Author name: CBCL

[By Prathmesh Agrawal] The author is a student of WBNUJS, Kolkata.   Introduction A Set-off is a concept which basically refers to setting of monetary cross-claims between parties which produces a balance amount. It has wide application in different sections of law. In this article, we will deal with the concept of set-off in an insolvency proceeding and the legality of it, which was discussed by the Supreme Court in a recent case, Bharti Airtel v. Vijaykumar V. Iyer. The Apex Court has dealt with the post-IBC regime, where the courts have in numerous instances earlier, taken the position of disallowing set off in any Corporate Insolvency Resolution Proceedings (“CIRP”) considering section 14 of the Insolvency & Bankruptcy Code (“Code”), which imposes the moratorium. There is an absence of any mandate which upholds the applicability of set-off in a CIRP. Generally, the set off can be given five different meanings, being – 1) statutory set off; 2) common law set off; 3) equitable set off; 4) contractual set off, and 5) insolvency set off. Insolvency Set-off The concept of insolvency set-off, particularly, stands on the premise of ‘mutual credits’ and ‘dealings’, which were undertaken prior to insolvency proceedings. This proposition has also been observed by the House of Lords in the case of Re.: Bank of Credit and Commerce International SA (No. 8)[1]. Let us take an example to understand, where a company A has a debt of Rs 100 towards company B along with list of other companies. And, company B also has a reciprocal (mutual) debt of Rs 50 which is payable to company A. So, applying setting off rules would mean that company A has a balance debt of Rs 50 towards company B. But the problem in case of insolvency arises because company A does not necessarily have the capacity to repay the whole debt to all the creditors (secured or unsecured). So, say company A only has a quantum of Rs 500 to repay all of its creditors, whereas it has a total debt of Rs 1000. Then executing a set-off with company B will imply a repayment to company B, atleast the set-off amount. And, this is being performed before the distribution of any amount to any other creditors, which triggers the contravention of Pari Passu principle. Succinctly, the insolvency set off will mitigate the Doctrine of Pari Passu, which the Indian courts are hesitant to uphold. Although, in a UK case, National Westminster Bank v. Halesowen Presswork & Assemblies[2], the court clearly underscored the mandatory nature of set-off and implicated that right to set-off co-exists with moratorium during administration. Previous and Current Insolvency Regime in India Before the introduction of the Code in 2016, there was an explicit provision for insolvency set-off under section 56 of the Provincial Insolvency Act, 1920 (“1920 Act”), which is now repealed. This specific provision was in consonance with a similar provision in the Insolvency Rules, 2016 of the United Kingdom, which is currently in effect. Additionally, the Apex Court in Official Liquidator of High Court of Karnataka v. Smt. V. Lakshmikutty had also permitted the insolvency set-off applying the aforementioned provision of the 1920 Act. In the present regime, section 36(4) of the Code deals with the exclusion of assets that do not form part of the liquidation estate, which delineates the apportion of assets which could be subject to set-off on account of mutual dealings. This provision is further supplemented by Regulation 29 of the IBBI (Liquidation Regulations), 2016, which provides for consideration of mutual credits and set-off. The problem with the aforestated present legislation is, it only applies to a liquidation proceeding, as under Chapter III Part II and not the CIRP process which is present in Chapter III Part II of the Code. Nevertheless, there is subsistence of a neutral and clear provision for set-off, which has to be provided in the written statement under Order VIII Rule 6 of the Code of Civil Procedure (“CPC”). Ruling of the Case The Supreme court in the instant case categorically repudiated the presence of any legislative intent of including set-off in a CIRP, which was buttressed with the conjoint readings of section 30 and section 53 (which lays down the waterfall mechanism) of the Code. It rejected the applicability of section 36 of the Code or the Regulation 29 on a CIRP. It reasoned those to be solely concerned with the liquidation proceedings and devoid of any role in a CIRP, forcing which might lead to anomalies. Thereafter, it also discarded the ruling of the Supreme Court in Swiss Ribbon, which sustained the exercise of insolvency set-off in a resolution process. Airtel contended the subsistence of clause (ii) of section 30 (2) of the Code, which corresponds the process of distribution followed in a liquidation process to the resolution process. The court rejected this contention and refuses the applicability of Section 36(4) (supra) and Regulation 29 (supra) in a resolution process, which it observed will solely come into play in a liquidation proceeding. The court buttressed its observation by upholding the mandate of section 25, which stipulates the powers of the Resolution Professional to take control of the assets of the insolvent company. The court, although, failed to correctly contemplate, the essence of the Code, and the prejudice the decision will cause to the creditors in a CIRP. Since, a CIRP is conducted to restitute the business of a company, the court should rather promote the concept of setting-off to expedite the process and interest of the stakeholders. The court, has although, forged two exceptions to the norm of non-applicability of the insolvency-set off under aforesaid Regulation 29(supra) or statutory set-off under Order VIII Rule 9 (supra) of the CPC:- Contractual Set-off – It is only applicable where the parties are entitled to the contractual set-off, which is in effect before or on the date of the commencement of CIRP. Transactional Set-off- It is triggered when the claim and counter-claim in the fashion of set-off

