Insolvency Law

[By Vishesh Jain and Sahiba Vyas] The authors are students at National Law University, Odisha. Introduction The 89th Law Commission Report subserves that no one should live under the menace of a plausible action for an indefinite period. When the Insolvency and Bankruptcy Code, 2016 (IBC) was instituted, there was no explicit provision regarding the application of Limitation Act, 1963 until the Hon’ble Supreme Court (SC) ascertained the applicability of limitation period for filing of an application under IBC. The Apex Court, in the matter of Innoventive Industries Ltd. vs. ICICI Bank Limited (2018), adjudged that, “a debt may not be due if it is not payable in law or in fact”. Thus, Section 238A was inserted into IBC which states that, “The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or Appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be.” The interpretation of the same has become misty after the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) have given contradictory judgements on the same question of law. The authors through this post comment on the differing views of the adjudicating authorities and try to establish a conclusion to encounter the disparate views with the help of foreign jurisprudence. NCLAT & NCLT at Odds The whole conundrum started when recently in the case of Syndicate Bank v. Bothra Metals and Alloys Limited, NCLT held that an application under Section 7 of IBC  is not barred by limitation. The case dealt with a Company Petition filed under Section 7 of IBC by Syndicate Bank (Financial Creditor), seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Bothra Metals and Alloys Limited (Corporate Debtor). The Corporate Debtor (CD) failed to pay the principal and interest of the loan availed by the Financial Creditor (FC). The CD raised the contention that the present application of the FC is barred by limitation but the Tribunal, held that “an acknowledgement in the Balance Sheet of the company satisfies the requirements of Section 18 of the Limitation Act, 1963, leading to a fresh period of limitation commencing from each such acknowledgement.” The contradictory views on the impugned issue can be observed from various rulings of NCLAT. In 2019 in case of Gautam Sinha vs. UV Asset Reconstruction Company Limited, the Tribunal ruled that though a default in the form of NPA is reflected in the Balance Sheet, it was not an acknowledgement of the debt by the Corporate Debtor and the default was time-barred for filing of an application under Section 7 of the IBC. Further, in February 2020 in the case of Sh. G Eswara Rao vs. Stressed Assets Stabilisation Fund, the Appellate Tribunal reaffirmed the same rationale and stated that under Section 92(4) of the Companies Act, 2013, the filing of Balance Sheet/annual return is mandatory notwithstanding which penal action might be initiated under Section 92(5) and 92(6) of the same Act. Thus, the filling of Balance Sheet/ Annual Return cannot be considered as a ground for acknowledgement of debt under Section 18 of the Limitation Act, 1963. In March 2020 again in case of V. Padmakumar v. Stressed Assets Stabilisation Fund, the AA relied on the same contradictory premise as stated in above-mentioned cases. In this case an application was filed under Section 7 of IBC by M/s. Stressed Assets Stabilization Fund (SASF) for initiation of CIRP against M/s. Uthara Fashion Knitwear Limited. A five-judge bench of NCLAT, with a ratio of 4:1, favoured barring limitation to file an application under Section 7 of IBC. The impugned case discussed the legal perspectives with regards to the acknowledgement of the debt using Recovery Certificate reflected in the Balance Sheet. The one dissenting opinion of Justice Cheema, in this case, favoured the acknowledgement of debt through the Balance Sheet. While deciding the case, the Adjudicating Authority (AA) relied on the judgement delivered by the Apex Court in the case of Jignesh Shah and another v. Union of India and another, where the Hon’ble court cited the prima facie objectives of IBC i.e. an insolvency proceeding is a proceeding ‘in rem’ and not a recovery proceeding; thus, a winding-up petition must trigger the date of default and not on the day of acknowledgement of debt. Thus, the contradictory views adopted by various Adjudicating Authorities have left the interpretation of the provision in a lurch. Acknowledgement of Debt and Foreign Jurisprudence Under the English Law, Atlantic and Pacific Fibre Importing and Manufacturing Co. Ltd is considered as one of the first cases on the acknowledgement of debt and Balance Sheet conundrum wherein the court opined that recording debenture debt in the Balance Sheet of the company is sufficient acknowledgement of debenture debt. The next most notable and celebrated decision on the Balance Sheet conundrum was rendered in Jones v. Bellgrone Properties, wherein the Court of Appeals held that once the chartered accountant and directors of a company sign the Balance Sheet, it constitutes as an acknowledgement of debt within the meaning of applicable limitation statue. The current legal position in English Law can be derived from the decision of Gee & Co.(Woolwich) Ltd., where the Court observed that there is no requirement in English law that debt must be due at the time when it is acknowledged. The Court further held that when the director duly signs the Balance Sheet, then it can be efficiently considered as acknowledgement of debt and the cause of action for the same is deemed to have accrued on the date of signing of the Balance Sheet by the director. This has also been upheld by the Court in the case of Overmark Smith Warden Ltd. If we look upon Australian Jurisprudence, the Courts have settled the position in the case of Stage Club v. Miller Hotels wherein it was held that the signed Balance Sheet is enough to constitute an acknowledgement for the debt for Statute

