Set-Off (Compensation) Under French Law: Conditions, Insolvency Limits, and Creditor Strategies

When businesses think about debt recovery in France, they usually think in straight lines: send reminders, issue a formal notice (“mise en demeure”), then sue if necessary. Yet many payment disputes in France do not end in court because the debtor pays; they end because the debt is legally extinguished by set-off—called “compensation” in French law.

If your debtor also claims that you owe them money (even for an unrelated contract), they may attempt to neutralise your invoice through compensation. Used properly, compensation is a legitimate and powerful tool. Used improperly, it can become a dangerous tactic that creditors must challenge quickly and strategically.

This guide explains compensation in France in a way that is practical for international creditors and French businesses alike. You will understand what compensation is, what conditions must be met, how it works after 1 October 2016, what happens during insolvency (safeguard, judicial reorganisation, liquidation), and what to do if the debtor suddenly asserts a “set-off” defence to avoid paying your invoice. The goal is simple: help you recover faster, avoid legal traps, and protect your cash flow with legally secure decisions.

1. What is “compensation” (set-off) under French law?

Since 1 October 2016, the French Civil Code defines compensation as follows: it is the simultaneous extinction of reciprocal obligations between two persons. It operates—subject to being invoked—up to the amount of the smaller debt, at the moment the legal conditions are met.

In practical terms, set-off means this: if your debtor is also your creditor, they can try to “pay themselves” by refusing to pay you while subtracting the amount they say you owe them.

Most of the time, the two debts are not equal. If you claim €100,000 and the debtor claims €20,000, then set-off (if valid) extinguishes both obligations up to €20,000. The debtor would still owe you €80,000. If the debtor’s counterclaim is higher than your invoice, your entire invoice could be extinguished, and you could become the debtor.

This is exactly why compensation matters in debt recovery. A creditor can invest time and money in recovery only to discover the debtor had a valid set-off defence that extinguished the invoice before enforcement even started.

2. Why compensation is a “payment guarantee” in practice

Compensation is sometimes described as a payment simplifier because it works as an accounting operation: both sides “clear” their reciprocal debts without transferring money.

But it can also function as a priority mechanism. If your debtor is insolvent and owes you money, but you owe them money as well, compensation can allow you—if conditions are met—to recover your claim indirectly by refusing to pay your own debt. In that sense, compensation may allow a solvent party to avoid becoming just another unsecured creditor in the insolvency queue.

That is why compensation sits at the intersection of debt recovery and insolvency strategy in France. It can protect creditors, but it can also be used by debtors to obstruct payment—especially if you do not react correctly.

3. The three forms of compensation in France

French law recognises three main ways compensation can occur:

Legal compensation (compensation légale). This is the classic set-off mechanism: it works only if strict legal conditions are satisfied.

Contractual (voluntary) compensation (compensation conventionnelle). Two parties may agree in advance (or later) that all reciprocal obligations—present or future—will be offset by set-off, even if legal conditions would not normally be satisfied.

Judicial compensation (compensation judiciaire). A court may order compensation even where legal conditions are not fully met—especially when one debt is not yet liquid (not precisely quantified) or not yet due, but the principle is established.

Each form matters for a creditor because the debtor might raise set-off as a defence in different ways depending on the contract structure, the type of counterclaim, and the stage of proceedings.

4. Legal set-off: the strict conditions you must check immediately

When a debtor says, “We are setting off your invoice against what you owe us,” the first question is not emotional; it is legal: are the conditions met? If not, the set-off fails—unless the debtor later obtains a court decision ordering judicial set-off.

For legal compensation, French law requires that the two debts be:

4.1 Reciprocal debts between the same two parties

Set-off requires a clean two-person relationship: each party must be both creditor and debtor of the other. If a third party is involved, legal compensation generally fails.

This matters in corporate groups. A debtor cannot usually say: “We do not pay Company A because Company A’s subsidiary owes us money.” A parent company cannot set off its debt against a debtor’s claim involving a subsidiary. French law treats each company as a distinct legal person.

4.2 Two debts that are “certain” (not seriously disputable)

Both debts must be certain. If one debt is genuinely contested, legal compensation generally cannot operate.

This is one of the most important creditor-protection levers. Many debtors try to manufacture a counterclaim to avoid payment. If the counterclaim is not established in principle, compensation should be rejected.

In practice, when a debtor raises set-off based on penalties, damages, alleged defects, alleged delays, or alleged non-conformity, you must examine whether those alleged claims are actually “certain,” or whether they require a judge to decide liability first.

4.3 Two debts that are “liquid” (amount precisely determined)

Both debts must be liquid, meaning their amounts are clearly determined. If the debtor’s counterclaim is “We will assess damages later,” or “We estimate your breach cost us losses,” that is often not liquid and cannot support legal set-off unless a judge later quantifies it.

