IBC CIRP rejects automatic statutory or insolvency set-off; only contractual/equitable set-offs allowed; Sections 238,243,30(2)(b)(ii) inapplicable

SC dismissed the appeals and held that the IBC's Chapter II Part II CIRP does not recognise statutory or insolvency set-off; such set-off is neither permitted by Sections 238/243 nor by Section 30(2)(b)(ii). Regulation 29 of the Liquidation Regulations and Section 36(4)(e) are inapplicable to CIRP. Contractual and equitable set-offs arising from mutual commercial dealings (e.g., interconnect charge adjustments) may be allowed and were permitted by the Resolution Professional, but automatic insolvency set-off is rejected. The moratorium under Section 14 protects the corporate debtor's assets. Appeals dismissed.

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Issues Involved:
1. Right to claim set-off in the Corporate Insolvency Resolution Process (CIRP).
2. Applicability of different types of set-off in the context of the Insolvency and Bankruptcy Code (IBC), 2016.
3. Analysis of the provisions of IBC relating to CIRP and liquidation proceedings.
4. Interpretation of mutual dealings and their applicability in insolvency proceedings.
5. Examination of contractual and equitable set-off during CIRP.
6. Impact of moratorium under Section 14 of IBC on set-off claims.

Summary:

1. Right to Claim Set-off in CIRP:
The appeals raised the question of the right to claim set-off during CIRP when the Resolution Professional takes custody and control of the corporate debtor's assets under Section 25(2)(a) of IBC. The court examined the facts, including agreements between Airtel entities and Aircel entities, and the subsequent initiation of CIRP against Aircel entities.

2. Applicability of Different Types of Set-off:
The court discussed various types of set-off, including statutory/legal set-off, common law set-off, equitable set-off, contractual set-off, and insolvency set-off. It noted that set-off is a form of payment and is given legal preference for reasons such as providing security, reducing litigation, and promoting economic efficiency.

3. Analysis of IBC Provisions Relating to CIRP and Liquidation:
The court distinguished between CIRP and liquidation processes under IBC. CIRP focuses on rehabilitation and resolution, while liquidation focuses on asset distribution. Unlike earlier company laws, IBC does not recognize the right of indebted creditors to set-off against the corporate debtor during CIRP. The court emphasized that Regulation 29 of the Liquidation Regulations, which allows for mutual credits and set-off, applies only to liquidation and not to CIRP.

4. Interpretation of Mutual Dealings in Insolvency Proceedings:
The court examined the concept of "mutual dealings" under Regulation 29, noting that it is broader than statutory or equitable set-off. Mutual dealings require commonality of identity between the parties and are concerned with the relationship rather than the nature of the claims. The court concluded that mutual dealings must exist for insolvency set-off to apply.

5. Examination of Contractual and Equitable Set-off During CIRP:
The court recognized two exceptions where set-off could be allowed during CIRP: contractual set-off and equitable (transactional) set-off. Contractual set-off is based on mutual agreement and remains binding during CIRP. Equitable set-off applies when claims and counterclaims are closely connected, making it inequitable to enforce one without adjusting the other. The court emphasized that set-off must be genuine, quantifiable, and not defeat equity and justice.

6. Impact of Moratorium Under Section 14 of IBC on Set-off Claims:
The court held that the moratorium under Section 14 of IBC, which prevents recovery and legal proceedings during CIRP, does not preclude contractual set-off. However, it does not allow insolvency set-off as it would contradict the principle of pari passu and the anti-deprivation principle. The court rejected the argument that insolvency set-off is automatic and self-executing under IBC.

Conclusion:
The court dismissed the appeals, holding that the provisions of IBC relating to CIRP do not recognize the principle of insolvency set-off. Contractual and equitable set-off may be allowed under specific conditions, but statutory and insolvency set-off are not applicable during CIRP. The court emphasized the importance of adhering to the legislative intent and the principles of equity and justice in insolvency proceedings.

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