[By Soham Banerjee] The author is an Associate (Dispute Resolution) at Vashi and Vashi – Advocates and Solicitors, Mumbai. Introduction: The National Company Law Tribunal (“NCLT”) by way of its Circular dated May 12, 2020 (“Impugned Circular”), directed all new and pending insolvency applications filed by Financial Creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to be mandatorily accompanied by a record of the Financial Default from an Information Utility (“IU”). Accordingly, Univalue Projects Ltd. and Cygnus Investments and Finance Pvt. Ltd. (“Petitioners”) challenged the vires of the impugned Circular invoking the writ jurisdiction of the Calcutta High Court. Grounds of Challenge: Being Financial Creditors with a pending/prospective applications under Section 7 of the IBC, the Petitioners alleged that the impugned Circular would adversely affect the substantive and vested rights of the Petitioners that had accrued upon them as a creditor under the IBC, prior to the publication of the impugned Circular. Additionally, the Petitioners also claimed that the impugned Circular was issued in gross contravention of the IBC, the Companies Act, 2013 (“CA 2013”), and regulations under the Insolvency and Bankruptcy Board of India (“IBBI).  Petitioner’s Submissions: a)Kompetenz – kompetenz of the NCLT to issue the Circular Section 424 of the CA, 2013 lays down the powers of the NCLT and the NCLAT. Accordingly, the Petitioner submitted that upon a bare reading of Section 424 of the CA, 2013, it is ex facie evident the scope of the NCLT’s jurisdiction is limited to the regulation of day to day procedure and such procedure that may be followed for the administration of justice. Section 424 of the CA, 2013 does not confer jurisdiction upon the NCLT to alter and/or contravene the basic structure of the CA, 2013, or the IBC. b)Statutory interpretation of “as may be specified” under Section 7(3)(a) Attention was drawn to Section 3(32) of the IBC on the definition of the term ‘specified’ which means specified by regulations made by the IBBI. Accordingly, relying on the term “as may be specified” under Section 7(3)(a) of the IBC, the Petitioners submitted that the power to make regulations under Section 7 of the IBC vested with the IBBI and not the NCLT. c)Presumption of implied delegated legislation The Petitioners submitted that where a statute expressly provides for delegation of power to a subordinate authority, exclusive jurisdiction vests with that subordinate authority to make rules and regulations under the statute. Accordingly, since the IBC had expressly delegated the power to make regulations to the IBBI, the NCLT traversed beyond the ambit of the statute in issuing the impugned Circular. d)Disjunctive nature of Section 7(3)(a) The Petitioners submitted that Section 7(3)(a) of the IBC envisaged proof of financial default through other modes of documents and evidence. Attention was drawn to the usage of the term “or” in Section 7(3)(a) of the IBC to argue that the intention of the legislature was to make Section 7(3)(a) disjunctive, and not limit proof of financial default to only furnishing of record of default with the IU. Reliance was also placed on Regulation 8(2) of the IBBI Regulations, 2016 to highlight that the said regulation also lists four other categories of documents, in addition to the record of default with the IU to establish financial default. e)Inherent powers of the NCLT and AA Rules, 2016 In conclusion, the Petitioners pre-emptively submitted that even under the NCLT’s inherent jurisdiction under Rule 11 of the NCLT Rules, 2016, the NCLT could not have issued the impugned Circular. A comparison was made with Section 151 of the Code of Civil Procedure, 1908 (inherent powers of a Civil Court) to submit that even a Civil Court cannot resort to its inherent jurisdiction to issue rules and regulations, ultra vires the parent statute [See KK Veluswamy v. N. Palanisami, (2011) 11 SCC 275]. Additionally, reliance was also placed on Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”), which deals with procedural aspects of an application filed by a Financial Creditor. It was contended that the ‘Form – I’ which had to be filed along with the documents evincing financial default also made provision for accommodating other sources of documents and evidence, apart from the record of default with the IU. Respondent’s Submissions: Per contra, the Respondent argued