Recently, in a significant ruling, the division bench of the Supreme Court clarified the intricate application of set-offs under the Insolvency and Bankruptcy Code (IBC) within the ambit of the Corporate Insolvency Resolution Process (CIRP). The recent judgment is crucial in addressing a contentious issue, providing a meticulous examination of various categories of set-offs and their ramifications. The Supreme Court of India in this judgment addressed the interplay between the right to claim set-off and the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).
In April 2016, Bharti Airtel Limited and Bharti Hexacom Limited entered into spectrum trading agreements with Aircel entities for the purchase of rights to use spectrum in the 2300 MHz band. The agreements were contingent on approval from the Department of Telecommunications (DoT), which required Aircel entities to furnish bank guarantees for pending dues. Since Aircel was unable to furnish the required guarantees, Airtel agreed to provide them on behalf of Aircel, deducting the guaranteed amount from the transaction’s consideration. The National Company Law Tribunal (NCLT) admitted insolvency petitions against the Aircel entities in March 2018. Following this, a moratorium under Section 14 of the IBC was imposed, prohibiting the enforcement of claims against Aircel entities. Airtel entities adjusted Rs. 145.20 crores owed by Aircel entities for operational charges, SMS charges, and interconnect usage charges against amounts payable under the spectrum agreements. They argued that these adjustments were valid under the doctrine of set-off.
The Supreme Court discussed the Contractual Set-Off, which arises from an agreement between parties. It does not depend on statutory provisions but is based on the mutual intention of the parties. The Court observed that for contractual set-off to apply, the claims and counterclaims must arise from closely connected transactions. In this case, the Court found that the operational charges claimed by Airtel arose from agreements unrelated to the spectrum trading agreements. Thus, the claimed set-off could not be enforced as a contractual right. Further, the court noted that Statutory or Legal Set-Off under Order VIII Rule 6 of the Code of Civil Procedure, 1908 allows a defendant to claim set-off for liquidated sums due from the plaintiff. However, the Court emphasized that statutory set-offs are inapplicable during the CIRP due to the overriding provisions of the IBC. Further, Equitable Set-Off requires a close connection between the claims, making it inequitable to enforce one without considering the other. The Court held that the operational dues and the amounts under the spectrum trading agreements did not share such a connection. Then, Insolvency set-offs under Regulation 29 of the Liquidation Regulations apply only during the liquidation process, not during CIRP. The Court clarified that the IBC’s CIRP framework does not permit insolvency set-offs. The Court highlighted that the CIRP focuses on the Revival and rehabilitation of the corporate debtor, the equitable treatment of creditors, and the prevention of preferential treatment to specific creditors. The moratorium imposed under Section 14 of the IBC prohibits enforcement actions against the corporate debtor during CIRP. Allowing set-offs would be in conflict with this objective if creditors are allowed to unilaterally adjust their claims, potentially reducing the debtor’s asset pool and disrupting equitable distribution. The Court referred to British Eagle International Airlines Ltd. v. Compagnie Nationale Air France (1975 1 WLR 758) wherein the House of Lords held that contractual arrangements conflicting with insolvency laws such as preferential set-offs are void. The principle was applied to reject Airtel’s reliance on contractual set-offs during CIRP. The Court further referred to Swiss Ribbons Pvt. Ltd. v. Union of India (2019 4 SCC 17) wherein the Supreme Court emphasized the IBC’s objective to ensure a time-bound resolution and equitable distribution of assets and ruled that permitting set-offs during CIRP would undermine this objective. The Court elaborated on two foundational principles of insolvency law including the Pari Passu Principle which ensures that creditors of the same class are treated equally (allowing set-offs would violate this principle by prioritizing one creditor over others) and the Anti-Deprivation Principle which prevents creditors from contracting out of insolvency laws to gain undue advantage (permitting Airtel’s set-off claims would contravene this principle as well).
The Court underscored the non-obstante clause in Section 238, which gives the IBC precedence over other laws. It further emphasized that the moratorium under Section 14 bars all recovery actions, including set-offs, during CIRP. Ultimately, the Court noted that Airtel’s set-off claims were based on unrelated transactions, the operational dues arose from agreements distinct from the spectrum trading agreements, and allowing the set-off would contravene the principles of mutuality and equity central to insolvency proceedings.