Supreme Court: In a set of two appeals, by Bharti Airtel, a question was raised as to right to claim set-off in the Corporate Insolvency Resolution Process, when the Resolution Professional proceeds in terms of clause (a) to sub-section (2) of Section 25 of the Insolvency and Bankruptcy Code, 2016, (‘IBC’) to take custody and control of all the assets of the corporate debtor, Sanjiv Khanna* and S.V.N Bhatti, JJ. dismissed the appeals and held that if the Resolution Professional proceeds in terms of Section 25 and secures the assets from the creditors, the creditors would not be entitled to claim set-off during the course of the Corporate Insolvency Resolution Process.
Background
In the matter at hand, Bharti Airtel Limited and Bharti Hexacom Limited entered into eight spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited for purchase of the right to use the spectrum allocated to the latter in the 2300 MHz band in April, 2016. The Department of Telecommunications, Government of India (‘DoT’) for grant of approval of the agreement demanded bank guarantees in relation to certain licence dues and spectrum usage dues from the Aircel entities. The Airtel entities and Aircel entered into three Letters of Understanding whereby the Airtel entities agreed to furnish the bank guarantees to the DoT on behalf of the Aircel entities.
In the meanwhile, Corporate Insolvency Resolution Process was initiated against Aircel entities, namely Aircel Limited and Dishnet Wireless Limited. The Adjudicating Authority, Mumbai Bench, admitted the petitions against Aircel Limited and Dishnet Wireless Limited. Claims on account of the interconnect charges were filed by Bharti Airtel Limited, including the claim on behalf of Telenor (India) Communications Private Limited, in light of Telenor’s merger with Bharti Airtel Limited. Claim was also filed by Bharti Hexacom Limited. The total claim by the Airtel Entities was Rs.203.46 crores. However, the Airtel entities also owed Rs.64.11 crores towards interconnect charges to the Aircel entities. The Resolution Professional for Aircel, Dishnet Wireless Limited and Aircel Cellular Limited, stated to Bharti Airtel that they had suo moto adjusted an amount of Rs.112.87 crores from the amount of Rs.453.73 crores payable by Airtel entities to Aircel entities, consequent to the discharge and cancellation of the bank guarantees. The Airtel entities objected on several grounds and claimed set-off of the amount due to them by the Aircel entities from the amount payable by them to the Aircel entities. The claim for set-off was rejected by Resolution Professional.
The Adjudicating Authority, Mumbai, vide order dated 01-05-2019 held that the 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 challenged the said order before the National Company Law Appellate Tribunal (‘NCLAT’). The NCLAT vide order dated 17-05-2019 allowed the appeal, holding that set-off is violative of the basic principles and protection accorded under any insolvency law. Set-off is antithetical to the objective of the IBC.
Analysis
The Court explained the meaning of Set-off as the recognition of the right of a debtor to adjust the smaller claim owed to him against the larger claim payable to his creditor.
The Court said that there is a difference between the Corporate Insolvency Resolution Process and the liquidation process of the IBC, the first focuses on and fosters rehabilitation, revival and resolution of the corporate debtor, whereas the latter, focuses on the constellation of assets of the company in liquidation, and distribution and payment to the creditors from the liquidation estate in terms of the order of preference set out in the insolvency statute.
Regarding the claim of set-off, the Court said that the IBC in the case of Corporate Insolvency Resolution Process does not give the indebted creditors the right to set-off against the corporate debtor, however, the earlier enactments, the Companies Act, 1956 vide Section 529 and the Companies Act, 2013 vide Section 325 (now omitted), did permit set-off per the Provincial Insolvency Act, 1920, which enactment is now repealed. Accordingly, under the Companies Acts, in terms of the provisions of Section 46 of the Provincial Insolvency Act, 1920, indebted creditors’ right to set-off against the corporate debtor was statutorily recognised subject to satisfaction of certain conditions. Significantly, in the case of partnerships and individual bankruptcies, Section 173 of the IBC does permit set-off.
The Court referred to Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, which provides for mutual credits and set-off- “Where there are mutual dealings between the corporate debtor and another party, the sums due from one party shall be set off against the sums due from the other to arrive at the net amount payable to the corporate debtor or to the other party.” Hence, the Court said that set-off on account of mutual dealings is permitted in terms of Regulation 29 of the Liquidation Regulations, the sums due mutually can be set off to arrive at the net amount payable to the corporate debtor or the other party.
