Supreme Court Clears Air On Right To Claim Set-Off In Corporate Insolvency Resolution Process Under IBC

The Supreme Court, in a recent judgment, cleared air on right to claim set-off in Corporate Insolenvency Resolution Process under the Insolvency and Bankruptcy Code (IBC).

The Court noted that provisions of statutory set-off or insolvency set-off permitted by the Liquidation Regulations cannot be applied to a Corporate Insolenvency Resolution Process under the Insolvency and Bankruptcy Code. But it carved out two exceptions to this rule: contractual set-off and equitable set-off/transactional set-off.

In that context, the Bench of Justice Sanjiv Khanna and Justice SVN Bhatti observed that,"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."

In this case, Bharti Airtel Limited and Bharti Hexacom Limited entered into spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited in 2016, agreeing to purchase spectrum rights in the 2300 MHz band for Rs. 4,022.75 crores.

The deal was contingent on Department of Telecommunications (DoT) approval, requiring bank guarantees. Airtel provided the guarantees, which were returned, making them liable for the payment.

In 2018, Aircel entered Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC). Airtel paid Rs. 341.80 crores to Aircel, offsetting Rs. 145.20 crores for charges owed. Airtel claimed Rs. 203.46 crores in Aircel's CIRP, admitted to Rs. 112 crores. Airtel also owed Rs. 64.11 crores in interconnect charges to Aircel. The Resolution Professional adjusted Rs. 112.87 crores from Airtel's payment to Aircel.

NCLT ruled in favor of Airtel's right to set off on 01.05.2019. The NCLAT overturned this decision on 17.05.2019, stating that set-off contradicts IBC's objective and is prohibited during the moratorium period. Airtel appealed against the NCLAT's decision before the Supreme Court.

The Supreme Court also carved out two exceptions to the application of statutory or insolvency set off to CIRP proceedings.

Exception 1: 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 Court observed that, "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."

Exception 2: An 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. 

It was further observed that, "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. It is not a civil suit where disputed questions of law and facts are adjudicated after recording evidence. 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."

Subsequently, the appeal was dismissed considering the set-off amounts were payable after the commencement of CIRP.

Cause Title: Bhati Airtel Limited & Anr. vs Vijaykumar V Iyer & Ors.

Click here to read/download the Judgment