that Section 424 of the CA, 2013 vested NCLT with the jurisdiction to regulate their own procedure. Further, the Respondent raised strong objections to the furnishing of record of default with the IU as a mere formality and contended that it was an essential feature of the IU to authenticate and verify the information submitted by a financial creditor. Additionally, the Respondent also argued that new disabilities and/or obligations have not been foisted upon financial creditors by way of the impugned Circular since Section 7(3)(a) of the IBC specified, at the outset, that a financial creditor is required to submit the record of the default with the IU, along with the application. Since there exist no specific regulations that govern the submission of other evidence/documents as proof of financial default, the record of default to be furnished to the IU is the only way to establish financial default, and hence mandatory. Findings: a)On jurisdiction of the NCLT: On the NCLT’s jurisdiction to publish the impugned Circular, reliance was placed on Government Of Andhra Pradesh & Ors v. Smt. P. Laxmi Devi [(2008) 4 SCC 720] to expound upon the hierarchy of legal norms when it comes to rules and regulations governing the field of Insolvency laws, as under: (i)Provisions of the CA, 2013 and IBC; (ii)Rules enacted by the Central Government and regulations made by the IBBI; and (iii)NCLT/NCLAT regulating their own procedure subject to Section 424 of the CA, 2013 (iv)Accordingly, while the NCLT has been vested with the jurisdiction to regulate its own procedure, such regulations are subservient to the provisions of the CA, 2013, the IBC, and regulations made by the IBBI b) On implied delegated legislation:

[By Prashansa M. Agrawal] The author is an Advocate practicing in the High Court of Bombay. Recently, in the judgment dated 14th August 2020 in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr., the Supreme Court decided that the application filed by the financial creditor therein was not barred by limitation. While pronouncing the decision, the Supreme Court reasserted the settled aspects of limitation under the Insolvency and Bankruptcy Code, 2016 (“the Code”) in reference to its earlier landmark judgments. At the same time, the Supreme Court touched upon a slightly different and disputed position with respect to the applicability of Section 18 of the Limitation Act to the Code― which has come up before the Supreme Court for the first in the instant case. In this article, the author analyses the landmark judgments on the limitation period under the Code along with a few disputed judgments on Section 18, in order to assess the stand of the Supreme Court in the instant case. Background The legislature sought to answer the ever-looming question of ‘limitation’ under the Insolvency and Bankruptcy Code, 2016 (“the Code”) by incorporating Section 238A in the Code by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which applies provisions of the Limitation Act (“the Act”) to the proceedings before National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) Consequently, the question of retrospective application of Section 238A arose before the Supreme Court in B.K. Educational Services Private Limited v.Parag Gupta and Associates. The Apex Court held that limitation provisions were applicable to the Code from its very inception. Therefore, it was construed that Section 238A only clarifies the said position and is applicable retrospectively. Thus, as per the judgment in B.K. Education(supra), the right to sue accrues when the default occurs, which lasts for three years to be computed from the date of default. After the said period, an application under the Code would be barred under Article 137 of the Act except when the delay is explained and condoned as per Article 5. However, there arose ambiguities with regard to other ways of extending the prescribed limitation period of three years. One such ambiguity relates to the applicability of Section 18 of the Act to the Code which came for consideration before the Apex Court in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. As per Section 18, when a party against whom a property or right is being claimed acknowledges the liability during the subsistence of the limitation period prescribed for a suit or application in respect of such property or right i.e. 3 years under the Code, a fresh period of limitation shall be computed from the date of such acknowledgment. The contention, ‘Whether or not Section 18 pushes the date of default under the Code’ has been addressed in a few judgments over the years as provided below- Prior to the Instant Case In Fernas Construction India Pvt. Ltd. v. RVR Projects Pvt. Ltd., the National Company Law Appellate Tribunal (“NCLAT”) held that Section 18 in Part I of the Act would not apply to an application under the Code as such an application is neither a suit nor can be regarded as a recovery proceeding. Thereafter in Jignesh Shah & Anr. v. Union of India & Anr., the question before the Supreme Court was whether a prior suit for recovery extends the limitation period for filing a subsequent winding-up petition. The