When a company goes into liquidation, any mutual debts between it and a creditor are set off automatically under rule 14.25 of the Insolvency (England and Wales) Rules 2016. Only the net balance survives: if the creditor is owed more, it proves for the balance; if the creditor owes more, it pays the balance to the liquidator. The same rule applies in an administration once the administrator gives notice of an intended distribution (rule 14.24), but debts taken on with notice of the insolvency, or bought in afterwards, are excluded.

Insolvency set off is one of the few ways an unsecured creditor can avoid receiving only a small dividend on what it is owed. It also catches debtors of the company who hoped to pay less by pointing to money the company owes them. This page covers companies in England and Wales.

How does set off work in a liquidation?

Rule 14.25 applies in a winding up where, before the company went into liquidation, there were mutual dealings between the company and a creditor who is proving, or claiming to prove, for a debt. An account must be taken of what each owes the other in respect of those dealings, and the sums due from one must be set off against the sums due from the other. Then:

  • if there is a balance owed to the creditor, only that balance is provable (rule 14.25(3)); and
  • if there is a balance owed to the company, it must be paid to the liquidator as part of the assets (rule 14.25(4)).

The rule uses “must”. Set off is not something the creditor elects to claim or the liquidator chooses to allow; it is the way the account is taken. A creditor still submits a proof of debt, but it should show the net figure and the cross claims behind it. The rule applies in both a creditors’ voluntary liquidation and a compulsory liquidation.

What about administration?

In an administration, set off under the rules only happens if the administrator intends to make a distribution and has delivered a notice of that intention under rule 14.29. Rule 14.24 then requires the account to be taken as at the date of that notice. Until that notice is given, rule 14.24 does not apply.

The cut off date differs between the two procedures. In a liquidation, rule 14.25 looks at mutual dealings before the company went into liquidation. In a distributing administration, rule 14.24 takes the account at the date of the distribution notice but excludes debts arising from obligations incurred after the company entered administration.

Which claims qualify as mutual dealings?

“Mutual dealings” means mutual credits, mutual debts or other mutual dealings between the company and the creditor. “Obligation” means an obligation however arising, whether by agreement, rule of law or otherwise, so claims in contract, damages claims and statutory liabilities can all count. Rule 14.25(7) treats a sum as due whether:

  • it is payable now or in the future;
  • the obligation is certain or contingent; or
  • the amount is fixed or liquidated, or can be ascertained by fixed rules or as a matter of opinion.

Rule 14.25(8) then applies the ordinary valuation rules. Contingent obligations are estimated by the liquidator under rule 14.14, foreign currency is converted at a single rate for each currency under rule 14.21, interest is dealt with under rule 14.23, and sums payable in the future are discounted under rule 14.44.

There is one important exception to discounting. If the balance owed to the company comes from a contingent or prospective debt owed by the creditor, that part must be paid in full, without discount, if and when it becomes due (rule 14.25(5)).

The debts must also be genuinely mutual: between the same two parties in the same capacity. HMRC’s own guidance on its statutory set off powers gives examples of where this fails, such as one party acting as trustee for the credit but personally for the debit, or a VAT group representative’s repayment being set against a debt owed by a different group member.

Which debts are excluded?

The rules stop creditors manufacturing a set off once they know the company is in trouble. In a winding up, rule 14.25(6) excludes:

  • a debt arising from an obligation incurred when the creditor had notice that a decision had been sought from creditors on the nomination of a liquidator under section 100, or that a winding up petition was pending;
  • where an administration came immediately before the liquidation, a debt from an obligation incurred when the creditor had notice that an administration application was pending or that notice of intention to appoint an administrator had been delivered, or incurred during the administration itself; and
  • a debt the creditor acquired by assignment or otherwise under an agreement made after the liquidation began, or at a time when the creditor had notice of any of those events.

Rule 14.24(6) contains parallel exclusions for administration, including any debt from an obligation incurred after the company entered administration.

The practical effect is that a supplier who learns of a winding up petition cannot then buy goods from the company on credit and later refuse to pay because the company owes it money from earlier trading.

How does HMRC set off fit in?

HMRC has its own statutory power, in section 130 of the Finance Act 2008, to set a credit it owes a person against a debit the person owes it. Outside insolvency, that is explained on HMRC set off of repayments.

Section 131 limits the power once an insolvency procedure applies. HMRC may not set a post insolvency credit against a pre insolvency debit. For a company, the procedure is treated as applied when a winding up order is made, an administrator is appointed, a resolution for voluntary winding up is passed, the company is put into administrative receivership or a voluntary arrangement comes into force. A procedure that starts while another is in force, or immediately after one ends, does not count as a new starting point (section 131(6)). HMRC’s Debt Management and Banking Manual at DMBM700060 gives the example of a company moving from administration into voluntary winding up being treated as one continuous period of insolvency.

In practice this means a VAT repayment for a period after liquidation cannot be used by HMRC against PAYE arrears from before it, although pre insolvency credits and debits can still be netted.

How does it work in practice?

Illustration only. A wholesaler goes into creditors’ voluntary liquidation on 1 June.

Counterparty Owed by company Owed to company Result
Supplier A £20,000 £8,000 for goods it bought in March Proves for £12,000
Customer B £5,000 rebate £15,000 of invoices Pays £10,000 to the liquidator
Supplier C £10,000 £6,000 for goods bought in May after it was told a liquidator’s nomination had been sought from creditors No set off; proves for £10,000 and must pay £6,000

Supplier C’s purchase is excluded by rule 14.25(6)(a), because the obligation was incurred when it had notice that a decision had been sought from creditors under section 100. It therefore pays the £6,000 in full and receives only the dividend on its £10,000 claim.

What mistakes do creditors and directors make?

  • Proving for the gross debt and ignoring what the creditor owes the company. The liquidator will apply rule 14.25 anyway, and an inflated proof creates delay.
  • Assuming an administrator must allow set off from day one. The rule only applies once a distribution notice is given.
  • Buying assets or stock from a company after hearing of a petition, expecting to net the price off old debts.
  • Taking an assignment of someone else’s claim against the company to create a set off after the insolvency is known.
  • Treating a related company’s debt as mutual. Set off needs the same parties in the same capacity.
  • Expecting a counterclaim for loss caused by a liquidator disclaiming a lease or contract to be handled differently. It is proved for, so it enters the same account.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.