IBC | Statutory Set Off Or Insolvency Set Off Inapplicable To Corporate Insolvency Resolution Process: Supreme Court

The Supreme Court has held statutory set off or insolvency set off is not applicable to Corporate Insolvency Resolution Process (“CIRP”) proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”). Further, Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), which provides for mutual dealing and set off, does not apply to Part II of the IBC which deals with CIRP.

The principle of Set-off recognizes the right of a debtor to adjust the smaller claim owed to him against the larger claim payable to his creditor.

The Bench has also carved out two exceptions to the application of statutory or insolvency set off to CIRP proceedings. First being, when a party is entitled to contractual set-off, on the date which is effective before or on the date of commencement of CIRP. Secondly, in cases of 'equitable set-off' when the claim and counter claim in the form of set-off are linked and connected on account of one or more transactions that can be treated as one.

The Bench comprising Justice Sanjiv Khanna and Justice S.V.N. Bhatti, has observed that Section 30(2)(b) does not support the plea of insolvency set-off, since the provision deals with the amounts to be paid to creditors and not amount payable by creditors to Corporate Debtor. Further, the specific legislative mandate given in Chapter II Part II of IBC, the provisions of IBC relating to CIRP do not recognize the principle of insolvency set-off. “We would not extend it by implication, when the legislature has not accepted applicability of mutual set-off at the initial stage, that is, the Corporate Insolvency Resolution Process stage.”

BACKGROUND FACTS

In 2016, Bharti Airtel Limited and Bharti Hexacom Limited (collectively, “Airtel Entities/Appellants”) entered into eight spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited (collectively, “Aircel Entities”), for purchase of the right to use the spectrum allocated to the latter in the 2300 MHz band. In view of the same, the Airtel Entities were to pay Rs.4,022.75 crores to the Aircel entities.

The agreement was contingent on approval of the Department of Telecommunications (DoT) which demanded bank guarantees from the Aircel entities. Upon request, Airtel entities furnished bank guarantees to DoT on behalf of Aircel entities.

The bank guarantees were returned and accordingly, Airtel entities became liable to pay the balance amount in terms of the letters of understanding to Aircel entities.

In 2018, Aircel Ltd. and Dishnet Wireless Ltd. were admitted into CIRP under IBC by the National Company Law Tribunal (“NCLT”).

In 2019, the Airtel entities paid Rs. 341.80 crores due to the Aircel entities and the balance amount of Rs.145.20 crores was set-off by the Airtel entities towards operational charges, SMS charges and interconnect usage charges to the Airtel entities.

The Airtel Entities submitted a claim of Rs.203.46 crores in the CIRP of Aircel Entities which was admitted by Resolution Professional to the extent of Rs. 112 Crores. However, the Airtel entities also owed Rs. 64.11 crores towards interconnect charges to the Aircel entities.

The Resolution Professional informed Bharti Airtel Limited that they he has suo moto adjusted Rs.112.87 crores from the amount payable by Airtel entities to Aircel entities, consequent to the discharge and cancellation of bank guarantees. The Airtel entities claimed set-off of the amount due to them by Aircel entities.

On 01.05.2019, the NCLT held that Airtel entities had a right to set off Rs.112.87 crores from the payment, which was retained, and due and payable to Aircel entities.

The Resolution Professional filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) against the order dated 01.05.2019.

On 17.05.2019, the NCLAT allowed the appeal and held that Set-off is antithetical to the objective of IBC. It was further held that moratorium under Section 14(4) of IBC applies till the date of completion of CIRP, which is till the resolution plan is approved or the liquidation order is passed, thus to permit set-off will be contrary to law. Also, the set-off being claimed is in respect of two separate and unrelated transactions was impermissible.

The Airtel entities filed an appeal before the Supreme Court against the order dated 17.05.2019.

SUPREME COURT VERDICT

The issue before the Bench was regarding right to claim set-off in CIRP, when the Resolution Professional proceeds in terms of Section 25(2)(a) of IBC to take custody and control of assets of Corporate Debtor.

The Bench examined the different kinds of set off such as (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off.

While analyzing statutory setoff, the Court observed that the same is created by a statute. For set-off in law, the obligations existing between the two parties must be debts which are for liquidated sums or money demands which can be ascertained with certainty. Both the debts must be mutual cross-obligations, that is, cross-claims between the parties in the same right.

It was observed that Insolvency set-off under the United Kingdom law is permitted when there are mutual debts, mutual credits and other mutual dealings between the parties at the relevant cut-off time, which is essentially the stage of commencement of the liquidation process.

The Court noted that unlike Companies Act, the IBC in the case of CIRP does not give the indebted creditors the right to set-off against the Corporate Debtor. Further, insolvency set-off under IBC is not automatic or self-executing.

In case of partnerships and individual bankruptcies, Section 173 of IBC permits set-off. Regulation 29 of the Liquidation Regulations provides for mutual credits and setoff. However, the Liquidation Regulations are not applicable to Chapter II Part II of IBC, which relates to CIRP.

The Court also carved out two exceptions to applicability of statutory or insolvency setoff to CIRP, as under:

1. Given the aforesaid legal position, we do not think that the provisions of statutory set-off in terms of Order VIII Rule 6 of CPC or insolvency set-off as permitted by Regulation 29 of the Liquidation Regulations can be applied to the Corporate Insolvency Resolution Process. The aforesaid rule would be, however, subject to two exceptions or situations. The first, if at all it can be called an exception, is where a party is entitled to contractual set-off, on the date which is effective before or on the date the Corporate Insolvency Resolution Process is put into motion or commences. The reason is simple. The Corporate Insolvency Resolution Process does not preclude application of contractual set-off. During the moratorium period with initiation of the Corporate Insolvency Resolution Process, recovery, legal proceedings etc. cannot be initiated, enforced or remain in abeyance. Besides the moratorium effect, the terms of the contract remain binding and are not altered or modified.
2. The second exception will be in the case of 'equitable set-off' when the claim and counter claim in the form of set-off are linked and connected on account of one or more transactions that can be treated as one. The set-off should be genuine and clearly established on facts and in law, so as to make it inequitable and unfair that the debtor be asked to pay money, without adjustment sought that is fully justified and legal. The amount to be adjusted should be a quantifiable and unquestionable monetary claim, as the Corporate Insolvency Resolution Process is a time-bound summary procedure.”

The Bench rejected Airtel's plea for set off since amounts become payable post commencement of CIRP.

The appeal has been dismissed and NCLAT order has been upheld.

Case Title: Bharti Airtel Limited and Another V Vijaykumar V. Iyer and Others

Citation: 2024 LiveLaw (SC) 11

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