When a company winds up, begins restructuring proceedings or
goes bankrupt, a debtor or creditor may be able to cancel out the
amount payable to the other party by using the remedy of
"set‐off". Set‐off involves the
cancelling of crossliabilities between two parties who owe each
other money. It is a valuable tool that can increase a
creditor's percentage of recovery and decrease the debt burden
of a debtor.
Types of Set‐off: Contractual, Legal or
Equitable
If a contract exists between parties, rights of setoff can be
created by including set‐off provisions in the contract.
Where a contractual set‐off provision does not exist,
parties may still assert a claim for set‐off on the basis
of legal set‐off or equitable set‐off. The
common law has developed a number of formal requirements for the
allowance of a claim for legal set‐off. In comparison,
equitable set‐off is granted by the court in cases where
the parties do not meet the formal requirements of
