Supreme Court clarifies set-off rights during Corporate Insolvency Resolution Process: Bharti Airtel vs. Vijaykumar Iyer (2024)

Date of the Judgment: January 3, 2024

Citation: 2024 INSC 15

Judges: Sanjiv Khanna, J. and S.V.N. Bhatti, J.

Can a company undergoing insolvency proceedings adjust debts owed to it against debts it owes to another party? The Supreme Court of India recently addressed this complex question, clarifying the extent to which set-offs are permissible during the Corporate Insolvency Resolution Process (CIRP). This judgment clarifies the rights of creditors to claim set-off against a corporate debtor undergoing CIRP, specifically focusing on when such set-offs are permissible. The bench comprised of Justices Sanjiv Khanna and S.V.N. Bhatti, with Justice Khanna authoring the opinion.

Case Background

In April 2016, Bharti Airtel Limited and Bharti Hexacom Limited (referred to as “Airtel entities”) entered into eight spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited (referred to as “Aircel entities”) to purchase the right to use spectrum in the 2300 MHz band. These agreements were contingent on approval from the Department of Telecommunications (DoT). The DoT required bank guarantees from the Aircel entities for certain license and spectrum usage dues. The Aircel entities, lacking the means to provide these guarantees, requested the Airtel entities to furnish them on their behalf.

The Airtel entities were to pay ₹4,022.75 crores to the Aircel entities under the spectrum transfer agreements. Three Letters of Understanding were signed, where the Airtel entities agreed to provide bank guarantees to the DoT on behalf of the Aircel entities. The Airtel entities were to deduct ₹586.37 crores from the payment to Aircel entities. Upon Aircel entities replacing the bank guarantees, and Airtel entities receiving them back from the DoT, ₹411.22 crores were to be paid by the Airtel entities to the Aircel entities.

The Telecom Disputes Settlement and Appellate Tribunal (TDSAT) ruled on January 9, 2018, that the DoT’s demand of ₹298 crores from the Aircel entities was invalid and ordered the return of the bank guarantees. However, the DoT did not return the bank guarantees and filed a Civil Appeal before the Supreme Court. The Supreme Court, on November 28, 2018, ordered that the TDSAT order regarding the bank guarantees be implemented. Despite this, the DoT did not return the bank guarantees.

Consequently, the Airtel entities asked the bank to confirm the cancellation of the bank guarantees. As the banks hesitated, the Airtel entities approached the Supreme Court, which on January 8, 2019, ordered the cancellation of the bank guarantees. Following this, on January 10, 2019, the Airtel entities paid ₹341.80 crores to the Aircel entities. The remaining amount of ₹145.20 crores was set-off by the Airtel entities, claiming that Aircel entities owed them this amount for operational, SMS, and interconnect usage charges.

Meanwhile, the Corporate Insolvency Resolution Process (CIRP) was initiated against Aircel entities, with the Adjudicating Authority admitting petitions on March 12, 2018, and March 19, 2018. The Airtel entities filed claims for interconnect charges totaling ₹203.46 crores, while also owing ₹64.11 crores to the Aircel entities for similar charges. The Resolution Professional admitted claims of the Airtel entities to the extent of ₹112 crores, rejecting a claim of ₹5.85 crores related to Telenor India. The Resolution Professional demanded payment of ₹112.87 crores from Airtel entities, which was objected to by Airtel entities, who claimed a set-off.

Timeline:

Course of Proceedings

The Adjudicating Authority in Mumbai initially ruled on May 1, 2019, that the Airtel entities had the right to set off ₹112.87 crores from the amount payable to Aircel entities. However, the Resolution Professional challenged this order before the National Company Law Appellate Tribunal (NCLAT). The NCLAT, on May 17, 2019, allowed the appeal, holding that set-off was against the principles of insolvency law and the objectives of the IBC. The NCLAT also noted that the set-off claimed was in respect of two separate and unrelated transactions. The NCLAT also referred to the non-obstante clause in the form of Section 238 of the IBC.

Legal Framework

The judgment discusses the concept of set-off, which is the right of a debtor to adjust a smaller claim against a larger claim owed to a creditor. The court identifies five types of set-off:

• Statutory or Legal Set-off: Created by statute, such as Order VIII Rule 6 of the Code of Civil Procedure, 1908, which allows a defendant to claim a set-off for an ascertained sum of money legally recoverable from the plaintiff.
• Common Law Set-off: This is not specifically defined in the judgment but is mentioned as a type of set-off.
• Equitable Set-off: Allowed for an unascertained sum of money payable as damages, provided there is a connection between the plaintiff’s claim and the defendant’s claim, making it unfair to drive the defendant to a separate suit.
• Contractual Set-off: Arises from an agreement between parties, where they mutually agree on set-off terms, potentially overriding normal set-off rules.
• Insolvency Set-off: Governed by specific insolvency laws, often broader than equitable set-off, and applicable during liquidation, as per Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

The court also highlights that the Insolvency and Bankruptcy Code, 2016 (IBC) does not explicitly provide for set-off during the Corporate Insolvency Resolution Process (CIRP), unlike previous laws such as the Companies Act, 1956 and the Provincial Insolvency Act, 1920. Section 173 of the IBC permits set-off in the case of partnerships and individual bankruptcies. Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, allows for mutual credits and set-off during liquidation, but not during CIRP.

