Setoff is the principle of allowing a party to reduce the debt it owes to an entity by applying a credit for any claim it has against the same entity. The purpose of setoff rights is rooted in “avoiding the absurdity of making A pay B when B owes A.” It is meant to be used by debtors as affirmative defenses or counterclaims. Section 553 of title 11 of the United States Code (the “Bankruptcy Code”) generally preserves the right of setoff in bankruptcy cases.
This memorandum explores how and when foreign debtors and representatives may exercise setoff rights in cases recognized under Chapter 15 of the Bankruptcy Code. Part I outlines the recognition process in the U.S. under Chapter 15, and how setoff is asserted. Part II highlights considerations courts have given foreign representatives in allowing or denying an assertion of setoff. Part III explores an exception to disallowing foreign representatives to assert setoff rights that derive from debts incurred specifically for the purpose of asserting setoff rights in future proceedings.