Jurisdiction(s):
United Kingdom

Key definition

Insolvency definition

What does Insolvency mean? In practice, insolvency describes a financial state where a debtor cannot meet liabilities when due, triggering remedies such as administration, liquidation or bankruptcy and informing directors’ duties and avoidance claims. For companies in England & Wales, Scotland and Northern Ireland, the Insolvency Act 1986, s 123 sets two alternative tests: - Cash‑flow insolvency: an inability to pay debts as they fall due. The inquiry is practical and forward‑looking, not confined to today’s bills (Re Patrick & Lyon Ltd [1933] Ch 786; BNY Corporate Trustee Services Ltd v Eurosail [2013] UKSC 28). - Balance‑sheet insolvency: liabilities (including contingent and prospective liabilities) exceed assets on...

Scotland: Set-off in Insolvency—Compensation, Retention, Balancing of Accounts, Illiquid Claims, Mutuality and Discharge

Published by a LexisNexis Restructuring & Insolvency expert

Practice notes

Introduction

In practice, the expression ‘set off’ in Scotland is used as a catch‑all for mechanisms that permit a debtor to resist, in whole or in part, a payment claim by relying on obligations due to them from the creditor.

The debtor may invoke three principles to their advantage:

compensation
Retention
balancing of accounts in Bankruptcy

Compensation

Compensation denotes the rule that where each party owes the other liquid sums, the larger debt operates to extinguish the smaller, leaving the surplus payable to the holder of the larger claim. The rule is set out in the Compensation Act 1592. The Act excludes illiquid debts and contingent claims, and confines set‑off to debts that are (a) liquid, (b) immediately verifiable by writ or by oath, and (c) pleaded before judgement is pronounced. As a result, concursus debiti et crediti is required: the parties must act in the same capacities in both claims. For example, an agent cannot set off a representative claim against a debt owed to them in a personal capacity.

Retention

...

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Web page updated on 22/05/2026

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