Following Enron Corp.’s collapse during the fall of 2001, many energy companies that were owed money by Enron and its affiliates became aware of the consequences of failing to establish the right of setoff, even when dealing with apparently creditworthy companies. Put more directly, many credit managers and lawyers at these energy companies were faced with explaining to top management why their companies were required to pay millions of dollars to one Enron affiliate, while another Enron affiliate that owed an equal amount of money to them avoided payment in bankruptcy. Many of these uncomfortable situations could have been avoided if agreements providing for setoff had been put in place before bankruptcy.
Setoff, of course, is the right of Party A to avoid paying amounts due to Party B, to the extent that Party B also owes amounts to Party A. Even without an agreement in place, all jurisdictions provide for a right of setoff between parties under common law or as part of applicable procedural rules.
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