Case law
10 January 2019

New case law on offsetting

Offsetting is widely used in the business sphere to settle debts. By offsetting, a creditor’s and a debtor’s mutual debts of the same kind (usually monetary) cease to exist. The Supreme Court has recently issued two decisions bringing several pitfalls in the use of this legal concept. What to watch out for when offsetting?

Irena Kolárová
Petr Kučera

In its first decision, the Supreme Court dealt with the question whether it was possible to offset a debtor’s monetary supply in Czech crowns against a creditor’s receivable that was to be paid in foreign currency. The mentioned supply was provided by the debtor before the contract was concluded, based on an invoice issued by the creditor, and was to equal, in Czech crowns, to the supply contracted in foreign currency. The SC deduced that if the contractual arrangement between the debtor and the creditor only assumed a supply in euros, it is not possible to offset a supply in Czech crowns against such a contractual debt, as the debtor’s contractual obligation to pay the contracted price to the creditor in an agreed-upon manner would not have been met at all.

The court based its decision on its previous case law, where it adjudicated that the content of the debtor’s obligation is to supply what was agreed (in this case to pay the contracted price in the stipulated currency), even if such a supply becomes disadvantageous for one of the parties.

This means that Czech law does not currently allow for offsetting receivables in any other than the agreed-upon currency to settle debts. The only way how to make this possible is by amending the contractual arrangement between the debtor and the creditor. Otherwise, there is a high risk that in the event of a court dispute the supply in other than the agreed-upon currency will not be considered a supply under the contract, with all implications this entails, such as default, etc. And the situation may even be more critical in case of insolvency proceedings, as offsetting of this type (i.e. without sufficient contractual basis) may be challenged by the insolvency trustee.

Offsetting multiple receivables
In the second case, the SC dealt with the required essentials of offsetting a higher number of receivables, mainly regarding the specification of which receivables are being offset and whether and in what amount they become extinct. 

In the case in question, the debtor offset receivables from contractual penalties against the creditor’s receivable from a purchase price payment. The juridical act by which the debtor effected the offsetting did not specify which specific receivables thus become extinct, while the debtor’s receivables from contractual penalties exceeded the creditor’s receivable from the payment of the purchase price. This debtor’s approach would seem correct, as the new Civil Code contains rules for cases where the debtor does not specify which receivables (of a number of receivables) and in what amounts are covered by the offsetting.

Yet surprisingly, the SC viewed the case along the lines of its existing case law, which is based on the old Civil Code and does not yet reflect the new rules of offsetting mentioned above. This means that even with the new legislation in effect, the court applies the same stance to cases where a debtor offsets a number of receivables that at the same time exceed the creditor’s receivable: the offsetting act in which the debtor fails to specify which of the receivables being offset become extinct is indeterminate and therefore null. The reason is that the creditor would be unable to determine what receivables and in what amount they still have to settle.
  
When offsetting a number of debtor’s receivables that exceed the creditor’s receivable, it is thus recommendable to specify precisely what receivables are being offset against.

While simple at first sight, offsetting of receivables is a legal tool that entails certain risks when used in practice. As the SC’s decision implies, attention has to be paid mainly to the juridical act by which the offsetting is effected, and to whether the receivables are actually eligible for offsetting.

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