The Supreme Court, vide its judgment dated January 3, 2024, in the matter of Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others [Civil Appeal Nos. 3088-3089 of 2020], has undertaken an in-depth analysis of various types of set-offs recognized under law and their applicability during Corporate Insolvency Resolution Process (“CIRP”) of a company under the provisions of Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

In April 2016, Bharti Airtel Limited and Bharti Hexacom Limited (“Airtel Entities” / “Appellants”) executed eight spectrum trading agreements (“Agreements”) with Aircel Limited and Dishnet Wireless Limited (“Aircel Entities”) towards purchase of right to use spectrum to Aircel Entities in the 2300 MHz band. The aforesaid agreements were subject to approval of the Department of Telecommunications (“DoT”). DoT demanded bank guarantees in light of past dues from Aircel Entities towards license dues and spectrum usage. Aircel Entities challenged the aforesaid direction before the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”). On June 3, 2016, TDSAT passed an interim order directing Aircel Entities to submit the bank guarantee. Since Aircel Entities were not in a financial position to procure and submit bank guarantee for approximately INR 453.73 crores (“Bank Guarantee”), Aircel Entities approached Airtel Entities to do the same on their behalf. Both the entities entered into three letters of understanding for the aforesaid purpose.

Airtel Entities were obligated to pay INR 4,022.75 crores to Aircel Entities under the eight Agreements. Airtel Entities were to deduct INR 586.37 crores from consideration payable to Aircel Entities under the Agreements. Upon Aircel Entities subsequently replacing the Bank Guarantees furnished by Airtel Entities and Airtel Entities receiving back the Bank Guarantees, INR 411.22 crores were payable by the Airtel Entities to the Aircel Entities. Thereafter, on January 9, 2018, TDSAT held that the demand of Bank Guarantee was not tenable and directed DoT to return the Bank Guarantees (“TDSAT Order”). However, DoT did not accept the TDSAT Order and preferred appeal before Supreme Court in 2018. Cross-appeals were filed by Aircel Entities. By order dated November 28, 2018, Supreme Court held that at the interim stage, the TDSAT Order, in so far as Bank Guarantees are concerned, shall be given effect to. However, DoT did not return the Bank Guarantees. Pursuant thereto, Airtel Entities approached the bank seeking confirmation of cancellation of Bank Guarantee. Since banks were reluctant, Airtel Entities approached the Supreme Court, which passed an order dated January 8, 2019 directing that Bank Guarantees shall be cancelled and not be used for any purpose whatsoever.

Thereafter, Airtel Entities made a payment of INR 341.80 crores on January 10, 2018. However, the remaining amount of INR 145.20 crores was set-off by the Airtel Entities stating that the aforesaid amount was owed by Aircel Entities to Airtel Entities towards net amount payable for operation charges, SMS charges and interconnect usage charges to Airtel Entities.

In March 2018, CIRP of Aircel Entities was initiated. Mr. Vijaykumar V. Iyer (“Respondent” / “Resolution Professional”) was appointed as the interim resolution professional in respect of both the Aircel Entities. Bharti Airtel Limited (“Bharti Airtel”) filed claim on account of interconnect charges as well as on behalf of Telenor (India) Communications Private Limited (“Telenor”) in view of merger of both the aforesaid companies. Bharti Hexacom Limited also filed a claim. Total claim filed by Airtel Entities was INR 203.46 crores. However, Airtel Entities also owed INR 64.11 crores towards interconnect charges to Aircel Entities.

Resolution Professional admitted claims of Airtel Entities to the tune of INR 112 crores. Claim of Telenor was not accepted. Thereafter, on January 12, 2019, the Resolution Professional addressed a letter to Bharti Airtel stating that they had suo moto adjusted INR 112.87 crores from INR 453.73 crores payable by Airtel Entities to Aircel Entities. Resolution Professional called upon Bharti Airtel to pay INR 112.87 crores failing which he would be obligated to take legal recourse. In response thereto, Airtel Entities objected on various grounds and also claimed set-off of the amount due to them by the Aircel Entities from the amount payable by them to the Aircel Entities. However, Resolution Professional rejected their reply and claim for set-off.

