Set off Legal Definition
If there is a counterclaim, court fees will be due, calculated in the same way as court fees for a claim – i.e. on a sliding scale of up to £10,000 for counterclaims above £200,000. In most cases, the Code of Civil Procedure also applies to a counterclaim in the same way as to a claim. For example, a formal defence against the counterclaim will be required. However, if set-off is used by a defendant as a defence to all or part of the claim in legal proceedings, there are no separate court fees. Insolvency set-off is complex and it is therefore advisable to seek specialist legal advice. In law, set-off is a legal technique used between persons with reciprocal rights and responsibilities, whereby gross positions are replaced by net positions.   It allows for the exercise of rights to settle obligations where there are counterclaims between a plaintiff and a defendant. As a result, gross claims of mutual debts give rise to a single net claim.  Net assets are referred to as the net position.
In other words, set-off is the right of a debtor to settle mutual debts with a creditor. In accounting, netting is also called reconciliation. [ref. needed] To determine compensation, simply subtract the smallest debt from the largest. Example: X initiates proceedings against Y for payment of £500,000 for the purchase of industrial machinery by Y. However, three months ago Y X supplied 8 boilers and X has not yet paid the agreed price of £16,000. Y may exercise a statutory right of set-off and in fact only owes X £484,000. Set-off is a legal event and, therefore, a legal basis is needed to assume that two or more gross claims are net. Among these legal bases, a common form is the legal set-off defence, which was originally introduced to prevent the unjust situation where a person (“Party A”) who owes money to another (“Party B”) may be sent to the debtor`s prison, even though Party B also owes money to Party A. The law thus allows both parties to defer payment until their respective claims have been heard by the court. It acted as a just shield, but not as a sword.
With the judgment, both claims are extinguished and replaced by a single net amount due (for example, if Party A owes 100 to Part B and Party B to Part A 105, both amounts are set off and replaced by a single obligation of 5 from Part B to Part A). Set-off can also be included by contractual agreement, so that in the event of default by one party, mutual claims are automatically cleared and cancelled. “Compensation.” Merriam-Webster.com Legal Dictionary, Merriam-Webster, www.merriam-webster.com/legal/set-off. Retrieved 27 September 2022. Compensation has two special characteristics. It must be based on a claim completely different from the plaintiff`s and it must be a valid legal action that the defendant could bring as a separate action. For example, a stereo store sues a customer for $700 for unpaid payments on a CD player. However, the customer`s car was damaged in the store parking lot when the store`s van returned, and repairs cost $500. As a defendant, the customer has the right to assert a counterclaim for damages on the vehicle; If the client is successful, the award reduces the amount owed to the plaintiff company, so that the defendant owes the plaintiff only $200. Set-off clauses give the lender the right of set-off – the legal right to seize funds from the debtor or a guarantor of the debt.
They are part of many loan agreements and can be structured in different ways. Lenders may choose to include a set-off clause in the agreement to ensure that in the event of default, they receive a higher percentage of the amount owed to them than they otherwise could. If a debtor is unable to fulfil an obligation to the bank, the bank may seize the assets listed in the clause. The set-off clauses are used for the benefit of the party threatened by the default. They grant the creditor legal access to a debtor`s assets either from the lender`s financial institution or from another financial institution with which the debtor has accounts. Before signing a contract with a set-off clause, borrowers should be aware that this may result in the loss of assets they could have retained through other means of debt settlement, such as bankruptcy. Although set-off and set-off are often used interchangeably, a legal distinction is made between set-off, which describes the procedure and the outcome of setting offsetting. On the other hand, netting describes the legal basis for the creation of net positions. Set-off refers to form as novation set-off or close-out set-off, while set-off describes reasons recognized by the court such as independent set-off or insolvency set-off. Therefore, clearing or clearing gross positions involves the use of counterparties with the same counterparty to address counterparty credit risk.
This is different from hedging, where opposing positions with multiple parties are used to mitigate risk. An effective close-out clearing system is essential for an efficient financial market.  Forfeiture netting differs from novation netting in that it covers all outstanding obligations of the party under a framework agreement similar to that used by ISDA. Traditionally, these only work in the event of a fault.