedings may not be used for set-off. Further,
contingent claims will only be set-off upon the request by the
creditor and subject to the consent of the relevant court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.