The Supreme Court Revisited the Conundrum of Insolvency Set-off
[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
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