[By Manisha Soni] The author is a student of Gujarat National Law University.   Introduction Recently, the Supreme Court of India, in the judgment of Bharti Airtel Ltd. vs Vijaykumar V. Iyer, solidified the position of the National Company Law Appellate Tribunal (NCLAT) that the arrears can not be set off when a Corporate Debtor is going through Corporate Insolvency Resolution Proceedings (CIRP), under the Insolvency and Bankruptcy Code, 2016 (IBC).   This provided a crucial clarification of the prevailing legal intricacies and upheld the legislative purpose of the code. Through this article, the author aims to simplify the wisdom inherent in the judgment, considering the legislative intent and the potential ramifications of permitting set-offs in the CIRP. The author proposes that set-offs are not inherently contradictory to insolvency law and can be accommodated within the framework of the IBC.  Factual matrix  Airtel entities were engaged in spectrum trading agreements with Aircel entities to seek the right to use spectrum. Aircel entities faced demands from DoT for bank guarantees related to license and spectrum usage dues. Upon request, Airtel agreed to furnish these guarantees on Aircel’s behalf, deducting the same from consideration payable under spectrum transfer agreements. However, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) declared DoT’s demand untenable; and the bank guarantees were asked to be returned.  In the meanwhile CIRP was initiated against Aircel entities. Airtel entities, having paid for Aircel entities, submitted a claim to set-off, asserting it as the net amount owed by Aircel entities for operational charges. Adjudication of such claims of Airtel for set-off during CIRP against Aircel created the challenge for insolvency legislation.   The Resolution Professional (RP) asked Airtel to pay Rs. 112 crores to Aircel, who was undergoing CIRP. This was objected to by Airtel entities in NCLT Mumbai.   The Adjudicating Authority in Mumbai initially allowed Airtel entities the right to set off. However, the NCLAT overturned this decision, contending that such a set-off is antithetical to the objective of insolvency legislation.   Analysis of the Judgment   In common language, the term ‘Set-off’ is an instrument that cancels mutual financial obligations between two parties by allowing one party to reduce the amount it owes to a second party by the amount the second party owes.   Arguments by Airtel  Since the United Kingdom’s Insolvency legislation has served as a model for IBC law in India, the Airtel representative relied on Insolvency set-off provisions in the UK. ‘Insolvency set-off’ applies when demands are between the same parties, even when several distinct transactions exist between them.  The pre-requisites of set-off u/s 323 of the UK Insolvency Act 1986, to claim set-off is when mutual credit and debt arise from ‘mutual dealings’ between the parties prior to the commencement of the bankruptcy. Airtel relied on the UK legislation and the case of HC of Kerela, where the judges allowed set-off and held even different, independent, transactions between parties as ‘mutual dealings’ under the Kerela Insolvency Act, 1955.  Airtel argued that the concept of set-off was permissible in India pre-IBC. Section 529 of the Companies Act 1956 and section 325 (now omitted) of the Companies Act 2013 did allow for set-off. Section 44 of the Provincial Insolvency Act 1920, contingent on certain conditions, permitted creditors’ right against the corporate debtors to set-off.  Order VIII Rule 6 of the Code of Civil Procedure, 1908, of India provides statutory set-off. To claim set-off under this rule, the amount should be ascertained.   After the advent of IBC in insolvency legislation, set-offs started to derive legitimacy under section 173 of IBC, where set-offs are allowed in partnership and individual bankruptcies. Apart from that, regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulation, 2016 provides for set-off on account of mutual dealings.    SC Judgment  The SC held that the nature of corporate debtors changes after the commencement of CIRP. Hence, any claim for set-off cannot be raised after CIRP. The Hon’ble Court rejected the applicability of set-off provisions of CPC in CIRP due to the presence of section 238 of IBC, which states that provisions of IBC override all other laws.   Regulation 29 of the Liquidation Regulations provides for mutual dealing and set-off but does not apply to Part II of the IBC, which deals with CIRP.   The court, however, permitted contractual set-off if the date of such set-off was before the CIRP was initiated. A contractual set-off is a mutual agreement to permit set-off and adjustment. The CIRP does not preclude it.   Set-offs are contrary to the common law doctrine of pari passu and anti-deprivation. Though the doctrine of pari passu is not explicitly mentioned in the IBC, an interpretation of the existence of the doctrine can be drawn from section 53 r/w section 52 of the IBC, as these provisions provide for the hierarchy of creditors during the distribution of value arising out of liquidation. This arrangement gives primacy to an operational creditor over a financial creditor should the operational creditor’s claim of set-off be permitted.  Due to the set-off, the liquidation estate’s value gets depleted, consequently affecting the dividend distribution among the rest of the creditors. The doctrine of anti-deprivation discourages this. This doctrine enumerates that a creditor can not obtain a better position than the law explicitly provides during bankruptcy. SC applied the essence of both doctrines in this matter.   The provisions related to CIRP do not provide for insolvency set-off, and the court refuses to extend it through implication. Unlike contractual set-off, Insolvency set-off is not self-executing in nature.  The creditor who wants to exercise set-off can do so from the assets excluded from the liquidation estate to the extent of the set-off value, u/s 36(4) of IBC. Such creditors are often given preferred status in assets statutorily excluded from the liquidation estate.   No new rights are created due to the rejection of rights to claim set-off, and the moratorium will be operative on the corporate debtor’s assets.   Author’s remarks  Set-off is a globally recognised and widely practised concept. Set-off should not be