A common trap: the debtor’s counterclaim may be valid “in principle” but not yet quantified. In that scenario, legal compensation is not available immediately; the debtor may instead seek judicial compensation.

4.4 Two debts that are “due” (exigible)

Both debts must be exigible—due and payable. If one party granted the other payment terms while remaining required to pay immediately, the party who granted terms typically cannot claim legal set-off.

However, court-granted grace periods do not necessarily block set-off in France. Another key rule: you cannot set off a prescribed claim; if a claim is time-barred, it generally cannot be used as the basis for compensation.

4.5 Same type of obligation: money vs money (or fungible goods of the same kind)

Legal compensation generally operates between monetary debts. It can also operate between obligations to deliver fungible goods of the same kind. But you cannot legally set off a money debt against an obligation to deliver specific merchandise or services.

This becomes important where a debtor tries to offset a payment invoice against an alleged obligation to deliver goods or complete work. If the obligations are not of the same category, legal set-off is usually unavailable.

4.6 The debtor must “invoke” set-off (it is not automatic anymore)

Since 1 October 2016, compensation does not operate “automatically” in the way many non-lawyers assume. It operates only if invoked, even though its effect is recognised as occurring at the date the conditions were met.

In practical terms, a debtor must clearly raise set-off, typically in writing. As a creditor, you should treat any set-off statement as a legal event: it can stop recovery actions if valid, and it can also open a dispute you must respond to in a structured way.

5. Effects of compensation: why it can stop your recovery actions

If valid set-off extinguishes the debt, continuing recovery actions can expose a creditor to liability. French law recognises that pursuing enforcement on a debt that has already been extinguished by compensation may lead to damages.

This is not theoretical. If you initiate aggressive recovery steps (for example, certain enforcement measures) when the debtor can prove that legal set-off extinguished the invoice before your action, you risk procedural defeat and cost exposure.

The practical message is straightforward: when a debtor asserts set-off, you must verify the conditions quickly and decide whether to accept it, reject it formally, or seek judicial confirmation.

Compensation also affects interest. Where debts bear interest, interest typically stops accruing at the date of set-off, and accrued interest can be added to principal before the calculation, depending on the structure of the claim.

Compensation can also be raised by sureties and co-debtors in certain ways, which matters if you are recovering with guarantees.

6. When compensation fails: the most common obstacles creditors should use

Debtors often “announce” set-off as if it were a unilateral right. It is not. Many attempted set-offs fail under French law. The most common creditor arguments include:

• The debtor’s counterclaim is not certain because liability is contested, performance is disputed, or the claim depends on future judicial findings.
• The counterclaim is not liquid because its amount is not determined without further accounting, expert assessment, or a future judgment.
• The counterclaim is not due because the debtor’s claim is subject to a term, conditionality, or payment schedule.
• The parties are not the same two legal persons (for example, corporate group issues).
• The debtor is trying to set off a monetary invoice against non-monetary obligations.
• The counterclaim is prescribed.
• There was a claim assignment (cession de créance) that alters the debtor’s ability to oppose compensation, especially if the debtor accepted the assignment without reserving compensation rights.

This is why set-off disputes are often decisive in commercial litigation: the creditor must show that the conditions were not met, or that set-off is legally blocked, and must do so with clean documentation.

7. Contractual set-off: why sophisticated businesses add “netting” clauses

French law allows parties to agree to set off present and future reciprocal obligations by contract. This is extremely common in advanced commercial relationships (distribution, long-term supply, logistics chains, framework service contracts, and financial arrangements).

Contractual set-off can operate even when legal conditions are not met—because the parties agreed to it. This is a major reason why international suppliers sometimes feel “trapped” in French disputes: the contract might contain a netting clause allowing set-off broadly, including for disputed items.

From a creditor perspective, contractual set-off can be either a risk or a tool:

• It is a risk if you are a supplier and the customer contract allows them to offset disputed penalties or alleged damages quickly.

• It is a tool if you are exposed to a debtor’s insolvency risk and want to structure an agreed netting mechanism that protects your position.

A properly drafted clause must be precise: define the scope, the obligations included, the timing, the currency, and whether disputes suspend set-off. If the clause is vague, it becomes a litigation battlefield.

8. Judicial set-off: the debtor’s favourite defence when conditions are incomplete

Judicial compensation is a powerful defence tool in French litigation. A debtor sued for payment can ask the court to order set-off even if one claim is not liquid or not due, provided the claims are established in principle.

This is why creditors must anticipate set-off at the litigation stage. If you sue a debtor who has a plausible counterclaim, the debtor may seek judicial set-off and delay judgment, or reduce the amount awarded to you.

However, the court still cannot offset a claim that is not certain in principle. If the debtor’s counterclaim is speculative, unproven, or legally weak, the court should not grant judicial set-off.

Judicial set-off often appears in fee disputes, service quality disputes, construction disputes, and logistics disputes, where damages are alleged but not quantified.

