2024 (1) TMI 187 - SC - IBC

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

BHARTI AIRTEL LIMITED AND ANOTHER Versus VIJAYKUMAR V. IYER AND OTHERS

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 ... CIRP - Right to claim set-off in the Corporate Insolvency Resolution Process, when the Resolution Professional proceeds in terms of clause (a) to sub-section (2) of Section 25 of the Insolvency and Bankruptcy Code, 2016 to take custody and control of all the assets of the corporate debtor - HELD THAT:- The IBC is a complete code relying upon the opening part of the enactment and Sections 238 and 243 takes care and nullifies the argument raised by the appellant Airtel entities that they are entitled to statutory set-off or insolvency set-off, in the Corporate Insolvency Resolution Proceedings under Chapter II Part II of the IBC. Regulation 29 of the Liquidation Regulations does not apply to Part II of the IBC. The legislation or even the legislative intent permits neither statutory set-off, nor insolvency set-off. Subsection (2)(b)(ii) to Section 30 does not support the contention of the Airtel entities. Sub-section (2) to Section 30 deals with the resolution plan and the quantum of payment required to be made when considering a resolution plan under Chapter II Part II of the IBC. The provision requires that the Resolution Professional shall examine each resolution plan received by him to confirm that each plan provides for payment of debts of the operational creditor in the manner as may be specified by the Board. The Board has not specified the manner in which payment of debts to the operational creditor shall be made. However, the stipulation that the payment of debts to the operational creditor shall not be less than the amount that the operational creditors are entitled to in terms of the order of priority in sub-section (1) to Section 53 of the IBC is mandatory. The section does not make Chapter III Part II, that is, Section 36(4)(e) or Regulation 29, applicable to the Corporate Insolvency Resolution Process under Chapter II Part II of the IBC. Secondly, clause (ii) to Section 30(2)(b) deals with the amounts to be paid to the creditors and not the amount payable by the creditors to the corporate debtor. Thirdly, clause (ii) to Section 30(2)(b) has appliance when the resolution plan is being considered for approval. Fourthly, and for the reasons elaborated earlier, and in view of the specific legislative mandate as incorporated and reflected in Chapter II Part II of the IBC, it is held that the provisions of the IBC relating to Corporate Insolvency Resolution Process do not recognise the principle of insolvency set-off. We would reject the argument that insolvency set-off is automatic and self-executing. Self-execution may be acceptable in cases of contractual set-off, as held above. On the aspect of mutual dealings and also equity, it is to be noted that adjustment of the inter-connect charges are under a separate and distinct agreement. The telephone service providers use each other’s facilities as the caller or the receiver may be using a different service provider. Accordingly, adjustments of set-off are made on the basis of contractual set-off. These are also justified on the ground of equitable set-off. The set-off to this extent has been permitted and allowed by the Resolution Professional. The transaction for purchase of the right to use the spectrum is an entirely different and unconnected transaction - Moratorium under Section 14 is to grant protection and prevent a scramble and dissipation of the assets of the corporate debtor. The contention that the “amount” to be set-off is not part of the corporate debtor’s assets in the present facts is misconceived and must be rejected. There are no merit in the present appeals and the same are dismissed. 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.