A) ABSTRACT / HEADNOTE
The Supreme Court in this case examined whether statutory or insolvency set-off rights are applicable in the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The appellants, Bharti Airtel Limited and Bharti Hexacom Limited, sought a set-off for payments made to Aircel entities. The Court analyzed the legislative intent, the applicability of set-off provisions in insolvency law, and the distinctions between various forms of set-off, concluding that the IBC as a complete code does not permit statutory or insolvency set-offs during the CIRP stage, barring some exceptions. The Court distinguished between liquidation and resolution processes and reinforced that set-off cannot disrupt the equitable distribution principle under insolvency proceedings.
Keywords: Insolvency; Corporate Insolvency Resolution Process; Statutory Set-Off; Contractual Set-Off; Insolvency Set-Off
B) CASE DETAILS
- Judgement Cause Title: Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others
- Case Number: Civil Appeal Nos. 3088-3089 of 2020
- Judgement Date: 03 January 2024
- Court: Supreme Court of India
- Quorum: Justice Sanjiv Khanna and Justice S.V.N. Bhatti
- Author: Justice Sanjiv Khanna
- Citation: [2024] 1 S.C.R. 140, 2024 INSC 15
- Legal Provisions Involved: Insolvency and Bankruptcy Code, 2016 (Sections 25, 238, 243); Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Regulation 29); Code of Civil Procedure, 1908 (Order VIII, Rule 6)
- Judgments Overruled: None specified.
- Law Subjects Involved: Insolvency Law, Corporate Law, Financial Law
C) INTRODUCTION AND BACKGROUND OF JUDGEMENT
The case arose from disputes surrounding the set-off claims by Bharti Airtel Limited against Aircel entities under the Corporate Insolvency Resolution Process (CIRP) initiated for Aircel. Airtel had supplied bank guarantees for Aircel, later seeking to adjust these payments against dues owed by Aircel. The Resolution Professional for Aircel denied Airtel’s set-off claims, leading to appeals at the National Company Law Appellate Tribunal (NCLAT) and subsequently to the Supreme Court. This judgment provides clarity on set-off rights in CIRP and highlights the IBC’s stand as a comprehensive code with principles favoring the pari passu distribution among creditors.
D) FACTS OF THE CASE
- Transaction Agreements: In April 2016, Airtel and Aircel entered into spectrum trading agreements. Airtel supplied bank guarantees on behalf of Aircel, amounting to Rs. 453.73 crores.
- Demand for Set-Off: Airtel sought set-off for Rs. 145.20 crores, claiming it was due to Airtel as operational charges and other fees.
- Initiation of CIRP: CIRP was initiated against Aircel Limited and Dishnet Wireless Limited by the Mumbai Bench of the NCLT in March 2018.
- Rejection of Set-Off Claim: The Resolution Professional rejected Airtel’s set-off claim, asserting that CIRP did not allow for statutory or insolvency set-offs.
- NCLAT’s Stand: NCLAT ruled that set-off claims are incompatible with the IBC’s objectives, prioritizing equitable distribution over set-off entitlements in CIRP.
E) LEGAL ISSUES RAISED
- Applicability of statutory or insolvency set-off rights in CIRP under the IBC.
- Interpretation of “mutual dealings” and its relevance to Regulation 29 in Liquidation Process.
- Differences between CIRP and liquidation processes in terms of asset control and creditor rights.
F) PETITIONER/APPELLANT’S ARGUMENTS
- Right to Set-Off: The counsel for Airtel argued that set-off rights should be allowed in CIRP as a form of reciprocal adjustment, citing Order VIII, Rule 6 of CPC and Regulation 29 of Liquidation Regulations.
- Application of Mutual Dealings: Airtel contended that mutual dealings existed under the agreements with Aircel, and the claims met the requirements for set-off.
- Equitable Treatment of Creditors: The counsel argued that allowing set-off does not contravene IBC’s equitable treatment of creditors, especially since the transaction predated CIRP initiation.
G) RESPONDENT’S ARGUMENTS
- Statutory Incompatibility: The counsel for the Resolution Professional argued that IBC, under Section 238, overrides all other laws, precluding set-off during CIRP.
- Priority of Pari Passu Principle: Allowing set-off would disrupt pari passu distribution, violating IBC’s intent of equal treatment for creditors.
- Separation of CIRP and Liquidation: The counsel distinguished CIRP from liquidation, asserting that Regulation 29 does not apply to CIRP and only to liquidation processes.
H) RELATED LEGAL PROVISIONS
- Insolvency and Bankruptcy Code, 2016
- Section 25: Duties of Resolution Professional to preserve assets
- Section 238: Code to have overriding effect
- Section 243: Repeal of earlier insolvency statutes
- Code of Civil Procedure, 1908
- Order VIII, Rule 6: Provisions on statutory set-off
- Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016
- Regulation 29: Set-off in mutual dealings for liquidation
I) JUDGEMENT
a. Ratio Decidendi
- CIRP and Liquidation are Distinct Processes: The Court clarified that CIRP focuses on the rehabilitation and resolution of the corporate debtor, while liquidation focuses on asset distribution among creditors.
- Exclusion of Statutory/Legal Set-Off in CIRP: The Court held that statutory set-off rights under Order VIII, Rule 6 of CPC and Regulation 29 do not apply during CIRP, except for contractual set-off pre-existing before CIRP commencement.
- IBC as a Complete Code: Section 238 of the IBC overrides other laws, thus excluding insolvency set-off and statutory set-off, aligning with the Code’s comprehensive nature.
b. Obiter Dicta
- Equitable Set-Off Considerations: Although CIRP does not allow statutory set-off, contractual set-off may apply if agreed upon before CIRP initiation, provided it aligns with the transactional set-off principles.
c. Guidelines Established
- Exclusion of Insolvency Set-Off in CIRP: Insolvency set-offs in liquidation do not apply in CIRP. Only set-offs based on contractual obligations effective before CIRP may be considered, subject to mutual dealings.
- Equitable Principles in Set-Off Claims: Only genuine and equitable claims that do not disrupt the CIRP objectives may be entertained, avoiding the misuse of insolvency mechanisms to unfairly advantage certain creditors.
J) CONCLUSION & COMMENTS
The judgment reinforces that CIRP under the IBC does not entertain statutory or insolvency set-offs, distinguishing between the goals of resolution and liquidation. The IBC’s structure as a complete code prohibits applying external statutory rights to disrupt the CIRP’s equitable framework, aligning with pari passu principles and preventing any preferential treatment of creditors.
K) REFERENCES
Important Cases Referred
- Indian Overseas Bank v. RCM Infrastructure Ltd. (2022) 8 SCC 516
- Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407
- Embassy Property Developments Pvt. Ltd. v. State of Karnataka (2020) 13 SCC 308
- Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17
- National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd. 1972 AC 785
Important Statutes Referred
- Insolvency and Bankruptcy Code, 2016
- Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016
- Code of Civil Procedure, 1908 (Order VIII, Rule 6)