Supreme Court answered the aforementioned in negative and remarked that the limitation period can only be extended by the provisions under the Limitation Act such as by way of Section 18 of the Act. Relying on the aforementioned judgment of the Supreme Court, the NCLAT in Sh G. Eswara Rao v.. Stressed Assets Stabilisation Fund and Others held that the period of limitation under the Code commences from the date of default and this date of default can be forwarded to a future date only under Section 18 of the Act. In light of the judgments in Jignesh Shah (supra) and Sh. G Eswara Rao (supra), the financial creditor in the instant case argued the applicability of Section 18 which was not accepted by the Supreme Court as explained below. Obiter Dictum of the Instant Case The Supreme Court clarified that the illustrative reference to Section 18 in Jignesh Shah(supra) was only with respect to suits or other proceedings, wherever it could apply. It further emphasized that the said observations in Jignesh Shah (supra) do not alter the settled position in B.K. Education(supra) i.e. an application under Section 7 (i.e. by a financial creditor) under the Code is time-barred after 3 years from the date of default except when the delay is condoned under Article 5. The Supreme Court further observed that even while assuming that Section 18 is, in fact, applicable for extension of the limitation period for an application under the Code, the same would not come to the rescue of the applicant creditor in the instant case as no suggestion of any acknowledgment as required under Section 18 has been made. It was thus observed that limitation is a mixed question of fact and law which requires the pleader to produce the necessary facts and evidence in order to argue that a particular provision is applicable to extend the prescribed limitation period. In light of the above observations, the Supreme Court decided that the application filed by the financial creditor was barred by limitation. Conclusion and Analysis The instant case certainly creates a doubtful situation around the applicability of Section 18 to the Code, causing dilemma to a number of creditors. In order to understand the position of Section 18 vis-a-vis an application under the Code, it is imperative to note that the phrase ‘suits or applications’ appears under Section 18, as opposed to Article 62 of the Act relating to mortgages which only contains the word ‘suits’ and

[By Amay Bahri] The author is a student at the National Law University, Delhi. Like any new legislation which is introduced, even the Insolvency and Bankruptcy Code 2016 (hereinafter ‘IBC’ or ‘the code’) has been marred by litigation since its inception. One of the more recent discussions on IBC is regarding the power of the creditor against guarantors of a corporate debtor. This discussion becomes all the more relevant after the introduction of new rules and regulations for governing the insolvency of personal guarantors. These new rules and regulations allow the creditor to initiate insolvency proceedings against the personal guarantor, however, there are still unresolved issues regarding the powers of the creditor to have legal recourse against the guarantor when the principal debtor is unable to pay debts. To iron out these unresolved issues, we refer to the already established precedents relating to corporate guarantors. Though corporate and personal guarantors are different to the extent of their liability, there appears to be no distinction or any reason for the distinction in their treatment within the code; thus the developed jurisprudence surrounding the rights against corporate guarantors can be applied to the personal guarantor. One of the objectives mentioned in the preamble to the Insolvency and Bankruptcy Code is that the code seeks to balance of interest of stakeholders. The code marks a paradigm shift from a regime of unaccountable corporates to adopting a realistic approach where commercially unviable companies would close shop. Upon such shift, the code has adopted a creditor centric approach, wherein wide powers to institute the insolvency proceedings are vested with the creditors. The concept of a guarantee is rooted in the Indian Contract Act, thus the powers of the creditor under IBC are to be exercised keeping in mind the principles of guarantee under the Indian Contract Act. There are two distinct issues that arise here, first regarding the power of the creditor to recover after acceptance of the resolution plan; and second regarding the power of the creditor to proceed against the guarantor when insolvency proceedings against corporate debtor have been initiated but the resolution plan has not been accepted. Against this backdrop, the author seeks to discuss the recovery mechanisms available to the creditor against the guarantor a) after the acceptance of the resolution plan and b) when the corporate debtor is under CIRP. The author shall then provide his own conclusion as to the flaws in the recovery mechanism and the way forward. Power of the creditor to recover after Acceptance of Resolution Plan According to the IBC, the acceptance of the resolution plan by the