Assignment and set-off of receivables

Assignment and set-off are two of the quickest ways to deal with a receivable without court proceedings — the first turns it into money or transfers it where needed; the second uses it to discharge your own debt. Both depend on details parties commonly overlook: a paragraph in the original agreement, a late notification or a claim that was not yet due on the set-off date.

Assignment of receivables

Sale or transfer without consideration. A claim can be assigned by written agreement without the debtor’s consent, with or without consideration, together with ancillary claims and all associated rights (§ 524 of the Civil Code), including security. In an assignment for consideration, the price and its relationship to precisely what the assignor guarantees are central.

Assignment restrictions. Not every claim can be assigned. Alongside statutory exceptions, an assignment contrary to an agreement with the debtor is invalid (§ 525 of the Civil Code) — and such terms are common in commercial contracts. We therefore check the original agreement before anything is signed; for a buyer, this check can save the entire purchase price.

Debtor notification. Until the assignor notifies the debtor or the assignee proves assignment, the debtor can validly discharge the debt by paying the original creditor (§ 526 of the Civil Code). The timing and form of notification therefore determine whether the money reaches the correct person. If the claim is secured by suretyship, a pledge or a mortgage, the security providers must also be notified.

What the assignor guarantees. In an assignment for consideration, the assignor is liable for the claim’s existence with the agreed content and for the assignee becoming the creditor. It guarantees recoverability only through a written undertaking, up to the consideration received with interest, and the guarantee expires if the assignee does not pursue the claim in court without undue delay (§ 527 of the Civil Code). This risk allocation should be deliberately arranged in every purchase, rather than left to the statutory default.

Receivables portfolios, balance sheets and financing. An entire portfolio can be assigned under one agreement — when cleaning up a balance sheet, selling harder-to-recover claims to a specialist buyer or arranging financing in which receivables serve as a source of funds or security. Clear identification of every claim and a notification process covering multiple debtors are decisive. We arrange these to be administratively manageable and capable of later proof.

Standing to sue. When an assignee later sues on an acquired claim, the debtor’s first defence is often that the claimant is not the creditor. The court needs the documentary chain: a valid assignment agreement, notification or proof of assignment, and documents supporting the claim that the assignor must hand over. We compile this file at the assignment stage — for recovery itself, see debt recovery.

The debtor loses no protections through assignment: defences available at the time remain, and subject to statutory requirements it may set off claims against the original creditor against the new one (§ 529 of the Civil Code). The buyer must also reflect this in the price.

Set-off

Unilateral or by agreement. If you and the other party owe each other performance of the same kind, the claims are extinguished to the extent they overlap once one party makes a set-off declaration to the other (§ 580 of the Civil Code). An agreement can go further, settling claims that cannot be set off unilaterally; in commercial relationships, any mutual claims can be set off by agreement (§ 364 of the Commercial Code).

Requirements for unilateral set-off. Claims must be mutual, involve the same type of performance (typically money against money) and be eligible for set-off. A claim not yet due cannot be set off against a due claim — except, in commercial relationships, where the debtor cannot meet its monetary obligations (§ 359 of the Commercial Code).

What cannot be set off. The law excludes unilateral set-off, among other cases, against a personal injury damages claim, against claims exempt from judicial enforcement and in the case of time-barred claims (§ 581 of the Civil Code). The commercial regime is more flexible: claims enforceable in court can be set off, and limitation does not prevent set-off if it arose only after the claims became eligible (§ 358 of the Commercial Code). The applicable regime is the first question — and the answer is not always intuitive.

The risk of defective set-off. Invalid set-off means your debt continues, with default interest and any contractual penalty, although you consider it settled. If your counterclaim becomes time-barred in the meantime, you effectively pay twice: once through the original debt awarded by the court and again through losing your own claim. We therefore check set-off before it is made and prepare a written declaration precisely identifying claims and allowing proof of delivery.

Intra-group set-off agreements. Related companies often settle mutual claims in bulk — at year-end, during reorganisation or before a company sale. A multilateral set-off agreement must work legally and in the accounts, and withstand later review or the insolvency of a participant. We prepare it with a schedule of claims being set off, serving as both an attachment and evidence.

If the other party acknowledges its debt but lacks funds, consider acknowledgment of debt and a repayment schedule instead of set-off. If the mutual balance arose from lending, see credit and loan agreements.