Section 36(4) of the IBC allows the Insolvency and Bankruptcy Board of India to specify assets that could be subject to set-off due to mutual dealings between the corporate debtor and the creditor. Section 238 of the IBC states that the provisions of the Code override other laws.

Arguments

Arguments by Airtel Entities:

• The Airtel entities argued that they were entitled to set-off the amount of ₹145.20 crores, which they claimed was owed to them by the Aircel entities for operational, SMS, and interconnect usage charges.
• They contended that the Resolution Professional had allowed set-off of about ₹64 crores, which was due and payable by the Aircel entities under the operational services agreement, the SMS services agreement, and the interconnect usage agreements prior to the commencement of the CIRP.
• They claimed that Section 30(2)(b)(ii) and Section 53 of the IBC ensure that the assets and liabilities of the corporate debtor, as recorded in the resolution plan, correspond to the liquidation estate in the event of liquidation.
• They argued that if the Resolution Professional secures the assets from the creditors, the creditors should be entitled to claim set-off during the CIRP.
• They relied on Section 60(5) of the IBC, which confers jurisdiction on the Adjudicatory Authority to entertain and dispose of any application or proceeding by or against a corporate debtor.
• They also argued that set-off under the IBC is self-executing and that the definitions of ‘claim’ and ‘debt’ in Section 3 of the IBC support this argument.
• They cited the UNCITRAL Legislative Guide on Insolvency Law, which suggests that the right to set-off is essential to avoid misuse of insolvency proceedings.
• They argued that the interconnect charges were under a separate agreement, and the set-off was justified on equitable grounds.

Arguments by the Resolution Professional:

• The Resolution Professional argued that set-off is not permissible during the CIRP under the IBC, except in cases of contractual set-off or transactional set-off.
• They contended that the set-off claimed by the Airtel entities was not related to the same transaction as the amount owed by the Airtel entities to the Aircel entities.
• They argued that Section 30(2)(b)(ii) of the IBC deals with the amounts to be paid to the creditors and not the amount payable by the creditors to the corporate debtor.
• They stated that the provisions of the IBC relating to CIRP do not recognize the principle of insolvency set-off.
• They argued that the set-off claimed by the Airtel entities would violate the principle of pari passu, which requires that creditors of the same class are treated equally.
• They contended that allowing set-off would give a creditor a preferred status over others, including secured creditors.
• They argued that the relationship and identity of the Corporate Debtor undergo a change on the commencement of the CIRP.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether a creditor can claim a set-off against a corporate debtor during the Corporate Insolvency Resolution Process (CIRP), when the Resolution Professional proceeds in terms of clause (a) to sub-section (2) of Section 25 of the Insolvency and Bankruptcy Code, 2016 to take custody and control of all the assets of the corporate debtor.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

Legal Provisions:

• Order VIII Rule 6 of the Code of Civil Procedure, 1908: Deals with statutory set-off.
• Section 5(1) of IBC: Defines “Adjudicating Authority”.
• Section 25 of IBC: Duty of Resolution Professional to preserve and protect assets of the corporate debtor.
• Section 30(2)(b)(ii) of IBC: Deals with the resolution plan and the quantum of payment required to be made.
• Section 36(4) of IBC: Deals with the exclusion of assets that do not form part of the liquidation estate.
• Section 53 of IBC: Deals with the distribution of assets in liquidation.
• Section 60(5) of IBC: Confers jurisdiction on the Adjudicatory Authority.
• Section 173 of IBC: Permits set-off in the case of partnerships and individual bankruptcies.
• Section 238 of IBC: States that the provisions of the Code would override other laws.
• Section 243 of IBC: Deals with the repeal of certain enactments.
• Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016: Provides for mutual credits and set-off during liquidation.

Judgment

How each authority was viewed by the Court?

