Section 173: Mutual Credit and Set-Off

Section 173 of the Insolvency and Bankruptcy Code, 2016 governs mutual credit and set-off where mutual dealings existed between a bankrupt and a creditor before the bankruptcy commencement date.

Legal context: The bankruptcy trustee must account for qualifying mutual dealings and set off sums due from one party against sums due from the other. Ordinarily, only the resulting balance is treated as the bankruptcy debt or as an amount payable to the bankruptcy estate.

Text of Section 173 - Mutual credit and set-off

(1) Where before the bankruptcy commencement date, there have been mutual dealings between the bankrupt and any creditor, the bankruptcy trustee shall-

(a) take an account of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set-off against the sums due from the other; and

(b) only the balance shall be provable as a bankruptcy debt or as the amount payable to the bankruptcy trustee as part of the estate of the bankrupt.

(2) Sums due from the bankrupt to another party shall not be included in the account taken by the bankruptcy trustee under sub-section (1), if that other party had notice at the time they became due that an application for bankruptcy relating to the bankrupt was pending.

Meaning and scope of Section 173

The provision applies where reciprocal financial dealings existed between the bankrupt and a creditor before the bankruptcy commencement date. Instead of treating each reciprocal liability independently, the bankruptcy trustee takes an account of the mutual dealings and sets the sums off against each other.

Mutual dealings before bankruptcy commencement

Sub-section (1) is tied to mutual dealings existing before the bankruptcy commencement date. The trustee determines what each party owes the other in respect of those dealings and applies the statutory set-off mechanism.

Only the balance is provable or payable

After set-off, only the net balance is relevant. Depending on which side the balance falls, it is either provable as a bankruptcy debt by the creditor or payable to the bankruptcy trustee as part of the bankrupt's estate.

Exception where there was notice of a pending bankruptcy application

Sub-section (2) restricts the account where the other party had notice, at the time the sums became due, that a bankruptcy application concerning the bankrupt was pending. Such sums due from the bankrupt are not included in the account taken under sub-section (1).

Key points under Section 173

The provision concerns mutual dealings between the bankrupt and a creditor.
The relevant mutual dealings must precede the bankruptcy commencement date.
The bankruptcy trustee accounts for reciprocal sums and sets them off.
Only the resulting balance is provable as a bankruptcy debt or payable to the bankruptcy estate.
The statutory exception in sub-section (2) applies where the other party had notice of a pending bankruptcy application when the relevant sums became due.

Related provisions

Section 171 deals with proof of debt, while Section 172 deals with proof of debt by secured creditors. Sections 174 to 178 deal with interim dividend, distribution of property, final dividend, creditor claims and priority of payment.

Current legal framework

The Insolvency and Bankruptcy Code, 2016 has been amended from time to time, including by the Insolvency and Bankruptcy Code (Amendment) Act, 2026. Users should check the current Act, commencement notifications, rules and applicable regulations on the official Insolvency and Bankruptcy Board of India website when applying the provision to a particular matter.

Page reviewed for the legal framework available as of September 2026.