Your debtor may be unable to meet his or her payment obligations towards you for various reasons. If you also have to make a payment to the debtor yourself, so there are mutual payment obligations, applying a set-off of the claims is an effective way to obtain payment of your claim. Set-off means that parties who have mutual claims against each other from the same legal relationship can offset these against each other.
The law expressly regulates how and when settlement may be made. Only if the legal requirements for set-off have been met will there be a legally valid set-off. The legal provisions are of regulatory law and expressly do not apply if one of the parties is in suspension of payment or is in a state of bankruptcy, nor if the debt rescheduling scheme applies to one of them.
Set-off Claim Requirements
First of all, there must be a statement from the party invoking the set-off. Set-off takes place as a result of the declaration and the claims are extinguished up to their joint amount. The statement is free of form and can be written or oral. As long as it is clear to the other party that you are invoking settlement. A written statement does provide evidence, so it is therefore recommended. The statement must also be addressed to the creditor. This also applies if this creditor is not also the debtor of the party invoking set-off, for example in the case of an assignment. The statement must also clearly indicate which claims will be settled.
Furthermore, there must be a power of set-off. The parties must be each other’s creditor and debtor. This requirement is not met if a party is creditor and debtor in different capacities. The right to offset is a necessary condition for offset, but does not bring about the offset as such.
The claim must be due and payable before settlement can be made. This may be when the agreed payment term has expired.
The consequence of a settlement statement is that the debts that both parties have to each other will be extinguished up to the amount settled. After settling the receivables, only the remaining balance needs to be paid.
Another legal requirement is that the mutual claims must correspond to each other. This means that one party could pay its debt to the other with its claim. In most cases, this will involve monetary amounts. For example, the monthly fee that the franchisee owes the franchisor with amounts that the franchisor must pay to the franchisee.
The requirement also applies that settlement must be made in the same currency. In the case of different currencies, the amounts must be converted according to the prevailing exchange rate. Less common is the settlement of goods. The law also offers this option, but the goods must in any case be comparable in type and quality in order to be able to settle.
If you are confronted with a settlement statement and you do not agree to this, for example because you believe that the claim is unjustified, you must immediately inform the other party that you do not agree with the settlement.
The options for making use of set-off in a bankruptcy situation are wider than outside a bankruptcy situation because the claim against the bankrupt does not have to be due and payable. However, it is not possible to set off a debt to the bankrupt and a claim against the bankrupt if one of the two claims arose after the bankruptcy. It must therefore expressly concern mutual claims that arose before the moment of the bankruptcy.
As stated, the statutory provision is of regulatory law. The parties can extend, limit or even exclude the power to set off. Therefore, pay close attention to the general terms and conditions in which this can be arranged. The power of set-off may also be limited or excluded by reason of reasonableness and fairness.
Ludwig & Van Dam franchise attorneys, franchise legal advice