9. Set-off

9. Set-off

“Set-off” is the legal principle that when two parties owe each other money, a party can reduce or eliminate its liability by cancelling out one another’s liability so that only the remaining balance is due. 

A loan agreement would usually contain a contractual set-off clause, which allows the lender to set off any matured obligation due from the borrower against any matured obligation owed by the lender (such as an amount standing to the credit of the borrower’s account maintained with the lender). This means that, if a borrower has bank accounts with a lender, the lender may set-off amounts outstanding under the loan agreement against the amounts in those bank accounts. 

On the other hand, a borrower is usually prohibited from exercising the right of set-off against the lender under the terms of the loan agreement.