9. Compensation in insolvency: when it becomes impossible (except for “connected” debts)

One of the most misunderstood areas is compensation during French insolvency proceedings: safeguard (sauvegarde), judicial reorganisation (redressement judiciaire), and liquidation (liquidation judiciaire).

These proceedings are designed to preserve equality between creditors. As a general rule, they prevent a creditor from obtaining preferential payment outside the collective process. For that reason, compensation becomes restricted.

9.1 If the conditions for legal set-off were met before the opening judgment

If reciprocal debts were certain, liquid, and due before the opening judgment of insolvency, French case law generally treats set-off as having already extinguished the obligations up to the amount of the smaller claim. In other words, the insolvency does not “undo” a set-off that was already legally complete before the opening.

9.2 After the opening judgment, set-off generally requires “connexity”

After the opening of insolvency proceedings, set-off is generally not allowed unless the debts are connected (“connexes”). Connexity means there is an economic and legal link between the reciprocal debts, typically arising from the same contractual relationship or a tightly linked set of operations.

French courts have recognised connexity in several typical scenarios: commercial leases (rent and security deposit dynamics), cooperative relationships, certain factoring account structures, and situations where obligations arise from one linked economic operation.

In contrast, if the reciprocal claims arise from unrelated contracts without economic linkage, set-off will normally be refused after insolvency opens.

9.3 Claim declaration remains a critical condition

Where set-off is sought based on connected debts during insolvency, the creditor must typically declare their claim. Failure to declare can block the ability to obtain set-off in that context.

This is a technical, deadline-driven area. The practical takeaway for creditors is simple: if your counterparty enters insolvency and you may rely on set-off, you must act quickly and correctly to preserve your rights.

9.4 The “suspect period” risk (période suspecte)

French insolvency law also allows courts to look back into a “suspect period” before the opening judgment and annul certain transactions deemed harmful to creditor equality. Voluntary set-off during that period can be attacked if it is not a normal and commonly used payment method in the business relationship, or if it appears engineered to bypass insolvency rules.

Set-off against a not-yet-due debt during the suspect period is particularly risky and can be null.

This is why sophisticated creditors treat set-off as part of an insolvency strategy, not just an accounting method.

10. Over-indebtedness proceedings (individual debtors): compensation can still operate

When an individual debtor enters over-indebtedness treatment, they are generally prohibited from paying pre-existing debts outside the procedure (except limited categories). French case law has clarified that compensation invoked by the creditor can still operate because it is not treated as a voluntary “payment,” but as simultaneous extinction of reciprocal obligations.

This matters mainly for creditors dealing with consumers and individuals rather than businesses, but it is another illustration of how central compensation is in French debt law.

11. What to do when the debtor asserts set-off: the creditor’s practical playbook

When you receive an email saying “We have offset your invoice,” you should move fast—but not emotionally. You should immediately treat the situation as a legal analysis exercise with commercial consequences.

Start by identifying whether the debtor is claiming legal set-off, contractual set-off, or merely threatening a set-off that would require judicial determination.

Then test the debtor’s counterclaim against the core conditions: certainty, liquidity, due date, reciprocity, and same nature of obligation. If the debtor’s claim depends on alleged damages, delays, or penalties, ask yourself: has liability been established? Is the amount fixed? Is it due?

Finally, consider context: is the debtor financially distressed? Is insolvency likely? If so, the set-off timeline becomes critical, because pre-opening set-off and post-opening set-off are treated very differently.

13. Why lawyer-led recovery matters in set-off disputes

Set-off disputes are rarely “just accounting.” They are legal disputes about the existence, maturity, and enforceability of counterclaims. Many debtors rely on set-off as a delay strategy. Others rely on it because they genuinely have a counterclaim that must be processed correctly.

A specialised debt recovery law firm in France helps you:

• qualify the debtor’s set-off claim (legal vs contractual vs judicial),

• challenge invalid set-off with the right arguments and proof,

• preserve your rights when insolvency is approaching,

• avoid procedural mistakes that can turn into liability,

• move seamlessly from amicable to judicial recovery when required.

And there is also the practical effect: a set-off challenge and formal notice drafted and sent by a lawyer often triggers settlement, because it signals that the file has shifted from negotiation to legal enforcement readiness—without needing threats.

Conclusion: Compensation can protect you — or be used against you

Compensation (set-off) is one of the most important mechanisms in French debt law. It can extinguish reciprocal obligations instantly, reduce recovery costs, and protect a creditor when insolvency risk appears. But it can also be used by debtors to neutralise invoices through disputed counterclaims, delayed quantification, or tactical litigation.

The safest strategy is to treat set-off as a legal issue from day one: test the conditions, respond in writing, preserve your evidence, and escalate properly when the debtor’s “set-off” is only a pretext to avoid payment.