Appellate ruling allows operational creditor set-off in CIRP under Regulation 7 and Form B, reducing admitted claim

NCLAT held that in CIRP an operational creditor may claim set-off of mutual dues under Regulation 7 read with Form B of the CIRP Regulations. Relying on SC precedent in Bharti Airtel, it held that while generic set-off under liquidation regulations does not apply to CIRP, contractual and equitable set-off are permitted and the present case falls within these exceptions. NCLAT found the RP erred in refusing to admit the creditor's claim after set-off and accepted that the creditor's claim should stand reduced to Rs. 3.40 crore after adjusting Rs. 5.56 crore payable to the CD. As this did not affect the approved resolution plan or payouts, the plan approval order was not disturbed. The appeal was disposed of.

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ISSUES PRESENTED AND CONSIDERED

1. Whether an operational creditor filing a claim in Form-B during the Corporate Insolvency Resolution Process (CIRP) can claim set-off of mutual credits, mutual debts or other mutual dealings against the claim under Column-8 of Form-B.

2. Whether the moratorium under Section 14 of the Code and the RP's reliance thereon prohibit a creditor from claiming set-off in the CIRP.

3. Whether the exceptions recognised by the Supreme Court (contractual/transactional or equitable set-off) apply to allow set-off in the facts where mutual dues between parties are admitted and the admitted claim of the creditor exceeds the counter-debt.

4. Whether an operational creditor who did not challenge the RP's initial rejection of a set-off claim at the CIRP stage can raise the legality of that rejection at the stage of challenge to approval of the resolution plan.

5. Whether acceptance in the CIRP of the claim with or without the set-off affects the validity or implementation of an approved resolution plan that provides nil payout to operational creditors.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Permissibility of set-off in Form-B (CIRP Regulations / Form-B framework)

Legal framework: Regulation 7 of the CIRP Regulations prescribes submission of claims by operational creditors in Form-B. Column-8 of Form-B expressly requires disclosure of "any mutual credit, mutual debts, or other mutual dealings ... which may be set-off against the claim."

Precedent treatment: The Court examined the statutory form and regulations; earlier authorities had held insolvency set-off under Liquidation Regulations not automatically transferrable to CIRP, but the Form-B provision itself contemplates set-off disclosure.

Interpretation and reasoning: The regulatory scheme and Form-B language demonstrate that the rule-making authority envisaged the possibility of set-off disclosures at the claim stage. Column-8 is directed to admitted mutual dealings (not unilateral disputed assertions) and is a vehicle to record counter-claims that may legitimately reduce the net claim. Thus, when a creditor properly discloses an admitted mutual debt in Column-8, the RP's refusal merely on the ground that CIRP prohibits set-off is inconsistent with the regulations.

Ratio vs. Obiter: Ratio - Form-B Column-8 permits disclosure of mutual credits/debts which may be set-off; denying admission solely on the ground of CIRP moratorium where mutual dues are admitted is contrary to the regulatory framework. Obiter - detailed limits on contested counterclaims are elucidated but rest on statutory text.

Conclusion: Set-off can be claimed in Form-B where mutual credits/debts are disclosed and not disputed; RP's refusal to accept such disclosure was not in accordance with CIRP Regulations.

Issue 2 - Effect of moratorium under Section 14 on set-off

Legal framework: Section 14 imposes moratorium prohibiting institution or continuation of proceedings, enforcement of security interests and recovery actions against the corporate debtor during CIRP.

Precedent treatment: The moratorium has been held to prevent creditors from pursuing recovery steps; however, the moratorium does not necessarily extinguish pre-existing contractual rights such as contractual set-off or transactional/equitable adjustments where appropriate.

Interpretation and reasoning: The moratorium prevents independent recovery actions but does not, by itself, negate rights that can be asserted within the CIRP framework or rights that constitute a defence/adjustment (contractual or transactional set-off). Disclosure and adjudication of admitted mutual dealings via Form-B does not amount to enforcement outside CIRP; it is a claim administration function within the CIRP, consistent with statutory scheme.

Ratio vs. Obiter: Ratio - Section 14 moratorium does not preclude the RP from accepting a claim that records admitted mutual dealings disclosed under Form-B; moratorium cannot be extended to defeat statutory claim procedures. Obiter - limits on use of moratorium to deny any form of adjustment are discussed.

Conclusion: The moratorium does not operate as a blanket bar on set-off where the set-off is recorded in the claim process and relates to admitted mutual dealings; RP's reliance on moratorium to refuse set-off was misplaced.

Issue 3 - Applicability of contractual/transactional (equitable) set-off exceptions

Legal framework: The Supreme Court has recognised that insolvency-set-off under liquidation regulations is not automatically applicable to CIRP, but two exceptions remain: (a) contractual set-off (predetermined by parties pre-CIRP) and (b) transactional/ equitable set-off where claims and counterclaims are closely connected and the counter-claim is an ascertained monetary amount.

