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.
By Miriam Simsa, Attorney at Law, Schoenherr
Aaron M. Muhly is the founder of Evelaw — a legal skills training consultancy. Muhly has worked extensively with lawyers as both a Chicago lawyer and as a training consultant for law firms in Europe.