The Supreme court on 3 January 2024 in the case of Bharti Airtel Limited v. Vijay V. Iyer has settled the position on the ‘Right to claim set-off in the corporate insolvency resolution process’ (CIRP). The court ruled that the statutory set-off as per Order VIII Rule 6 of Code of civil procedure (CPC) and Insolvency set-off as per the Regulation 29 of the Liquidation regulation 2016 are not applicable to the CIRP. The court has also devised two exceptions to this rule the first one being in the case of Contractual set-off and the second in the case of Equitable set-off.
This post aims to critically analyse the ruling of the court and also seeks to highlight the possible problems surrounding the exceptions as devised by the court.
Brief Background of the case
In the present case the appellant Airtel entities entered into an agreement with Aircel entities for purchase of right to use spectrum. This agreement was subject to approval from the Department of telecommunications (DoT) which asked for bank guarantees due to certain dues of Aircel entities.
The Aircel entities approached the Airtel entities to submit bank guarantees on behalf of Aircel entities to the DoT for which both of them entered into three letter of understanding. Later the Telecom Disputes Settlement and Appellate Tribunal held the demand of DoT untenable and gave direction for return of ban guarantees.
Later the CIRP was initiated against the Aircel entities and the Airtel entities presented a total claim of Rs. 203.46 crores. The resolution professional accepted the claims to the extent of Rs. 112 crores. The resolution professional asked Airtel entities to pay amount of Rs. 112.87 crores to which Airtel entities objected and claimed set off of amount due to them by Aircel entities.
The Airtel entities approached NCLT, Mumbai (adjudicating authority) which allowed the claim of Airtel entities and held that Airtel entities has right to set off Rs. 112.87 crores. The resolution professional challenged this order in National Company Law Appellate Tribunal which allowed the appeal and found out that setoff is antithetical to the objective of IBC.
Ruling of the Court
Firstly the court observed the fact that how CIRP and liquidation process are different from each other in terms of their key objective, where the CIRP aims to revive the corporate debtor the liquidation process aims to liquidate assets of the company in order to distribute and pay the creditors the amount due in an order of preference as provided.
The regulation 29 of the Liquidation regulation 2016 states that if there is a mutual dealing with the corporate debtor and another party the sums can be setoff to arrive at an amount payable to the corporate debtor or other party. But these Liquidation regulations are only applicable to liquidation process under Chapter III of Part II and not Chapter II Part II of the IBC which is on CIRP. Further the court also held that since the provisions under the chapter II Part II are clear and free from ambiguity it does not require any purposive interpretation.
The court then examined the expression “mutual dealings” and what constitutes as “Insolvency set-off” by drawing analogy between cases from various jurisdiction. While doing so court determined that for a transaction to be a mutual dealing the primary thing is the relationship and apposite identity of the parties which gave rise to the claim under question and it should be such that if ones claim is enforced without regard to others it would violate the sense of fairness and justice.
Secondly the court while referring to various previously determined cases laid emphasis on the fact that Insolvency and Bankruptcy code 2016 (IBC) is a complete code in itself and that it only allows provisions of other enactments to be applicable only when it refers. It referred to Section 238 of the IBC which states that provisions of this code would override other laws.
At the heart the court’s reasoning was based on the argument that IBC being the complete code on law of insolvency and bankruptcy, no other provision outside of the code could be applied to it. Through this reasoning it came to the conclusion that the statutory set-off as per Order VIII Rule 6 of CPC and Insolvency set-off as per the regulation 29 of the Liquidation regulation 2016 are not applicable to the CIRP.
Critical Analysis of the Exceptions Carved out by the Court
The supreme court in this case has ruled out two exceptions to the applicability of statutory and insolvency set-off to CIRP the first one is where on the date or the date before which the CIRP initiates the party is entitled to a contractual set-off. In a contractual set-off the set-off is dependent on the agreement itself rather than a application for set-off. The reason to allow such exception by the court was that CIRP does not bar the application of contractual set-off and that while other legal proceedings, recovery etc. are suspended under moratorium the term and condition of contracts remain binding.
The problem under this exception is that even if a contractual set-off is allowed the rights of the creditors at the time of liquidation would be affected. Under section 30(2)(b)(ii) of IBC the resolution professional shall ensure that the payment of debt to the operational creditors shall be not less than what they are entitled to as per the waterfall mechanism under section 53 of the code.
If a contractual set-off is allowed the share of other creditors would not be at par with the creditors entitled to claim set-off who would be placed at priority in terms of payment. This will defeat the very purpose of section 53 which ensures equal treatment of same class of creditors. This set-off also transgress the Pari passu principle which states that all the creditors shall be entitled to the their dues in a proportional manner and that no creditor shall receive more than what he is entitled to. When a creditor would be entitled to a contractual set-off he would by virtue of his claim have primacy over the claim of other creditors.
In later part of the judgment the court held that the objective moratorium under of section 14 of IBC is to accord protection to the assets of the corporate debtor. In case of contractual set-off as an exception the purpose of moratorium could be defeated as it could also allow amounts to be set-off against the assets of the corporate debtor depleting the assets which would finally impact the distribution of assets at the time of liquidation among the other creditors. This goes against the Principle of Anti-deprivation which aims to protects the assets of the insolvent estate from distribution through any arrangement, so that they can be preserved for benefit of the creditors.
The second exception is in the case of Equitable setoff wherein the claim and counter claim of setoff arise out one or more transaction which are so closely connected and linked in a way that they can be regarded as one. But what qualifies as a closely linked transaction is ambiguous and subjective which has to be decided as per the different factual scenario. But this Set-off still acts as a detriment to the proportionate distribution of amount which the creditors not having claim of set-off would receive at the time of liquidation.
For this exception the court also used the term ‘Transactional set-off’ which is evident as per its requirement which is that the transaction shall be closely connected and that it would be arbitrary to separate the transaction in order to accept claim of one party without adjusting amount due to other. Further the court stated that “Lastly, being an equitable right, it can be denied when grant of relief will defeat equity and justice”. Now what constitutes as the expression ‘Equity an Justice’ in such a case is still open for interpretation.
Conclusion
While the supreme court’s ruling that the statutory set-off as per Order VIII Rule 6 of CPC and Insolvency set-off as per the regulation 29 of the Liquidation regulation, 2016 are not applicable to the CIRP has settled the position with regards to set-off under CIRP to an extent, But there is still a grey area with respect to the exceptions as laid down by the court in terms of the misuse of contractual set-off depleting the assets of the corporate debtor during CIRP which directly deprives the shares of other creditors in case of liquidation. As regards to the second exception the expression ‘closely connected’ for the transactions is way too subjective and must be decided as per different factual scenario.
The court has outrightly rejected the Set-off in CIRP, unheeding the fact that were the claim of set-off does not impact the assets of the debtor a set-off shall be put into effect in order to allow the creditor to recover the amount due, which could possibly be difficult to recover after the completion of CIRP.
Author Bio
