In CIVIL APPEAL NOs. 3088-3089 OF 2020-SC- Provisions of IBC relating to Corporate Insolvency Resolution Process do not recognise the principle of insolvency set-off, clarifies Apex Court
Justices Sanjiv Khanna & S.V.N Bhatti [03-01-2024]

Read Order: BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS

Tulip Kanth

New Delhi, January 5, 2023: While dismissing the appeals of Bharti Airtel challenging an order of the NCLAT, the Supreme Court has observed that unlike the provisions of the Companies Act, in the case of Corporate Insolvency Resolution Process, IBC does not give the indebted creditors the right to set-off against the corporate debtor.

The present appeals, before the Division Bench of Justice Sanjiv Khanna and Justice S.V.N Bhatti, raised an interesting question on the right to claim set-off in the Corporate Insolvency Resolution Process, when the Resolution Professional proceeds in terms of clause (a) Section 25(2) of the Insolvency and Bankruptcy Code, 2016 to take custody and control of all the assets of the corporate debtor.

The factual background of this case was such that in April 2016, Bharti Airtel Limited and Bharti Hexacom Limited (appellants or Airtel entities) entered into eight spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited (Aircel entities) for purchase of the right to use the spectrum allocated to the latter in the 2300 MHz band. The DoT for grant of approval demanded bank guarantees from the Aircel entities. Challenging this direction, the Aircel entities approached the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).

By the interim order TDSAT directed Aircel entities to submit the bank guarantees. As the Aircel entities did not have the means to procure and submit the bank guarantees for approximately Rs.453.73 crores, they approached the Airtel entities to submit bank guarantees on their behalf to the DoT.

The Airtel entities and Aircel entities 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. The claims submitted by the Airtel entities were admitted by the Resolution Professional to the extent of Rs.112 crores. Claim on account of receivable of about Rs.5.85 crores owed by Aircel entities to Telenor India, which had been merged with Bharti Airtel Limited, was not accepted.

The Resolution Professional for Aircel Limited, Dishnet Wireless Limited and Aircel Cellular Limited, wrote to Bharti Airtel Limited, stating 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. Bharti Airtel Limited was asked to pay Rs.112.87 crores to Aircel entities, which were undergoing Corporate Insolvency Resolution Process, failing which the Resolution Professional would be obligated to take steps for recovery. The Airtel entities objected on several grounds, and also claimed set-off of the amount due to them by the Aircel entities from the amount payable by them to the Aircel entities. Their reply and claim for set- off was rejected by the Resolution Professional.

The Airtel entities thereupon approached the Adjudicating Authority which 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. This order was challenged before the National Company Law Appellate Tribunal (NCLAT) and the Appellate Tribunal allowed the appeal.

The Airtel entities urged that Section 30 of the IBC seeks to ensure that the assets and liabilities of the corporate debtor, as recorded in the resolution plan, correspond to the liquidation estate of the corporate debtor in the event of liquidation. It was submitted 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, which is earlier in the point of time.

At the outset, the Bench highlighted the fact that the expression mutual dealings is the condition to be satisfied for insolvency set-off under Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

It was further observed 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’t be applied to the Corporate Insolvency Resolution Process.

“The aforesaid rule would be, however, subject to two exceptions or situations. The first, if at all it can be called an exception, is 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 second exception will be 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, 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 Top Court said.

The finding of the Bench that the IBC is a complete code relying upon the opening part of the enactment and Sections 238 and 243, nullified the argument raised by the appellant Airtel entities that they are entitled to statutory set-off or insolvency set-off, in the Corporate Insolvency Resolution Proceedings under Chapter II Part II of the IBC. Regulation 29 of the Liquidation Regulations does not apply to Part II of the IBC.

Referring to section 30 of the IBC, the Bench opined that the provision requires that the Resolution Professional shall examine each resolution plan received by him to confirm that each plan provides for payment of debts of the operational creditor in the manner as may be specified by the Board. The Board has not specified the manner in which payment of debts to the operational creditor shall be made. However, the stipulation that the payment of debts to the operational creditor shall not be less than the amount that the operational creditors are entitled to in terms of the order of priority in sub-section (1) to Section 53 of the IBC is mandatory.

The Bench made it clear that clause (ii) to sub- section (2)(b) of Section 30 does not support the plea of insolvency set-off. The section does not make Chapter III Part II, that is, Section 36(4)(e) or Regulation 29, applicable to the Corporate Insolvency Resolution Process under Chapter II Part II of the IBC. Secondly, clause (ii) to Section 30(2)(b) deals with the amounts to be paid to the creditors and not the amount payable by the creditors to the corporate debtor. Thirdly, clause (ii) to Section 30(2)(b) has appliance when the resolution plan is being considered for approval.

“Fourthly, and for the reasons elaborated earlier, and in view of the specific legislative mandate as incorporated and reflected in Chapter II Part II of the IBC, we should hold that the provisions of the IBC relating to Corporate Insolvency Resolution Process do not recognise the principle of insolvency set-off. We would not extend it by implication, when the legislature has not accepted applicability of mutual set-off at the initial stage, that is, the Corporate Insolvency Resolution Process stage”, the Bench held.

The Bench did not agree that insolvency set-off under the IBC is automatic and self-executing. It also did not find any provision in the IBC which states so. “In the context of the IBC, insolvency set-off is neither automatic, nor self-executing”, the Bench held while also rejecting the argument that insolvency set-off is automatic and self-executing.

On the aspect of mutual dealings and also equity, the Bench noted that adjustment of the inter-connect charges are under a separate and distinct agreement. The telephone service providers use facilities of each other as the caller or the receiver may be using a different service provider. Accordingly, adjustments of set-off are made on the basis of contractual set-off. These are also justified on the ground of equitable set-off. The set-off to this extent has been permitted and allowed by the Resolution Professional, the Bench added.

According to the Top Court, the transaction for purchase of the right to use the spectrum was an entirely different and unconnected transaction. The agreement to purchase the spectrum encountered obstacles because the DoT had required bank guarantees to be furnished. Accordingly, Airtel entities, on the request of Aircel entities had furnished bank guarantees on their behalf. The bank guarantees were returned and accordingly Airtel entities became liable to pay the balance amount in terms of the letters of understanding. The amounts had become payable post the commencement of the Corporate Insolvency Resolution Process, the Bench noted.

“For the same reason, we will also reject the argument that by not allowing set-off, new rights are being created and, therefore, Section 14 of the IBC will not be operative and applicable. Moratorium under Section 14 is to grant protection and prevent a scramble and dissipation of the assets of the corporate debtor. The contention that the amount to be set-off is not part of the corporate debtor’s assets in the present facts is misconceived and must be rejected”, the Bench held.

Thus, in light of the provisions of the IBC relating to the Corporate Insolvency Resolution Process, the Bench dismissed the appeals.