Right to Claim Set-off under IBC in light of Bharti Airtel Ltd.
Owais S. Khan
Penultimate year Student, Government Law College, Mumbai
Introduction:
Recently, the Hon’ble Supreme Court (SC) in Bharti Airtel Limited & Anr vs. Vijaykumar V. Iyer and Ors. (2024) ibclaw.in 02 SC adjudicated on an imperative question of law relating to the Applicability of Set-off under the Insolvency and Bankruptcy Code, 2016 (Code). The Code explicitly recognizes the applicability of Set-off under Part III Chapter V relating to the Partnership firms and Individuals and for Liquidation Proceedings under Part II Chap III. However, the approach under Part II Chap II dealing with Corporate Debtors (CD) under Corporate Insolvency Resolution Process (CIRP) is not the same and has been discussed in brief below.
Factual Matrix:
The Bharti Airtel Ltd. and Bharti Hexacom Ltd. (Airtel Entities) entered into Spectrum Trading Agreements with Aircel Ltd. and Dishnet Wireless Ltd. (Aircel Entities) for purchase of the right to use the spectrum allocated to the latter . The agreement was contingent to the approval by Dept. of Telecommunication, which insisted on a bank guarantee from the Aircel Entities. Since, the Aircel entities were not in a position to provide the same; the guarantees were provided by the Airtel Entities on behalf of the Aircel Entities. On the basis of the above arrangement, Airtel Entities were to pay Rs. 411.22 Cr. to the Aircel Entities. The Airtel entities made a part of the payment, and the balance amount was set-off on the ground of Operational Charges, SMS Charges and Interconnects User Charges owed by Airtel Entities to Aircel Entities.
In the interim, CIRP was initiated against Aircel Entities. Claims worth Rs. 203.46 Crores were filed by the Airtel Entities before the Resolution Professional (RP) of Aircel Entities. The RP approved a claim of Rs. 112 Cr. Further, owing to the discharge and cancellation of the Bank Guarantee, RP asked the Airtel Entities to pay Rs. 112.87 Cr. to the Aircel Entities, failing which steps shall be taken to recover the same. The Airtel Entities objected, and also claimed set-off on 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 the RP, but allowed by the Adjudicating Authority. The Order was challenged before the National Company Law Appellate Tribunal, which held that set-off is violative of the basic principles and protection accorded under any insolvency law and is antithetical to the objectives of the Code. It also stated that, until the moratorium ceases to exist, permitting any set-off shall be contrary to law.
Judgement:
The SC upheld the orders of NCLAT rejecting the Airtel Entities to claim any set-off, stating that the legislature does not provide for set-off under CIRP. The said judgement highlighted the manifold facets for the non-applicability of Set-off claims under CIRP.
- Applicability in Liquidation Proceedings Only: The SC, stated the reason for the Applicability of set-off of claims for Liquidation Proceedings and not for CIRP, highlighting that CIRP focuses on resolution, rehabilitation and revival of the CD, whereas the Liquidation focuses on constellation of the assets of the company and distribution and payment to the creditors from the liquidation estate as per the order of Preference laid down in Sec. 53 of the Code. Further, any claim for set-off is explicitly excluded from the liquidation estate as provided in Sec. 36 of the Code. Also, Sec. 173 of the Code and Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 201627 provides for mutual credits and setoff. Referring to the Statutory Set-off claims as postulated in Order VIII Rule of the Civil Procedure Code, 1908 (CPC) and the equitable set-off under common law, the term ‘mutual dealing ‘ was held to be more broad. For claiming a set-off “…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 …”
Discussing the non-applicability of the set-off during CIRP, the SC held that the CD undergoes a change in its identity and relationship on the commencement of CIRP. “ … Set-off of the dues payable by the Corporate Debtor for a period prior to the commencement of the Corporate Insolvency Resolution Process cannot be made and is not permitted in law from the dues payable to the Corporate Debtor post the commencement of the Corporate Insolvency Resolution Process … “.
- Violative of Doctrine of Pari Passu: This refers to treating the creditors of the same class in the same manner. The classes are outlined in the Waterfall Mechanism of the Code under Sec. 53 dealing with distribution of assets. It was held that insolvency set-off would result in primacy to the creditor whose claims are set-off, thus depleting the assets available for distribution in favour of one to the detriment of the others. Though, this Doctrine is not stated in the Code, Sec. 53 read with Sec. 52 of Code, creates a hierarchy of creditors, with a stipulation that the same class of creditors shall be given equal treatment. Thus, the SC held that set-off can be allowed, only when mandated or is justified by law, as it is violative of the pari passu principle.
- Promoting the Principle of Anti- Deprivation: This principle, in simple terms provides that the creditor cannot contract to obtain a more beneficial position, in the event of bankruptcy/insolvency of the debtor. The Principle aims at protecting and conserving the estate of the insolvent for the benefit of the Creditors. Thus, any claim of set-off in favour of any creditor would result in wrongful debit from the assets of the insolvent, thus creating a beneficial position for him. With the Judgement, the SC has ensured that the principle finds its rightful place and adherence in the Code, even if not explicitly stated.
- Exceptions when Set-off would apply in CIRP: The SC however laid out two exceptions where a creditor can claim a set-off under CIRP. First, when the Set-off is a result of a contract between the parties (Contractual Set-off), which is effective before or on the date of commencement of CIRP. Second, when there is an Equitable Set-off (Transactional Set-off) where the claim and counterclaim though linked on account of one of more transactions, but can be treated as one. However, this exception shall apply only where money is to be paid against money and not asstes. “…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 …. “. One of the major reasons highlighted by SC for rejecting the set-off claim was the fact that Spectrum agreements and Bank Guarantee are two unrelated documents, and hence cannot be treated as a single transaction to allow a transaction set-off.
Analysis:
The Judgement is of great succour to the RP’s who are often faced with the predicament and dilemma relating to the claim of set-off. Though, it has been held in Swiss Ribbon judgement (2019) ibclaw.in 03 SC that set-off between the CD and Financial Creditor is a rarity, the court stated the said provision are Obiter dicta and not Ratio Decidendi, thus affirming the fact that there is no application of set-off claims for a CD under CIRP.
Perusing through the pages of the code, it can be construed that whenever a company enters into a CIRP, ensuring the CD remains a going concern and receives a favourable Resolution Plan from the Resolution Applicants (RA) remains its prime objectives. Both of these require sufficient funds and assets in its custody. No CD would be under a position to continue as a going concern if their rightful claims against the creditors are set-off, leading to a fund crunch for the CD. Similarly, No RA would propose a Resolution Plan for the CD if the creditors are allowed to claim a set-off for their debts, as they are ultimately to be deducted from the available assets of the CD.
Conclusion:
Thus, Bharti Airtel Judgement is surely yet another feather in the cap in the ever evolving landscape of IBC Jurisprudence. The Judgement upholds the inherent fact that during CIRP, it is the Promotion and protection of the assets of the CD that must be of prime consideration. All other considerations, including that of the creditors shall be secondary and inferior to that of the interest of the CD.
However, on a concluding note, one aspect remains unanswered. Who approves the Set-off in case of exceptions as highlighted in the judgement – The Commercial Wisdom of the Committee of Creditors or the Administrative discretion of the Resolution Professional?