• The court used Jurong Aromatics Corporation Pte Ltd. and Others v. BP Singapore Pte Ltd. and Another [(2018) SGHC 215] to explain the different types of set-off.
• The court used Federal Commerce and Navigation Co. v. Molena Alpha Inc. [(1978) Q.B. 927] to note that common law and equity on the right of set-off have combined and are indistinguishable.
• The court used Ministre du Revenu national c. Caisse Populaire du bon Conseil [2009 SCC 29] to show that contractual set-off is based on the intention of the parties.
• The court used Jeffs v. Wood [[1723] 2 Eq Ca. Ab. 10] to show that courts may rely on the equitable foundations of set-off to relax the evidentiary burden required to prove an agreement to set-off.
• The court used Citibank Canada v. Confederation of Life Insurance Company [42 CRB (3)(d) 288] to show that for set-off in law, the obligations existing between the two parties must be debts which are for liquidated sums or money demands which can be ascertained with certainty.
• The court used Ramdhari v. Premanand [19 Cal WN 1183] to show that equitable set-off can be claimed in respect of an unascertained sum of money payable as damages.
• The court used Maheswari Metals & Metal Refinery, Bangalore v. Madras State Small Industries Corporation [AIR 1974 Mad 39] to show that the claim for an equitable set-off must have a connection between the plaintiff’s claim for the debt and the defendant’s claim to set-off.
• The court used Re.: Bank of Credit and Commerce International SA (No. 8) [[1996] Ch. 245] to explain that insolvency set-off must relate to dealingsprior to bankruptcy and that mutuality is central to bankruptcy set-off.
• The court used Stein v. Blake [[1996] A.C. 243] to show that bankruptcy set-off applies to all claims from mutual credits or dealings prior to bankruptcy.
• The court used National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd. [1972 AC 785] to highlight the mandatory nature of insolvency set-off in the UK.
• The court used Gye v. McIntyre [(1991) 171 CLR 609] to explain that mutuality means that the demands must be between the same parties and they must be held in the same capacity.
• The court used BP Singapore Pte Ltd v. Jurong Aromatics Corp Pte Ltd and Others [(2020) SGCA 09] to show that the requirement of mutuality will fail in respect of prior claims against the debtor company.
• The court used Gokul Chit Funds and Trades Private Ltd. v. Thoundasseri Kochu Ouseph Vareed and Others [AIR 1977 Ker 68] to show that mutuality can exist when there are even several distinct and independent transactions.
• The court used Indian Overseas Bank v. RCM Infrastructure Ltd. and Another [(2022) 8 SCC 516], Innoventive Industries Limited v. ICICI Bank and Another [(2018) 1 SCC 407], Embassy Property Developments Private Limited v. State of Karnataka and Others [(2020) 13 SCC 308], and V. Nagarajan v. SKS Ispat and Power Limited and Others [(2022) 2 SCC 244] to show that the IBC is a complete code in itself.
• The court used British Eagle International Airlines Ltd v. Compagnie Nationale Air France [1975 1 WLR 758] to demonstrate the interaction between contractual set-off and insolvency set-off rules.
• The court used Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another [(2022) 2 SCC 401] to show that one of the objects of the IBC is to provide for a comprehensive and a time-bound framework.
• The court used Swiss Ribbons Private Limited and Another v. Union of India and Others [(2019) 4 SCC 17] to show that a set-off between the corporate debtor and a financial creditor is a rarity.
• The court used The Official Liquidator of High Court of Karnataka v. Smt. V. Lakshmikutty [(1981) 3 SCC 32] to show that the court had permitted insolvency set-off on interpretation and application of Sections 529 and 530 of the Companies Act, 1956.
• The court used Career Institute Educational Society v. Om Shree Thakurji Educational Society [2023 SCC OnLine SC 586] to explain the tests for ratio decidendi.

Final Decision

The Supreme Court dismissed the appeals filed by the Airtel entities. The Court held that set-off is not permissible during the CIRP, except in cases of contractual set-off or transactional set-off. The Court also held that the IBC is a complete code in itself and there is no provision for set-off during CIRP. The court noted that the set-off claimed by the Airtel entities was not related to the same transaction as the amount owed by the Airtel entities to the Aircel entities. The court also stated that the set-off would violate the principle of pari passu.

Implications

This judgment has significant implications for creditors and the CIRP process:

• Clarity on Set-off Rights: The Supreme Court has clarified that set-off rights are limited during CIRP, and are only permissible in cases of contractual set-off or transactional set-off. This means that creditors cannot claim set-off for unrelated debts during the CIRP process.
• Protection of Pari Passu Principle: The judgment reinforces the principle of pari passu, ensuring that all creditors of the same class are treated equally. Allowing set-off would give a creditor a preferred status over others, which is not permissible under the IBC.
• Focus on CIRP Objectives: The judgment emphasizes the objectives of the CIRP, which are to rehabilitate and revive the corporate debtor. Allowing set-off would hinder the CIRP process by reducing the assets available for resolution.
• Emphasis on Contractual Agreements: The judgment highlights the importance of contractual agreements. Parties can protect their set-off rights by including specific set-off clauses in their contracts.
• Impact on Creditors: Creditors need to be aware that they cannot claim set-off for unrelated debts during the CIRP. They must file their claims with the Resolution Professional and participate in the resolution process.

Flowchart of the Case