Committee of Creditors (CoC) and approval of the same by the adjudicatory body brings the insolvency proceedings to an end. As per section 31 of the IBC, such an accepted resolution plan determines the full and final liability of the principal debtor. The IBC does not directly deal with the liabilities of a guarantor; neither does it bar the creditor to institute proceedings against the guarantor of the debt. Guarantors seek to protect themselves from the claims of recovery of debt amount by applying the provisions of the Indian Contract Act. These provisions are Section 133 and 134 of the Indian Contract Act. Section 133 provides that a surety is discharged of the debt if there is variance in the terms of the contract without the consent of the surety. The resolution plan can be seen as a variance of terms without the consent of the guarantor, thus the guarantor should be absolved from its liability. However, section 31(1) of the IBC makes the resolution binding on the guarantor, thus countering such claims of the guarantor and making the guarantor liable to bear the liability. Turning to section 134 of the Contract Act, the provision provides that any act which relieves the principal debtor of its obligation to pay will also discharge the surety of its obligation for such a debt. Applying section 134 would be erroneous since a crucial ingredient to satisfy the requirements of this section is that the agreement to discharge the principal debtor of the debt was reached through their own volition and not due to any operation of law. By approval of the resolution plan, the corporate debtor is discharged of its obligations to make a payment, but this discharge is due to the application of the law. Since the crux of section 134 is not satisfied, the said section cannot be invoked to discharge the guarantor of their obligation to pay. Hence, the guarantor is bound to pay the unpaid amount of debt, after the acceptance of the resolution plan and the creditor can take legal actions against the guarantor. One complication that arises out of this arrangement is whether the right to subrogation survives after acceptance of the resolution plan. This was answered in negative, in the case of Essar Steel case but this does not seem to be the final position of law. The right to subrogation would entitle the guarantor to recover the amount of debt paid to the creditor as the guarantor would then step into the shoes of the creditor to claim the amount paid. The holding of Essar Steel is a huge blow to the rights of the guarantor as the judgment has done away with a right to subrogation, which is not only a statutory right under the Indian Contract Act, but also a principle of natural justice. Considering this decision not only impacts the inherent rights of guarantors, but also has adverse impacts on the market economy; the decision of Essar Steel relegating subrogation right requires reconsideration. Power of the creditor to proceed against the guarantor when the debtor is under CIRP As per the Indian Contract Act, the liability of a guarantor and that of the principal debtor are co-extensive, thus a creditor is not obligated to expend the legal remedies against the principal debtor before making a claim against the guarantor and can sue either of them for the debt

[By Jyotiranjan Mallick and Sai Akanksh Deekonda] The authors are students at the National Law Institute University, Bhopal. Introduction The current Pandemic has affected the economy by disrupting the demand and supply chain. It has exacerbated the situation by bringing financial institutions on its knees, owing to the increase in non-performing assets, and default by corporations. Policies are being introduced around the world to protect the state of the economy. It includes “reducing the interest rates” or by introducing “economic stimulus” to balance the economic disruption. The Government of India introduced the ‘Aatmanirbhar’ plan under which it has proposed Rs. 3 lakh crores Collateral-free Automatic Loans for Businesses, including Medium and Small Enterprises. Further, to protect corporations, from facing the brunt of unnecessary liquidation, the government, introduced the Insolvency and Bankruptcy Code (“I&B Code”) Amendment Ordinance, 2020, through which, it has suspended the initiation of the Corporate Insolvency Resolution Process (“CIRP”) for all defaults under section 7, 8, and 9 of I&B Code for 6 months, after 25th March 2020. In a step further, National Company Law Appellate Tribunal (“NCLAT”) in Vivek Bansal v. Burda Druck Pvt Ltd, has allowed the parties, to exit the CIRP midway, and settle through an agreement. This comes as a relief for corporate debtors, who are already in the process of resolution. In this article, we will analyse whether broadening the scope of a settlement agreement is favourable in the current crisis, and what changes can be implemented to further improve the process. A Brief Look at the Case The CIRP was initiated by an operational creditor, Vivek Bansal. The National Company Law Tribunal (“NCLT”) New Delhi Bench, in its order, appointed an Interim Resolution Professional (“IRP”) and a moratorium was imposed on the