In the context of Cyprus’ personal insolvency law (Cap. 5/the “Law”), the concept of mutual set-off plays a crucial role in the settlement of debts and credits between a bankrupt individual and other parties (art. 35). Under the Law, mutual debts, credits, and transactions between a bankrupt person and others who have verified or are claiming the verification of a debt in the bankruptcy process must be carefully examined.

What is mutual set-off?

At its core, mutual set-off refers to the process where two parties owe each other money. Rather than each party paying the full amount they owe to the other, the debts are offset against each other, and only the net balance is settled. For example, if Party A owes Party B €10,000 and Party B owes Party A €5,000, the debts are set off against each other, and only the remaining €5,000 will be paid by Party A to Party B. This process helps streamline the insolvency process and ensures that the transactions are fair.

How does set-off apply in bankruptcy?

When a bankruptcy order is issued against an individual under Cap. 5, the process of set-off becomes crucial. If there are mutual debts, credits, or other transactions between the bankrupt person and any creditor (or potential creditor) involved in the bankruptcy, an account must be drawn up to determine the net balance between the two parties. This ensures that only the outstanding balance, and not the full amounts, are claimed or paid by either side. Essentially, creditors and debtors do not settle the entirety of what they owe each other; they only settle the remaining balance once mutual debts are offset.

Legal implications of set-off in bankruptcy

One of the key points for legal professionals advising clients in this area is that set-off is subject to specific limitations under the Law. The latter clearly stipulates that creditors are not entitled to claim the benefit of set-off if they were aware of the bankrupt individual’s financial troubles at the time when credit was extended. Specifically, if the creditor knew that the bankrupt individual had committed an act of bankruptcy when the credit was granted, the creditor will not be able to use the mutual set-off provision to reduce or eliminate their debt.

This provision aims to prevent abuse in the system, where creditors might deliberately extend credit to a person they know is in financial distress, only to later use the set-off to reduce their claims in the event of bankruptcy. The Law seeks to avoid situations where creditors take advantage of the bankruptcy process by entering into transactions with knowledge of the debtor’s insolvency status.

Key legal considerations

For those involved in bankruptcy proceedings, some key legal considerations must be highlighted:

1. Verification of debts: Creditors involved in bankruptcy must ensure that their claims are verified properly in accordance with the bankruptcy order. Any errors in verification could impact their eligibility for set-off.
2. Awareness of the bankrupt’s situation: As noted, one of the most important factors for clients is the issue of knowledge. Creditors must be cautious about the timing of credit extension to the bankrupt individual. If the creditor knew of the bankrupt’s financial difficulties or had reasonable grounds to believe the individual had committed an act of bankruptcy, the creditor’s ability to use set-off may be compromised. The consequences of acting improperly can result in the loss of the right to set off mutual debts, which could lead to greater financial exposure in the event of a bankruptcy.
3. Proper documentation: It is crucial for both the bankrupt and the creditors to maintain clear and thorough records of mutual debts and credits. A detailed account of transactions will be necessary to calculate the balance due accurately and to ensure that all parties involved comply with the law.

Conclusion

For those navigating the complexities of personal insolvency law in Cyprus, the provisions surrounding mutual set-off offer significant legal considerations. While the set-off process can streamline debt recovery, it is subject to strict rules, particularly when a party is aware of the debtor’s insolvency. Creditors should seek expert legal advice which can guide them through these nuances to ensure compliance with the law, avoid potential abuse, and protect their financial interests.

For more information, please contact Charis Agapiou or your usual contact at Chrysses Demetriades & Co LLC.