set off English meaning Cambridge Essential British

Suppose that on Monday, ‘A’ and ‘B’ enter into transaction 1, whereby A agrees to pay B £1,000,000 on Thursday. On Tuesday A and B enter into transaction 2, whereby B agrees to pay A £400,000 on Thursday. Novation netting takes effect on Tuesday to extinguish the obligations of the parties under both transaction 1 and 2, and to create in their place a new obligation on A to pay to B £600,000 on Thursday.

Depending on the set-off clause, banks may be able to access other customer assets, including deposits in savings, checking, a certificate, or money market if the customer defaults. If these assets are held with the bank, they will be more easily available to the bank upon default. The five types of set off are extremely important as a matter of efficiency and of mitigating risk. Contractual set offs recognised as an incident of party autonomy whereas banker right of combination is considered a fundamental implied term. It is an essential aspect for cross-claims, especially when there exits overlapping obligations.

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Often the supplier will include a clause in the contract that gives the supplier the right to access deposit accounts and other assets at a bank or financial institution upon default. In this way, a supplier will be able to acquire payment equivalent to the debt incurred through the manufacturing contract by accessing these funds in the customer’s savings, checking, certificate, or money market account. Set-off clauses are used for the benefit of the party at risk of a payment default. They give the creditor legal access to a debtor’s assets at either the lender’s financial institution or another one where the debtor has accounts. Before signing a contract with a set-off clause, borrowers should be aware that it may result in the loss of assets they would have been able to retain through other means of debt settlement, such as bankruptcy.

A set-off clause might be also part of a supplier agreement between the supplier, such as a manufacturer, and a buyer, such as a retailer. This type of clause can be used in place of a letter of credit from a bank and gives the supplier access to deposit accounts or other assets held at the buyer’s financial institution if the buyer fails to pay. With a set-off clause, the seller can obtain payment equivalent to the amount that’s owed them under the supplier agreement. In their set-off clause, banks or other financial institutions might also include their rights to access accounts and other assets in other institutions. These assets may be less accessible to the bank, but the contract gives the bank legal consent to seize these assets nonetheless.

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Common features of set-off are that they are confined to situations where claim and cross claim are for money or reducible to money and it requires mutuality. The right to set off is particularly important when a bank’s exposures are reported to regulatory authorities, as is the case in the EU under financial collateral requirements. If a bank has to report that it has lent a large sum to a borrower and so is exposed because of the risk that the borrower might default, thereby leading to the loss of the money of the bank or its depositors, is thus replaced. The bank has taken security over shares or securities of the borrower with an exposure of the money lent, less the value of the security taken. The law does not permit counter-parties to use third party debt to set off against an un-related liability.[5] All forms of set-off require mutuality between claim and cross claim.

In certain jurisdictions, including the UK,[19] certain types of set-off take place automatically upon the insolvency of a company. This principle has been criticized [20] as an undeclared security interest which violates the principle of pari passu. The alternative, where a creditor has to pay all its debts, but receives only a limited portion of the leftover moneys that other unsecured creditors get, poses the danger of ‘knock-on’ insolvencies, and thus a systemic market risk.[21][22] Even still, three core reasons underpin and justify the use of set-off. First, the law should uphold pre-insolvency autonomy and set-offs as parties invariably rely on the pre-insolvency commitments. Second, as a matter of fairness and efficiency both outside and inside insolvency reduces negotiation and enforcement costs.[23] Third, managing risk, particularly systemic risk, is crucial.

Legal Definition

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. This is the British English definition of set off.View American English definition of set off.

Obligations are not modified under settlement netting, which relates only to the manner in which obligations are discharged.[16] Unlike close-out netting, settlement netting is only possible in relation to like-obligations having the same settlement date. common cash flow problems in small businesses These dates must fall due on the same day and be in the same currency, but can be agreed in advance.[17] Claims exist but are extinguished when paid. To achieve simultaneous payment, only the act of payment extinguishes the claim on both sides.

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All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional. Although not a direct customer advantage of set-off clauses themselves, the Truth in Lending Act prohibits set-off clauses from being applied to credit card purchases. If a customer purchases a defective product, this act will protect them from having their deposits or assets seized. A set-off claim is limited to money, and is a defensive claim rather than a substantive claim.