Offsetting of claims (compensation) is one of the ways of termination of obligations, regulated by the Law of Contract and Torts. Certain procedural and legal rules, referring to the offsetting objection and the compensatory counter-claim, are also contained in the Law on Civil Procedure. The institution of offsetting claims is especially important when one of the parties in the obligatory relationship is in bankruptcy, in which case the special bankruptcy rules are applied. The importance of this topic is further enhanced by the changed business conditions in the world after the COVID-19 pandemic, with economic entities being increasingly forced to settle their obligations with compensation for the time being, until new sources of growth yield positive effects on liquidity.
While bankruptcy proceedings conducted under previous Serbian regulations were always a matter of mandatory, legal compensation, the applicable Bankruptcy Law (BL) – in Article 82, introduces a new concept of legally permitted and limited offsetting. Similar solutions are provided in the legislation of other countries in the region.
The importance of offsetting in practice, especially for creditors, is great. It allows the creditor to fully collect their claim outside the bankruptcy payment lines and regardless of the amount of available funds in the bankruptcy estate. For reasons of fairness, offsetting deviates from collective settlement as the legally established goal of the bankruptcy procedure and from the principle of parity, i.e. from the proportional settlement of bankruptcy creditors.
Practically speaking, by using offsetting claims in bankruptcy proceedings, the creditor avoids the regular course of events where they would have to enter the value of their obligation in full into the bankruptcy estate – as fulfillment to the bankruptcy debtor – while only settling their claim against the bankruptcy debtor together with other bankruptcy creditors, in the appropriate payment order, appropriate proportion, and depending on the available means of settlement. In practice, there is rarely a situation in which all bankruptcy creditors collect their claims in full through bankruptcy proceedings. The advantages of the institution of offsetting mutual claims are clear, and of great benefit to creditors. Through offsetting, claims can be settled in full or at least up to the amount of the claim that the bankruptcy debtor has against the specific creditor.
In order to exercise the right to offset in bankruptcy proceedings, in addition to the general conditions concerning reciprocity, homogeneity, and maturity of claims, the BL requires fulfilling three special, cumulative conditions: (1) the acquisition of the right to offset before filing a petition to open bankruptcy, (2) filing of the entire claim, and (3) a statement on offsetting. The right to offset was not acquired if both mutual claims did not fall due before the submission of the petition to open bankruptcy. The right to offset is, however, considered to be acquired before such a submission if the debtor’s accounts were blocked at the time of maturity of the creditor’s claim. The BL does not set the liquidity of mutual claims – the indisputability in terms of their bases and amounts – as a condition for offset.
Regarding limitations, offsetting is not allowed if: (1) the bankruptcy creditor acquired the claim in the last six months before the day of filing the petition to open bankruptcy, and the bankruptcy creditor knew or should have known that the debtor was insolvent or over-indebted; (2) if the conditions for offsetting have been acquired through a legal transaction or other legal action that can be challenged in accordance with the provisions of the BL.
The use of the benefits of offsetting of claims in bankruptcy proceedings is related, in time and procedure, to the filing of claims in court. Creditors having the right to use this benefit have to submit the statement on offsetting to the court along with filing for the entire amount of their claim against the bankruptcy debtor, within the filing deadline. Otherwise, the right to offset is lost, and the creditor will be forced to fulfill their obligation to the bankruptcy debtor (the bankruptcy estate), while only being able to settle their own claim in the appropriate proportion, together with other creditors of the same bankruptcy payment order.
By Nemanja Aleksic, Managing Partner, Aleksic & Associates
This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.