Fraudulent set-off after cessation of payments: the lesson of 1979

Imagine: you are the owner of commercial premises in Le Cannet, let to a company that seems to be in difficulty. You learn that it has just filed for bankruptcy. You have unpaid rents, but you also know that it sold you some second-hand equipment a few months ago. You think: 'I'll set off my purchase debt against the rents due, that way I get paid.'

Bad idea. The Court of Cassation, in a decision of 21 May 1979 (No. 77-15.921), held that such a set-off, arranged after the date of cessation of payments, is unenforceable against the body of creditors. In other words, it does not hold. But what exactly does that change?

This decision, although old, remains a cornerstone of collective proceedings law. It protects honest creditors against the manoeuvres of those who would like to help themselves first. For landlords and lessors, it is a stark reminder: you cannot improvise a set-off when the debtor is already bankrupt.

The facts: a story that happens every day

In 1973, a company leasing commercial premises in Sophia-Antipolis (at the time booming) was in financial difficulty. Its landlord, the company FAF, bought second-hand equipment from it in February 1975, i.e. after the date of cessation of payments fixed at 8 July 1973. On 6 February 1975, FAF asked the trustee (representative of the creditors) whether it intended to continue the sublease contracts. But above all, it attempted to set off the purchase price of the equipment against the unpaid rents.

The trustee, acting on behalf of the body of creditors, refused. He took the matter to court. The Court of Appeal upheld his position: set-off is not a normal method of payment in this context. FAF appealed to the Court of Cassation, but the Court of Cassation dismissed its appeal. It confirmed that a creditor, who knew of the heavily indebted situation of its debtor, cannot, after the cessation of payments, artificially create a set-off to pay itself at the expense of other creditors.

What few people know is that FAF was not just a landlord: it was also a creditor for rents. By buying the equipment, it hoped to wipe out its purchase debt by set-off against the rents due. But the judges considered that this was a roundabout way of obtaining preferential payment, prohibited by collective proceedings law.

The reasoning of the court — dissected

The reasoning of the Court of Cassation is simple but formidable. It relies on the principle of equality of creditors (Article 2093 of the Civil Code, which provides that the debtor's assets are the common pledge of its creditors). Since the date of cessation of payments (8 July 1973), the tenant company was in a state of bankruptcy. Any subsequent transaction aimed at favouring one creditor to the detriment of others is suspicious.

The Court notes that FAF knew of the heavily indebted situation of its debtor. Yet it bought second-hand equipment after the cessation of payments, with the manifest aim of creating a set-off. However, legal set-off (Article 1289 of the Civil Code: when two persons are debtors to each other, the debts are extinguished to the extent of the smaller amount) cannot be invoked if it is fraudulent. Here, FAF attempted to bring into existence a debt (the price of the equipment) to set it off against its own rent debt. This is what the judges call a 'roundabout way'.

In short, the Court of Appeal rightly considered that this set-off did not constitute a normal method of payment. It is therefore unenforceable against the body of creditors. The trustee could claim the rents in full, without deduction of the price of the equipment. Note, however: if FAF had bought the equipment before the cessation of payments, the set-off could have been valid. But timing is crucial.

undefined, I have come across cases where landlords attempted similar operations, often out of ignorance. This decision reminds them that collective proceedings law is unforgiving: once the debtor is bankrupt, there is no question of taking the law into one's own hands.

What this changes for you — concretely

If you are a landlord: you cannot set off unpaid rents against a debt you owe to your tenant if you act after the cessation of payments. Example: your tenant in Sophia-Antipolis owes you €15,000 in rent. You sold it a business for €10,000. If the sale takes place after the date of cessation of payments, you cannot deduct the €10,000 from the rents. You must pay everything to the trustee and declare your rent claim.

If you are a tenant: you are protected against manoeuvres by your landlord who would like to buy assets from you at a low price after your entry into administration to wipe out its own debts. Set-off is blocked.

If you are a buyer of a property in co-ownership: you must check that the seller is not in cessation of payments, otherwise any set-off between the sale price and prior claims could be challenged. The deadlines are strict: the date of cessation of payments is often set 18 months before the opening judgment.

For a landlord in Le Cannet, this means that you must act quickly at the first signs of non-payment. If you wait for bankruptcy, you lose all room for manoeuvre. The amounts at stake can be considerable: a 100 m² commercial premises in Sophia-Antipolis rents for between €15 and €25/m²/month, i.e. €1,500 to €2,500/month. Over 12 months of unpaid rent, the bill can reach €30,000.

Four tips to avoid this type of dispute

• Check your tenant's financial health: ask for annual accounts, a Kbis extract, and monitor payment incidents. At the first delays, activate guarantees (guarantor, security deposit).
• Do not wait for collective proceedings: as soon as you suspect a cessation of payments, consult a lawyer. An action for termination of the lease or for payment can be brought before the opening judgment.
• Avoid cross transactions after cessation of payments: do not buy assets from your tenant in difficulty, even if it seems convenient. The set-off will be unenforceable.
• Declare your claim within the deadlines: if your tenant is in administration or judicial liquidation, you have two months from the publication in the Bodacc to declare your unpaid rents. After this period, your claim is extinguished.

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Further reading: related case law and developments

This 1979 decision is part of a consistent line. Already in 1968 (Civ. 1re, 22 January 1968), the Court of Cassation had held that set-off after cessation of payments is void if it is fraudulent. More recently, in 2015 (Com. 10 February 2015, No. 13-27.204), it specified that even a legal set-off can be challenged if it occurred after the date of cessation of payments.

The trend is therefore clear: judges are very strict on respecting equality between creditors. Set-off, which is nevertheless a normal method of extinguishing obligations, becomes suspicious as soon as it is arranged after bankruptcy. For the future, with the multiplication of collective proceedings (particularly in commercial real estate in Sophia-Antipolis), this case law remains highly relevant.

Frequently asked questions

Can I set off unpaid rents against a debt my tenant owes me if the set-off takes place before the cessation of payments? Yes, if the set-off is prior to the date of cessation of payments, it is valid. But be careful: the date of cessation of payments can be backdated by the court. If in doubt, consult a lawyer.

What should I do if my tenant offers to buy equipment to settle the rents? Refuse, especially if you know it is in difficulty. You risk having the transaction annulled and having to repay the trustee.

What are the deadlines for declaring my claim for unpaid rents? Two months from the publication of the opening judgment in the Bodacc. If you are not informed, you can request a relevé de forclusion within six months.

Does this case law apply to residential leases? Yes, the principle is the same. But residential leases are often protected by specific laws (1948 law, Alur law). Set-off remains prohibited after cessation of payments.

Can I be sued by the trustee if I have already set off? Yes. The trustee can request the annulment of the set-off and claim payment of the rents in full. You would then have to pursue the debtor for the price of the equipment.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →