Balancing Credits

Facts
Decision

A recent judgment resolves an important matter related to insolvency: the possibility of set-off after the declaration of bankruptcy when the obligations to be compensated are connected.

Facts

After a declaration of bankruptcy, the debtor refused to pay a credit owed to the bankruptcy estate, claiming a set-off with another credit that the bankruptcy estate owed to it. The set-off was based on Article 69 of the Law on Bankruptcy which provides:

"the declaration of bankruptcy thwarts any set-off that has not operated before by the sole operation of law, among the mutual obligations of the bankrupt and debtors, unless the obligations are connected, arising from one agreement or one negotiation, even if they become payable on different terms."

The trustee claimed that the set-off was impossible since the conditions of Article 69 had not been met. The trustee argued that the obligations to be set off arose from different agreements and did not form part of one negotiation. Furthermore, the contracting parties were different. The debtor argued that the obligations to be set off were connected because, although not arising from the same contract, they arose from the same negotiation.

Decision

The arbitrator found in favour of the debtor, stating that although the obligations arose from different agreements and the contracting parties were not the same in both agreements, they were part of one negotiation or trade agreement. This was evidenced by a letter sent by the debtor before the execution of the agreements, in which it was found:

• The debtor (through the correspondent company) would enter into the sales contract with the bankrupt entity (or a company designated by the entity) and that, jointly, an agreement for the provision of services would be executed with the contract;

• All necessary documentation would be simultaneously executed, a fact that was subsequently conceded by the bankrupt entity; and

• The parties had expressly agreed the set-off of the obligations that would arise from the purchase and sale contract and the provision of services agreement.

The arbitrator found that, although the parties were different in both contracts, that was because one of the parties had to sell its assets through one of its subsidiaries (which was the owner of the assets to be sold), but the intention of the parties as evidenced in the letter was that they should be considered as being the same parties.

For further information on this topic please contact Marcelo Armas at Philippi, Yrarrázaval, Pulido & Brunner by telephone (+56 2364 3700) or by fax (+56 2364 3796) or by e-mail ([email protected]).