corporate debtor, However, after the order, the parties settled their dispute through an agreement, and an appeal was filed to NCLAT by Bansal, to allow them to exit the CIRP so that they can act upon the settlement. The NCLAT using its inherent power under Rule 11 of NCLAT Rules 2016 (“Rule-I”) set aside the order of NCLT and permitted the parties to exit the CIRP. Background of ‘settlement agreement under I&B Code’ To settle through an agreement, the parties first have to withdraw their application filed before the adjudicating authority, under Rule 8 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Rule-II”). However, during the initial phase of the enactment of the I&B Code, the scope of the settlement was highly limited, as Rule 8  of Rule-II, only permits the withdrawal of application before its admission to the NCLT. Ergo, if parties wanted to settle after the admission of the application, the NCLT used to apply Rule 8 and discard such settlement. As a result, appeals started mounting in the Supreme Court, to provide the requisite relief. In Lokhandwala Kataria Limited v. Nisus Finance Managers LLP, the apex court refused to interfere with the decision of NCLAT where it rejected the settlement reached between the parties after the application has been admitted by the NCLT. The NCLAT here refused to use its inherent powers under Rule 11 of Rule-1since the same wasn’t adopted for the I&B Code. Following this, the Apex court in Uttara Foods Pvt Ltd. v. Mona Parachem directed the competent authority to make changes in the code through which the NCLT/NCLAT may allow such settlement, which would restrict unnecessary appeal filed before the Apex court. The Insolvency Law Committee discussed this issue; following which section 12 A was inserted in the code, by IBC (Second Amendment) Act, 2018. Section 12 A gives the power to the adjudicating authority to allow such settlement when it gets the support of at least 90% voting share of the Committee of Creditors (“COC”). In Swiss Ribbons v. Union of India, the apex court observed that even if CoC hasn’t been constituted, the NCLAT may allow the settlement agreement using its inherent power under Rule 11 of the Rule-I. Hence, this judgment extended the scope of inherent powers under Rule 11 to matters under the I&B Code.  The NCLAT in the Vivek Bansal’s case allowed the settlement following this observation in Swiss Ribbons. What Makes the Settlement Agreement Favorable in the Current Crisis Since the inception of the I&B Code, a huge chunk of cases is still pending for resolution. The average time taken for the resolution of completed cases took around 375 days, which is way more than 330 days limit as set by the code. The delay in results and monetary loss makes alternatives like settlement a suitable option. The pandemic has caused India’s economic growth and activities to shrink by 45%., this has made the scope of settlement even more favorable. To understand this, one has to look at the recovery mechanism under CIRP. If a corporate debtor defaults, then CIRP can be initiated. In case, a corporate debtor fails to pay the debt, then the company is either restructured by taking over its management or is liquidated. However, due to the economic turmoil, it is neither beneficial for the creditors to take over the management of the company, as businesses are in complete distress, nor the current market is favorable for liquidation which is considered to be the last resort under I&B Code. As a result, creditors are resorting to settlement. The IBC ordinance 2020, has suspended the initiation of CIRP for any default after 25th March for 6 months. This means that CIRP cannot be initiated, for any default by a corporation within this period. The implication would make it more favorable, even for financial creditors to follow a settlement, which wasn’t earlier preferred, owing to the institutional formalities and the nature of lending. The crisis has made the courts to give flexibility even in terms of the time limit set for such settlement. In a recent verdict of ES Krishnamurthy v. Bharath Hitech Builders, NCLAT observed that considering the present crisis; a concession can be given to the corporate debtors to

[By Riya Jain and Kajal Singh] Riya is a graduate from the Institute of Law, Nirma University and Kajal is currently a student at the Institute of Law, Nirma University. Introduction Set-off is a plea in defense, which by adjustment would wipe-off or reduce the liability of the debtor.[i] It is an equitable right that allows parties to cancel or offset the mutual debts that the parties owe towards each other. Under Indian laws, set-off is categorized under two heads, namely, equitable set-off, which stems from the basic principles of equity, justice and good conscience, and legal set-off, which is envisaged under Order VIII Rule 6 of the Code of Civil Procedure, 1908. The usage of set-off in insolvency cases has occasioned much debate across jurisdictions. Recently, NCLAT in the case of Vijay Kumar V Iyer v. Bharti Airtel & Ors.