Precedent treatment: The judgment in Bharti Airtel (supreme court) is applied: insolvency set-off is not automatic, but contractual and transactional/equitable set-offs are exceptions permitting adjustment during CIRP where criteria are satisfied.

Interpretation and reasoning: On the facts the parties had two interrelated agreements (cooperation agreement and MoU) giving rise to reciprocal monetary obligations; neither party disputed the existence or quantification of the counter-debt (Rs. 5,56,59,526). The creditor's admitted claim (as later admitted by the RP) exceeded the counter-debt. The transactions are closely connected, the counter-amount is quantifiable and undisputed, and the set-off functions as a genuine adjustment rather than a contested litigation matter - thus falling squarely within the textual exceptions recognised by the Supreme Court.

Ratio vs. Obiter: Ratio - Where contractual or transactional/equitable set-off criteria are met (pre-existing contractual entitlement or closely connected transactions producing quantifiable undisputed counterclaims), set-off is permissible in CIRP. Obiter - contrasts with cases where amounts arise post-CIRP or where counterclaims are disputed.

Conclusion: The exceptions apply; the claim filed after giving set-off was within the permitted category and should have been accepted as such.

Issue 4 - Procedural challenge timing: raising non-admission of set-off at resolution plan stage

Legal framework: Section 60 and jurisprudence permit challenging RP's acts/omissions before the Adjudicating Authority; courts have entertained challenges to RP's claim determinations when brought in the context of plan approval if the impugned acts affected the plan or rights of the creditor.

Precedent treatment: The Supreme Court's decision in the Greater Noida Industrial Development Authority case shows that defects in RP's claim handling can be challenged at the plan approval stage where RP's actions materially affect the plan or the creditor's interests and the claim was filed with proof.

Interpretation and reasoning: The present appellant filed the original Form-B within time and disclosed set-off in Column-8; RP's objection related only to the set-off. Even though the appellant later filed a revised Form-B, it did not challenge RP's rejection earlier. However, the legal principle established in prior precedent permits challenging RP's non-compliance with law at the stage of plan approval because RP's incorrect act in claim admission can be reviewed when considering final plan, particularly when the error does not prejudice the plan's distributive scheme.

Ratio vs. Obiter: Ratio - A creditor may challenge RP's non-compliance with claim admission requirements at plan approval stage where the claim was supported by proof and RP's act was not in accordance with law. Obiter - the Court notes no universal bar to late challenges but depends on whether plan or distribution is affected.

Conclusion: The appellant could raise the legality of RP's refusal in the challenge to the approved plan; the issue was properly entertainable at the appeal stage.

Issue 5 - Effect of accepting set-off on the approved resolution plan providing nil payout

Legal framework: A resolution plan once approved governs payouts; material changes to admitted claims that affect distribution can vitiate the plan; conversely, adjustments that do not alter payouts or implementation are not disruptive.

Precedent treatment: Authorities distinguish between claim-admission errors that materially affect plan distributions and those that do not; in the latter case correction may be ordered without disturbing the approved plan.

Interpretation and reasoning: Whether the claim is treated as net (after set-off) or gross (with admitted counter-claim) does not alter the resolution plan's allocation because operational creditors receive nil under the approved plan. Acceptance of the net claim for record-keeping does not change any creditor's entitlement under the plan nor the mechanics of implementation.

Ratio vs. Obiter: Ratio - Acceptance of an operational creditor's claim on account of disclosed and admitted set-off does not vitiate or affect an approved resolution plan where the plan's payout to that creditor remains unchanged. Obiter - distinction noted where plan distributions would be affected.

Conclusion: Treating the appellant's original Form-B (net claim after set-off) as accepted does not disturb the approved resolution plan or its implementation; the acceptance of set-off is ordered without reopening the plan approval.

FINAL CONCLUSIONS (CROSS-REFERENCING KEY POINTS)

1. Form-B under CIRP Regulations contemplates disclosure of mutual credits/debts in Column-8; such disclosure enables legitimate set-off where mutual dealings are admitted and quantifiable (see Issues 1 and 3).

2. Moratorium under Section 14 does not ipso facto prohibit recording or adjustment of admitted mutual debts within the CIRP claim process; moratorium prevents independent recovery actions but not claim adjudication consistent with the Regulations (see Issue 2).

3. The exceptions recognised by the Supreme Court - contractual/transactional (equitable) set-off - apply where counterclaims are pre-existing, closely connected, undisputed and quantifiable; those criteria are satisfied on the facts, permitting set-off (see Issue 3).

4. A creditor may challenge the RP's non-compliance with claim admission rules at the stage of plan approval when the claim was filed with proof and the RP's act runs contrary to the law; here the challenge was maintainable (see Issue 4).

5. Treating the claim as accepted after set-off does not affect the approved resolution plan nor payouts where the plan provides nil to the operational creditor; correction is ordered without disturbing the plan (see Issue 5).

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