Section 173 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 173 applies where a bankrupt and a creditor were dealing with each other before the bankruptcy commencement date. The bankruptcy trustee must take an account of what each owes the other, set the sums off, and only the balance is provable as a bankruptcy debt or payable to the trustee. Sums that fell due to another party after that party had notice of a pending bankruptcy application are left out.
The article follows the IBBI consolidated text of the Code amended up to 12 August 2021 (the "consolidated text").
Where there were mutual dealings before the bankruptcy commencement date, the trustee takes an account of what is due each way and sets off one set of sums against the other. Only the balance is then provable as a bankruptcy debt (if the bankrupt owes) or payable to the trustee as part of the estate (if the creditor owes). Sums due from the bankrupt that the other party became entitled to with notice of a pending bankruptcy application are not included in the account.
Sub-section (1): the account and the set-off
The sub-section reads: "Where before the bankruptcy commencement date, there have been mutual dealings between the bankrupt and any creditor, the bankruptcy trustee shall –". Two obligations follow.
| Clause | What the trustee must do |
|---|---|
| (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 |
| (b) | Treat "only the balance" as provable as a bankruptcy debt or as the amount payable to the bankruptcy trustee as part of the estate of the bankrupt |
Points worth noting:
- The trigger is "mutual dealings". The section does not define the phrase, and this article does not supply a definition. The text speaks of dealings "between the bankrupt and any creditor".
- The time frame. The dealings must have taken place "before the bankruptcy commencement date", the date of the bankruptcy order under section 126 (section 79(6)).
- The duty is mandatory. The trustee "shall" take the account and the sums "shall be set off". It is not an option for the trustee or the creditor as the section is printed.
- Two possible balances. If the bankrupt owes the creditor more than the creditor owes him, the balance is "provable as a bankruptcy debt". If the creditor owes more, it is the "amount payable to the bankruptcy trustee as part of the estate of the bankrupt". Both outcomes are in clause (b).
If you are a creditor with money going both ways between you and a bankrupt, a recovery suit is not the first step here; the account under this section comes first, and our team can help you work through the figures.
Sub-section (2): the exclusion
"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."
The exclusion has four elements:
- The sums are "due from the bankrupt to another party" (that is, debts the bankrupt owes).
- The other party "had notice" of a pending application for bankruptcy relating to the bankrupt.
- The notice existed "at the time they became due", the time the sums fell due, not the time of the account.
- The sums are then left out of the account, which means they cannot be used to reduce what that party owes the bankrupt.
The effect is that a person who learns of a pending application cannot then build up a set-off against what he owes the estate by letting new claims against the bankrupt fall due. The sub-section looks only at sums falling due after notice; sums already due when notice arrived are not within its words. The text does not say how notice is proved.
How section 173 fits with sections 171 and 172
Proof of debt is dealt with in sections 171 and 172. Section 171 sets out the proof, section 172 the position of secured creditors, and section 173 the netting of mutual dealings before a claim is proved. See Sections 171 and 172 of this series and the live post on proof of debt, secured creditors and mutual set-off.
The balance that remains is then paid out of the estate according to the order of payment in section 178; see the live post on the priority of payment of debts under section 178. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) changes section 178 by its section 57, which this article does not explain.
A worked example
Ajay Menon, now bankrupt, ran a printing business. Before the bankruptcy commencement date he bought paper from Greenfield Papers on credit and owes Greenfield Rs. 6 lakh. Greenfield, in turn, had hired Ajay's press for a job and owes him Rs. 2 lakh.
The trustee takes an account under section 173(1)(a): Greenfield's Rs. 2 lakh is set off against Ajay's Rs. 6 lakh. Under clause (b), only the balance of Rs. 4 lakh is provable by Greenfield as a bankruptcy debt, in the proof process in section 171.
Suppose, instead, that Greenfield learns that an application for bankruptcy against Ajay is pending and then buys up a trade debt of Rs. 1 lakh that Ajay owes to a third party, so that the sum becomes due from Ajay to Greenfield at a time when Greenfield has notice of the pending application. Under sub-section (2), that sum is not included in the account. The names and sums are invented, and the example does not predict the outcome of any case.
If the position were the other way round, with Greenfield owing Ajay more than Ajay owes Greenfield, the balance would be payable by Greenfield to the trustee as part of the estate.
Questions the text leaves open
- It does not define "mutual dealings".
- It does not say what happens to a set-off between a secured creditor's claim and the bankrupt's claim; secured creditors are the subject of section 172.
- It does not say who prepares the account for the creditor's inspection or how it is challenged.
- It gives no time within which the account must be taken.
Law around this section
The Amendment Act, 2026 (No. 6 of 2026) has no clause that amends section 173. It comes into force on the date or dates the Central Government notifies; the notification is not in the texts consulted, so check whether any change to a related provision has been notified.
For personal guarantors to corporate debtors, the Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (the copy consulted is amended up to 02-06-2026) apply alongside Part III; no rules or regulations for other individuals or for partnership firms are in the texts consulted.
Amendments and notifications made after 12 August 2021, other than the Amendment Act, 2026, are not in the texts consulted and should be checked.
Need help with mutual dues owed to or by a bankrupt?
If you trade with someone who has become bankrupt, or is likely to, the order of steps matters: account first, set-off second, proof of the balance third. Our team can help you prepare and test the figures with a recovery suit or other route in view.
Key takeaways
- Section 173 applies to mutual dealings before the bankruptcy commencement date.
- The trustee must take an account and set off the sums each way.
- Only the balance is provable as a bankruptcy debt, or payable to the trustee as part of the estate.
- Sums due from the bankrupt to a party who had notice, when they fell due, that an application for bankruptcy was pending are excluded from the account.
- The text does not define mutual dealings or set a time for the account.
Read next
- Sections 174 and 175: interim dividend and distribution of property of the bankrupt
- Sections 171 and 172: proof of debt and proof of debt by secured creditors
- Proof of debt under sections 171 to 173 and mutual set-off
- Individual insolvency under the IBC: Part III
Disclaimer: Based on the IBBI consolidated text of the Insolvency and Bankruptcy Code, 2016 amended up to 12 August 2021 and on the Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026), which comes into force on the date or dates notified by the Central Government, as consulted on 2 October 2026. It explains the words of the statute only; commencement notifications, other amendments made after 12 August 2021, notified thresholds, the rules and IBBI regulations, and the way tribunals and courts apply these sections should be checked. This article is general information, not legal advice; check the official text before acting.