[ii] had the opportunity to comment upon the nature of set-offs and their utility in matters concerning insolvency. NCLAT in the instant judgment held that no dues can be set off during the period of the Corporate Insolvency Resolution Process (CIRP) when the company is under moratorium. Further, NCLAT opined that if such set-off is allowed it would mean that creditor is accorded preferential treatment which stands in contravention to the tenets of the Insolvency and Bankruptcy Code, 2016 (the Code). NCLAT’s judgment raises certain important questions with reference to a creditor’s right to claim set-off against a company under insolvency. The authors in the subsequent discussion will critically analyze the judgment and argue that NCLAT’s ruling, in not allowing the set-off, lacks perspicuity and fails to provide the much-needed clarity required in respect of set-off of claims under the Code. Factual background & Judgment A Spectrum Trade Agreement (“STA”) was entered into between Aircel Limited & Dishnet Wireless Limited (Aircel Ltd.) and Bharti Airtel. Pursuant to the agreement, Airtel Ltd. was to furnish bank guarantees of approximate INR 453 crores on behalf of the Aircel Ltd. Pertinently, Aircel, pursuant to unpaid invoices, also owed an approximate amount of INR 112 crores to Airtel Ltd. As Aircel Ltd. entered into insolvency, certain differences with reference to the STA arose between the parties. Consequently, the differences were first adjudicated by the Telecom Disputes Settlement and Appellate Tribunal, and subsequently by the Supreme Court (SC). In view of the SC judgment, Resolution Professional (RP) pursued Airtel Ltd. to pay INR 453 crores to Aircel Ltd.  Subsequently, Airtel Ltd. paid INR 341 crores to Aircel Ltd. and withheld 112 crores by setting-off the said amount against the total amount owed to Aircel. Airtel then moved an application before NCLT Mumbai to get an affirmation order with respect to the set-off made.  NCLT Mumbai, in its order dated 1.05.2019, allowed Airtel to set off the amount to the tune of approx. Rs.112 crores. Pursuant to NCLT Mumbai’s order, RP of the Corporate Debtors filed a complaint under section 61 of the Code. RP alleged that the NCLT, by permitting the set-off, has accorded Airtel Ltd. a preferential treatment over other operational creditors and has resultantly violated the objective of the Code, which is to balance the interest of all stakeholders. Moreover, it was contended by the RP that this has also led to a violation of section 14 of the Code. NCLAT observed that in light of the non-obstante clause, the provisions of the Code will prevail over accounting conventions. Further, it adverted to the judgments in the case of Indian Overseas Bank v. Mr. Dinkar T.Venkatsubramaniam[iii] and MSTC Ltd. v. Adhunik Metaliks Ltd &Ors[iv] to conclude that no dues can be set-off when moratorium under section 14 is in force. Analysis NCLAT in the instant judgment has failed to explain the application of the cases and provisions so referred, to the facts and circumstances of the present case. NCLAT relied upon the case of Indian Overseas Bank and MSTC to conclude that set-off shall not be permitted. In the aforementioned cases, NCLAT held that after the admission of an application under Section 7 or 9 of the code, the creditor is not allowed to recover any dues from the corporate debtor as the same would lead to the creation of additional burden on an already stressed debtor.[v] Notably, set-off does not tantamount to recovery of dues as set-off is not merely a defense to a creditor’s claim but provides equal relief to the debtor as well. Additionally, set-off does not create stress on the assets of a company as both the parties are reciprocally creditor and debtor to one another, whereas, recovery of debts leads to the creation of a liability on the debtor, thereby, exacerbating its condition. Resultantly, set off in a way helps in reducing the pressure on the debtor by either reducing or extinguishing the outstanding amount altogether. NCLAT could have examined the issue better had it revisited the elementary rationale behind moratorium. The primary purpose of the moratorium is to disallow any transaction that will result in creating more burden on an already stressed Corporate Debtor (CD). However, if the transaction carries the prospect of any kind of refund of money to the CD, then the same shall not be disallowed at any cost. Axiomatically, as held in the case of SSMP Industries Ltd. vs. Perkan Food Processors Pvt. Ltd.[vi], the term “proceedings” as envisaged under section 14(1)(a) of the Code does not include “all” proceedings. Therefore, the ambit of section 14(1)(a) extends only to those proceedings and suits which might pose a coercive action against the CD. Appositely, NCLAT, instead of rejecting the set off categorically, should have objectively assessed the situation taking into consideration the situation of the CD. Essentially, if allowing the set-off does not lead to further dissipation of the assets of the debtor and strengthens the financial position of the same, the parties should have been allowed to carry out the set-off. Further, as opposed to the Provincial Insolvency Act, 1920, even though there is no particular provision of set-off under the present code, it