The Supreme Court in Bharti Airtel and Anr. v Vijaykumar V, Iyer has settled various issues regarding insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) that have arisen before the Court of law in cases such as Union of India v Association of Unified Telecom Service Providers of India. This case comment will provide an in-depth view of the observations made by the Supreme Court while addressing the implications of such a verdict on the Indian legal scenario.
Facts
In 2016, Bharti Airtel Ltd. and Bharti Hexacom Ltd. entered into an agreement with Aircel Ltd. and Dishnet Wireless Ltd. with regards to eight spectrum trading agreements. At the consideration of Rs. 4,022.75 crores, the agreement provided Aircel entities the right to use such spectrum. The enactment of the said agreement was contingent on approval from Department of Telecommunications (DoT) which had mandated Aircel to provide bank guarantees as there were certain pending dues. Aircel entities provided such bank guarantees which were later triggered and therefore, made them liable for payment. National Company Law Tribunal (NCLT) admitted the Corporate Insolvency Resolution Process (CIRP) against Aircel entities. In 2019, a payment of Rs. 341.80 crores was made by Aircel entities setting off Rs. 145.20 crores for operational and interconnected charges. A separate claim was filed by Bharti Hexacom Ltd. and a total claim of Rs. 203.46 crores was submitted by Airtel entities which was admitted to the extent of Rs. 112 crores by the Resolution Professional (RP).
The RP adjusted the amount of Rs. 112 crores from the amount that Airtel entities were supposed to pay Aircel entities following the cancellation of the bank guarantees. Therefore, Airtel entities were asked to pay the leftover sum to Aircel entities. Airtel approached NCLT which held that Airtel had a right to set-off the amount payable to Aircel entities following which an appeal was filed in the National Company Law Appellate Tribunal (NCLAT) by the RP. NCLAT allowed the appeal and therefore, Airtel entities filed an appeal to the Supreme Court.
Issues Raised
There are three main issues. They are as follows;
“Whether the right to claim set-off in CIRP when the RP proceeds in terms of Section 25(2)(a) of the IBC to take custody and control of assets of the Corporate Debtor valid or not?”
“Whether statutory set-off or insolvency set-off be applied to CIRP under IBC be permitted by Regulation 29 or not?”
“Whether the set-off claimed by Airtel entities is contractual, statutory, equitable or insolvency set-off and does it violate the Pari Passu principle, deprivation principle or the objective of IBC or not?”
Contentions
Arguments of the Appellants
The Appellants had three main arguments. Firstly, they claimed that they have a right to set-off the amount payable to Aircel entities due to the present interconnect charges between both the parties. Second, they added that the set-off was based on equitable and contractual grounds and therefore, should not be affected by the commencement of CIRP. The argument was that the set-off did not violate moratorium under Section 14 as it is not regarding any recovery of property but a mode of discharging mutual obligations. There is no transfer per se. Third, the appellants claimed that due to the set-off being a pre-existing right which arose before the commencement of the CIRP, it did not prejudice any other creditor of Aircel entities and therefore, was valid.
Arguments of the Respondent
The Respondents replied to each contention laid down by the Appellant in a comprehensive manner as follows. For the fist contention regarding right to set-off during CIRP, the Respondents mentioned that claiming such a right by the Appellants would violate the provisions and objective of IBC. They further mentioned that entitling the appellants with such a right would violate the principle of maximization of the value of the assets and create imbalance between the interests of all parties. They placed special emphasis on Section 238 and Section 14 to support their argument. Second, they argued that there were no contractual or equitable set-offs arising from any transaction as they were not interconnected and arose from completely separate and unrelated transactions. They highlighted the difference between the transactions by pointing out that the appellants’ claim arose from interconnect charges payable by the Respondent to the Appellant whereas the Respondent’s claim arose from spectrum trading agreement. This was an important aspect that they utilized to highlight the alleged mal intentions of the Appellant. Thirdly, the Respondents argued that Regulation 29 is only applicable at the time of liquidation and not at the time of CIRP. They added onto the argument by emphasizing on the fact that the Appellants did not fulfil the requirements to trigger Regulation 29 and none of the transactions between the parties were interconnected in any capacity.
