demystifying set- off in commercial transactions · pdf filewhat is set-off? (2) “in...
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Demystifying set-
off in commercial
transactions
Dr William A.J. Higgs
Barrister at Law
Elizabeth St Chambers
Alex Chernishev
Senior Associate
Mills Oakley
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Scope
What is set-off?
Core concepts
Complexities
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Scope (2)
Principles
Practical applications – by Examples
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What is Set-off? (1)
Some pedantry:
set-off = noun
set off = verb
“It is not worth spending too much time on definitions
of this sort. A definition wide enough to catch
everything becomes so woolly as to miss the pith. A
definition narrowed to the essence is incomplete”.
Wood, English and International Set-off
(1989)
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What is Set-off? (2)
“In substance, however, where a creditor claims a debt
from his debtor and the debtor has a cross-claim on the
creditor, then, if the debtor can reduce or extinguish
the amount of the creditor’s claim by his cross-claim,
the debtor is said to set off. The set-off operates as a
double payment or discharge of the reciprocal claims.”
Ibid.
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What is Set-off?(3)
B
(pays $80; receives $20 and pays $100)
A
(receives $80;receives $100 & pays $20)
Claim
$100
Cross-claim
$20
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What is Set-off? (4)
Securitisation transaction
Originator
Bank
(assignor)
debtor Issuer
(assignee)
Deposit
$20
Loan
(P&I)
$100
Insolvency
official
$100
$80
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How tricky is that, then?
Apples and pears: non-monetary obligations; different
currencies
Unmatured or contingent claims
Reciprocity
3rd parties and other interveners
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Why does it matter?
Credit risk
Settlement risk
Regulatory capital
Accounting
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A
B
GBP USD
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A
B
Deposit Loan
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A
B
Deposit Guarantee or
ISDA Master
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A
B
Deposit Loan
C,D,ESharing payment
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Some key distinctions (1)
security v. self-help
- i.e., right in rem v. personal right
“sword” v. “shield”
- i.e., substantive defence v. procedural defence
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Some key distinctions (2)
solvent set-off v. insolvency set-off
mandatory set-off v. voluntary set-off
money claims v. other claims
- distinguish set-off from counterclaim
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Types of set-off
contractual set-off
Statutory set-off
Insolvency set-off; and
Equitable set-off
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Types of set-off
contractual set-off
Statutory set-off
Insolvency set-off; and
Equitable set-off
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Types of set-off
contractual set-off
Statutory set-off
Insolvency set-off; and
Equitable set-off
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Types of set-off
contractual set-off
Statutory set-off
Insolvency set-off; and
Equitable set-off
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Sons, sisters, friends
security interests
charge-backs
payment (or settlement) netting
netting by novation
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Core concepts
mutuality
“due” claims/cross-claims
executory contracts
choice (and conflicts) of law
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Mutuality (1)
“one man’s money shall not be applied to pay another
man’s debt” Wigram V-C in Jones v. Mossop [1844]
“same name; same right”
each of the two parties must [solely?] beneficially own
the debt owed to it and be [solely?] personally liable for
the debt owed by it
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Mutuality (2)
time for mutuality
trusts
joint creditors and debtors
creating mutuality through guarantees and co-primary
obligor arrangements
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Bank
Corporate
Borrower
Loan
Personal
GuarantorDeposit
Guarantee
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What is “due”?
matured debts
reciprocity: does it matter whether claim matures
before or after cross-claim?
liquidated damages
contingent, unascertained and unmatured claims
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Executory contracts
executory on one or both sides
damages or equitable remedies?
repudiation and disclaimer
Ince Hall Rolling Mills Ltd. v. Douglas Forge Co. [1882]
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Contracting out
payments free and clear and set-off waiver
different products, different practices
inconsistency and conflicts
British Eagle [1975] and SSL Realisations (Squires &
others v. AIG Europe) [2006]
is it reasonable? Stewart Gill v. Horatio Myer [1992]
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Insolvency set-off
is set-off good or bad?
different countries, different entities
administration: a limbo state
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Examples
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Example 1
BANK
CUSTOMER
Assignment
Deposit DebtLoan Debtset-
off?
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Example 2
ASSIGNOR
CUSTOMER
Deposit
Debtset-
off?
BANK
set-
off?
Loan
Debt
(Legal)Loan Debt
(Equitable)
Cross-claim
Equitable
Assignment or
Declaration of
Trust of Loan
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Example 3
BANK
CUSTOMER
Assignment
ISDA SwapLoan Debtset-
off?
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Example 4
BANK
CUSTOMER
PARENT
Collateral
Return
Loan
Debt
set-
off?
security?
CUSTOMER
G/EE
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Example 5
BANK
CUSTOMER
Secured Loan
Debt + Mortgage 100
(Mortgage Value 110)
Unsecured
Unguaranteed
Loan Debt 100
Deposit Debt 100
Rateable or selective
set-off?