The Court also examined how insolvency set-off is different from contractual, statutory and equitable set-off. In United Kingdom, the insolvency set-off was examined in re BANK OF CREDIT AND COMMERCE INTERNATIONAL S.A. (No. 8), [1996] 2 WLR 631), wherein it was held that the set-off must relate to dealings prior to bankruptcy and the requirement of mutuality is central to bankruptcy set-off and must be rigorously enforced. Therefore, the Court said that the insolvency set-off regime in the United Kingdom is wider than statutory/legal set-off or equitable set-off.
The Court noted the meaning of ‘mutual’, as discussed in Gye v. McIntyre (1991) 171 CLR 609, whereby, mutuality means that the demands must be between the same parties and they must be held in the same capacity, or right or interest. There must be identity between the persons beneficially interested in the claims and the person against whom the claim existed. Therefore, an obligation arising out of an instrument may be set-off against a simple contract debt, and a secured debt may be set-off against an unsecured creditor.
The Court also noted that in BP Singapore Pte Ltd v. Jurong Aromatics Corp Pte Ltd. (2020) SGCA 09, it was observed that the requirement of mutuality will fail in respect of prior claims against the debtor company, where the receiver carries on business of the debtor company under a specific agreement to which the creditor and the corporate debtor are also parties and that it is not necessary that the claim and cross-claim should arise on the same contract, albeit it should be a close and inseparable relationship or connection between the dealings and the transactions which give rise to the respective claims, such that it would offend one’s sense of fairness or justice to allow one’s claim to be enforced without regard to the other.
Therefore, the Court said that the expression ‘mutual dealings’ for the purpose of Regulation 29 of the Liquidation Regulations, is wider than the statutory set-off postulated under Order VIII Rule 6 of the Civil Procedure Code, 1908, as well as, equitable set-off under the common law as applicable in India. Hence, the Court said that the insolvency set-off applies when demands are between the same parties. There must be commonality of identity between the person who has made the claim and the person against whom the claim exists. Even when there are several distinct and independent transactions, mutuality can exist between the same parties functioning in the same right or capacity.
Referring to Section 238 of the IBC, which states that the provisions of the Code would override other laws, the Court said 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 cannot be applied to the Corporate Insolvency Resolution Process, except with application of the following two exceptions, striking a balance with the doctrines of pari passu and anti-deprivation:
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Where a party is entitled to a contractual set-off, on the date which is effective before or on the date the CIRP is put into motion or commences. The CIRP does not preclude application of contractual set-off. During the moratorium period with initiation of the CIRP, 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.
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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, making it inequitable and unfair that the debtor be asked to pay money, without adjustment sought that is fully justified and legal. Set-off of this nature does not require legal proceedings. Further, set-off of money is to be given against money alone. It will not apply to assets. Lastly, being an equitable right, it can be denied when grant of relief will defeat equity and justice.
Regrading Airtel entities’ reliance on Section 30 of the IBC, the Court said that in the event the corporate debtor undergoes liquidation, Section 36(4)(e) and Regulation 29 would apply, however, if the Resolution Professional proceeds in terms of Section 25 and secures the assets from the creditors, the creditors would not be entitled to claim set-off during the course of the Corporate Insolvency Resolution Process, which is earlier in the point of time. Further, the Court explained that Section 30(2) deals with the resolution plan and the quantum of payment required to be made when considering a resolution plan under Chapter II Part II of the IBC. Therefore, the Court culled out that Section 30(2)(b)(ii) does not support the plea of insolvency set-off.
Conclusion
The Court did not find any merits in the present appeals by Airtel entities, hence, the appeals were dismissed.
[Bharti Airtel Ltd. v. Vijaykumar V. Iyer, 2024 SCC OnLine SC 4, Decided on: 03-01-2024]
Judgment Authored by: Justice Sanjiv Khanna
Know Thy Judge| Supreme Court of India: Justice Sanjiv Khanna
Advocates who appeared in this case :
For the appellants: AOR Sandeep Devashish Das and Advocate Ramakant Rai
For the respondents: Advocate Rishi Agrawala, Advocate Ankur Saigal, Advocate Victor Das, AOR E. C. Agrawala, AOR Cyril Amarchand Mangaldas, Advocate Raunak Dhillon, Advocate Aishwarya Gupta, Advocate Anchit Jasuja