Thereafter, Airtel Entities approached the National Company Law Tribunal, Mumbai (“NCLT”) which passed an order dated May 1, 2019 and held that Airtel Entities were entitled to set-off INR 112.87 crores from the payment, which was due and payable to Aircel Entities. Resolution Professional challenged the NCLT order before the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) wherein NCLAT held that set-off is violative of basic principles and protection provided to a corporate debtor under CIRP under the provisions of IBC. Aggrieved by the NCLAT order, the Airtel Entities approached the Supreme Court.

Issue

Whether set-off done at the behest of any entity against a company undergoing CIRP for a period prior to commencement of CIRP is violative of the basic principles and provisions of IBC.

Arguments

Contentions of the Appellants:

It was contented by the Appellants that they were entitled to approach NCLT under Section 60(5) (Adjudicating Authority for corporate persons) of IBC which confers jurisdiction to NCLT to entertain and dispose of any application or proceeding by or against corporate debtor.

Placing reliance on definitions of “claim” and “debt” as provided in sub-sections (6) and (11) of Section 3 (Definitions) of IBC, Appellants argued that the concept of set-off derived from common law principles is automatic and self-executing. Appellants further contended that the amount in question with respect to set-off does not form part of the assets of the corporate debtor and therefore the question of violation of Section 14 (Moratorium) of IBC does not arise.

It was further contended by the Appellants that Section 30 (Submission of resolution plan) of IBC seeks to ensure that assets and liabilities of corporate debtor as recorded in the resolution plan correspond to the liquidation estate of corporate debtor in liquidation, whereby Section 36(4) (Liquidation estate) of IBC provides for assets which do not form part of the liquidation estate and permits the Insolvency and Bankruptcy Board of India to specify assets which could be subject to set-off on account of mutual dealings between the corporate debtor and the creditor.

Observations of the Supreme Court

Supreme Court observed that there are five aspects of set-off: (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off. It was observed that contractual set-off arises out of agreement between parties, whereby parties mutually and consensually decide the terms of set-off as long as it is not against the purview of legality and public policy. In ascertaining the applicability of contractual set-off, courts need to ascertain intention of the parties. Right of contractual set-off may be explicitly set out in the clauses of the agreement or can be interpreted from existence of oral or implied agreement. Statutory or legal set-off is created by virtue of a statute. Pertinently, Order VIII Rule 6 of the Code of Civil Procedure, 1908 (“CPC”) provides that where a suit for recovery of money is filed, the defendant can claim set-off against the plaintiff’s demand for a sum of money legally recoverable, subject to not exceeding pecuniary limits of the jurisdiction of the court. Equitable set-off is a common law principle which flows from the judicial precedents for an unascertained sum of monies being payable as damages. Certain jurisdictions such as United Kingdom recognize the principle of insolvency set-off, which is essential at the stage of liquidation process.

Pertinently, Section 173 (Mutual credit and set-off) of IBC and Regulation 29 (Mutual credit and set-off) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) deal with set-off. However, the aforesaid provision relates to liquidation process and not CIRP. Further, Section 36(4) of IBC permits the Insolvency and Bankruptcy Board of India to specify assets which could be subject to set-off on account of mutual dealings between the corporate debtor and the creditor. However, Supreme Court made it clear that the aforesaid provisions pertain to liquidation process and have been analyzed for the purpose of legal understanding only and are not applicable to the present case.

Thereafter, Supreme Court analyzed the expression “mutual dealing”. In this regard, Supreme Court referred to various judgments pronounced in foreign as well as Indian jurisdiction and arrived at the conclusion that the expression “mutual dealings” in Regulation 29 of the Liquidation Regulations is wider than statutory set-off contemplated under CPC as well as equitable set-off under common law prevailing in Indian legal jurisdiction. It was further observed that insolvency set-offs are applicable only where demands are between the same parties, that is, there must be commonality of identity between the person who has made the claim and the person against whom the claim exists.

