Hinged Upon Misplaced Reasoning: NCLAT Disallows Set-Off Under the Insolvency Regime
[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 cannot be reckoned to be a case of ‘casus omissus’.  Pertinently, the SC’s judgment in the case of Swiss Ribbons v. Union of India[vii] is also instructive on this issue. The apex court held that set-off can be considered during the resolution process subject to the challenge before the Adjudicating Authority (AA). Accordingly, it can be construed that since there is no express legal bar to allow/sanction the set-off, the same may be allowed by the AA.

Moreover, set-off is an internationally accepted and widely practiced principle. European Insolvency Regulations explicitly provide for provisions with respect to set-off, and see set-off as an instrument that will perform guarantee type function for creditor claims. The UNCITRAL Legislative Guide as well specifically provides for set-off of claims after the initiation of insolvency proceedings.

Another major anomaly in the judgment is with reference to the overriding effect of the Code. NCLAT held that set-off will not be allowed as provisions of the Code will supersede accounting conventions. The conclusion is misplaced and unfounded as the set-off is not just an accounting principle but is also a well-recognized concept under the Code. Entry 8 of claim Form B of IBBI Regulations, 2016 explicitly asks for mutual dealings between the corporate person and operational creditor, which may be set off against the claim. Moreover, Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016 mandates the mutual set off between the parties. Even though the following regulation corresponds to liquidation, it will still be applicable as liquidation and CIRP are two facets of the same situations. The same may be concluded from section 30(2)(d) of the Code, which provides that while the CIRP proceedings are in progress, the terms and conditions of liquidation proceedings should also be taken into account.

Further, While there is no bar on bestowing more benefits on the creditor; however, if for such benefits, another creditor, who is otherwise more entitled, suffers – there is an imbalance. Therefore, in cases where both the creditor and debtor owe a mutual amount to each other, then a set-off may be allowed as it will prevent in the creation of such imbalances. In the instant case, NCLAT by not allowing the set-off has put Airtel in a precarious situation wherein Airtel may or may not recover the amount in question post the culmination of CIRP.

Conclusion

All things considered, it was an appropriate opportunity for NCLAT to settle the position with regards to set-off of claims under the insolvency regime. The appellate authority, by not providing proper reasoning to the matter, failed to consider that reason is the heartbeat of every conclusion without which the order is lifeless. Moreover, taking into account the fact that the Code is still at its nascent stage, the AA should be more effective while delivering judgments, as it will help in the steady and positive growth of the insolvency regime.

Endnotes:

[i]JyantiLal v. Abdul Aziz, AIR 1956 Pat 199.

[ii]Company Appeal (AT) (Ins) No.530 & 700 of 2019.

[iii]Company Appeal (AT) (Insolvency) No. 267 of 2017.

[iv]Company Appeal (AT) (Insolvency) No. 519 of 2018.

[v] Supra, note iii, iv.

[vi]2019 (177) DRJ 473.

[vii]AIR 2019 SC 739.

[viii] Article 9 European Insolvency Regulation, 2000; see also Rule 14.25 of the Insolvency (England and Wales) Rules 2016.

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