Rationale
To understand the case better, various types of concepts have been explained briefly along with other important aspects as follows. Contractual set-off stems from the type of arrangement of mutual agreement between parties provided such agreement is legal and valid. Insolvency set-off involve a better, effective and more efficient management during liquidation of assets. Statutory set-off is dealt with Order 8 Rule 6 of the Civil Procedure Code, 1908 (CPC). Equitable set-off arise from interconnected transactions. There must be a link between plaintiff’s debt claim and defendant’s claim for set-off.
In this case, the Court discussed the nature of the transactions and therefore, the applicability of the type of set-off and whether it can be claimed by Airtel entities or not. The Court accepted that contractual set-offs stem from mutual agreement and consideration that must fulfil all the criterions of a valid contract and must not arise from separate transactions. The Court observed that for statutory set-off, it must be governed by Order 8 Rule 6 of the CPC and must include cross-obligations or mutual obligations between the parties which should arise from the same right. For equitable set-offs, the transactions must not be separate in nature and should arise from the same transaction or a set of transactions which can be regarded as one whole transaction. Insolvency set-offs are permitted under Regulation 29 and provide for mutual credit. The amount between the parties that is mutually due can be set-off against each other to achieve a net payable amount which is owed by one party to the other. Even when there are separate transactions, this can be considered provided there is fairness in such a method of setting off the claims.
The Court also referred to the anti-deprivation principle which states that no parties can deprive the insolvent out of its assets at the time of insolvency procedures. Additionally, the Pari Passu principle was also referred to which states that creditors in the same class must be treated equally and should get a proportionate return to their dues. The Hon’ble Supreme Court observed that allowing set-offs might lead to violation of such principles however, the Court accepted contractual and equitable set-offs considering their importance provided such set-offs are genuine, clearly stated and are one transaction so they do not contradict the moratorium. Further, the Court rejected the claim of set-off under Regulation 29 at the time of CIRP as its scope was clearly limited to liquidation process and not more. The reason stated by the Court for such a decision was that allowing such set-off during CIRP might give preferential treatment to a creditor and therefore, would reduce assets for distribution amongst the other creditors. Such an act would lead to the violation of the Pari Passu principle and would defeat the objective of the Code.
Defects of Law
This landmark judgement by the Hon’ble Supreme Court provides an insight into the application of set-offs before or during the CIRP. The Court in this case has observed the issues at hand and has provided the Indian legislature with an important precedent by establishing that set-offs are not applicable at the time of CIRP apart from the two exceptions i.e. contractual and equitable set-off. Such a clarification on issues that were previously partly addressed and considered has been revolutionary as it provides a clearer set of rules and guidelines for individuals working in the field of insolvency law along with other legal practitioners and stakeholders. The other notable part of this judgement is the observation that insolvency set-offs are not automatic and they need to be applied for by the parties involved. Considering the judgement and the stance taken as a whole, the judgement has provided a balanced view on the issues regarding set-offs in insolvency proceedings and has provided us with a better understanding of set-offs in the field of insolvency. This judgement has provided us with clarity on an issue that had stayed as a grey area for a long time.
Inference
The Supreme Court settled various issues in the case at hand and held that creditors are not entitled to claim set-off during CIRP under IBC. Additionally, it held that provisions of statutory set-off or insolvency set-off permitted by IBC Regulations cannot be applied to CIRP. Further, two exceptions were highlighted; first, a contractual set-off could be permitted if the parties involved in the said contract are entitled to it on or before the date CIRP commences, second, an equitable set-off could also be permitted when the claim and counter-claim are interconnected and therefore, can be treated as one. Therefore, the Hon’ble Supreme Court did not allow any set-offs and upheld the decision of NCLAT while dismissing the appeal.
Name: Jhanvi Jain
College Name: O.P. Jindal Global University