In so far as the contention raised by Airtel Entities that Section 30 of IBC seeks to ensure that assets and liabilities of corporate debtor as recorded in the resolution plan correspond to the liquidation estate of corporate debtor in liquidation, Supreme Court observed that basis perusal of Section 30(2)(b)(ii) of IBC, it is clear that legislature has neither intended nor provided for any such analogy.

Further, it was observed that in the matter of Swiss Ribbons Private Limited and Another v. Union of India and Others [(2019) 4 SCC 17], which refers to a claim for set-off being considered by the resolution professional during resolution process, such set-off is a rarity.

In so far as the contention raised by Airtel Entities on maintainability of the application to NCLT under Section 60(5) of IBC, Supreme Court observed that the aforesaid legal provision is to aid and assist the corporate debtor throughout CIRP and not for the purpose of allowing a creditor/debtor to claim set-off during CIRP of the corporate debtor.

In so far as the contention raised by Airtel Entities that the concept of set-off derived from common law principles is automatic and self-executing, Supreme Court rejected this argument and observed that there is no such provision in IBC to suggest that insolvency set-off is automatic or self-executing.

The relationship and nature of identity of the corporate debtor undergo a change on the commencement of CIRP. Set-off of dues payable by corporate debtor for a period prior to CIRP cannot be made, and is not permissible in law, from the dues payable to the corporate debtor post the commencement of CIRP. Hence, on account of the aforementioned reason, this will not meet the mandate of mutual dealing and will be contrary to equity and would amount to misuse of the provision of insolvency set-off. Further, it was observed that such insolvency set-off puts the creditor, even an operational creditor, in a better position as compared to other creditors, to the extent of set-off. Hence, it violates the doctrine of pari passu which is recognized in common law. Though the principle of pari passu is not expressly stipulated in IBC, however, it is apparent in Section 53 (Distribution of assets) read with Section 52 (Secured creditor in liquidation proceedings) of IBC. Further, such set-off also violates the principle of anti-deprivation, which in simple words, means that a person cannot contract to obtain a more beneficial position in the event of bankruptcy than what the law otherwise provides.

Further, Supreme Court observed that provisions of set-off provided under CPC or the Liquidation Regulations cannot be applied to any corporate debtor undergoing CIRP. However, the aforesaid rule would be subject to two exceptions. The first exception would be where a party is entitled to contractual set-off on the date which is effective before or on CIRP commencement date. The second exception would be 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.

In so far as the contention raised by Airtel Entities that set-off does not violate moratorium as envisaged under Section 14 of IBC, Supreme Court observed that amounts in question have become payable post the commencement of CIRP and hence rejected the contention of Airtel Entities that by not allowing set-off, new rights are created and that Section 14 of IBC will not be applicable.

Decision of the Supreme Court

Supreme Court held that statutory set-off or insolvency set-off is inapplicable to CIRP under the provisions of IBC. In light of the aforesaid ratio, Supreme Court observed that there is no merit in the present appeals and dismissed the same.

VA View:

Since the enactment of IBC, there have been multiple instances of set-off done at the behest of various creditors during CIRP and such set-offs have taken place during the CIRP towards pre-CIRP dues. Consequently, multiple applications filed by various resolution professionals are pending adjudication before the Adjudicating Authority.

This judgment is the first landmark pronouncement after the enactment of IBC which makes an in-depth analysis of various kinds and principles of set-off recognized in common law and thereafter analyses the concept of set-offs under the provisions of IBC and rules and regulations thereunder. Further, this judgment makes it clear that statutory set-off or insolvency set-off is inapplicable to CIRP. Also, this judgment settles the legal provision once and for all that set-off done at the behest of any entity against a company undergoing CIRP for a period prior to commencement of CIRP is violative of the basic principles and provisions of IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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