Bharti Airtel Ltd Vs. Vijaykumar V. Iyer : The Supreme Court holds that Set off is not permissible during CIRP

The Supreme Court has held in Bharti Airtel Vs. Vijaykumar V. Iyer  ( Civil Appeal No. 3088 -3089 of 2020 ) that set off is not permissible during CIRP except certain contractual and equitable set off in certain circumstances.

Facts Of The Case

Bharati Airtel Ltd and Bharati Hexacom Ltd  ( “ Airtel entities” ) entered into spectrum agreements with Aircel Ltd. and Dishnet Wires (“Aircel entities” )  to purchase spectrum in 2300 MHZ Band. The Agreement was contingent on approval of Department of Telecommunications. DoT directed Aircel entities for deposit of Bank Guarantees against spectrum dues. The same was challenged by Aircel entities before the TDSAT which directed for deposit of bank guarantee of around Rs. 453 Crore. Aircel entities did not have means to deposit such Bank Guarantee as such they approached Airtel entities.

Airtel Entities were to pay Rs. 4022.75/- to Aircel Entities against spectrum purchase. Airtel entities entered into understanding for depositing of Bank Guarantee on behalf of Aircel Entities and to deduct 587.37 crore against outstanding payment. In case of replacement of Bank Guarantee by Aircel with DoT, Aircel was to receive Rs. 411.22 Crore.

TDSAT vide order dated 9^th January 2018 ordered for return of Bank Guarantee of   Rs. 298 Crore. As DoT was not returning the Bank Guarantee, the same was cancelled by the Supreme Court. Airtel entities made a payment of Rs. 341.80 Crore to Aircel and an amount of Rs. 145.20 Crore was set- off against certain pending dues.

In the meantime CIRP was initiated against Aircel Ltd and Dishnet Wireless Ltd.  Claims were filed by Bharti Airtel Ltd for itself and on behalf of Telenor Ltd, which has merged with Bharti Airtel Ltd. Claims were also filed by Bharti Hexacom Ltd. Total claims filed by Bharti entities were Rs. 203.46 Crore. Airtel entities also owned 64.11 Crore towards Corporate Debtor against interconnect charges. The RP admitted claim to the extent of 112 Crore of Airtel entities and rejected claim of 5.85 crore.  

The RP of Aircel entities wrote to Airtel entitles that Airtel entities had wrongly set off   Rs. 112.87 Crore and called for payment of balance amount.

Airtel entities approached NCLT seeking set off which was allowed. RP made an appeal before the NCLAT which reversed the decision of NCLT.  Bharti Airtel approached the Supreme Court.

Findings Of The Court

The Supreme Court noted that  “set off” has five different connotations ie. (i) statutory and legal Set Off  (ii) common law set off (iii) equitable set off (iv) contractual set off  and (v) insolvency set off. Contractual set off is a matter of agreement between parties subject to legality and public policy. Statutory set off is created by statute as in the case of Order VIII Rule 6 of CPC. Equitable set off can be claimed in case of unascertained sum of money. The claim for an equitable set-off must have a connection between the plaintiff’s claim for the debt and the defendant’s claim to set-off, which would make it inequitable to drive the defendant to a separate suit. Insolvency set-off under the law of the United Kingdom is permitted when there are mutual debts, mutual credits and other mutual dealings between the parties at the relevant cut-off time, which is essentially the stage of commencement of the liquidation process.

Set Off Under IBC

The Court noted there is difference of treatment of set off under CIRP and Liquidation. CIRP focuses on revival and rehabilitation while the liquidation process focuses on distribution and payment out of sale of assets. IBC like Companies Act, 1956 or 2013 does not give right to a debtor to  set off. But under Liquidation process, Section 36(4) permits the Insolvency and Bankruptcy Board of India to specify assets which could be subject to set-off on account of mutual dealings between the corporate debtor and the creditor.  IBBI has framed IBBI (Liquidation Process ) Regulations which permit set off during liquidation under Regulation 29.  In the case of partnerships and individual bankruptcies also, Section 173 of the IBC permits set-off.

After discussing various judgments, the Supreme Court noted that set off under mutual dealings is  wider in comparison to statutory set off under Order VIII Rule 6 CPC or equitable set off. Relevant para is as under:

22. In light of the aforesaid discussion, the expression ‘mutual dealings’ for the purpose of Regulation 29 of the Liquidation Regulations, is wider than the statutory set-off postulated under Order VIII Rule 6 of CPC, as well as, equitable set-off under the common law as applicable in India. Insolvency set-off applies when demands are between the same parties. There must be commonality of identity between the person who has made the claim and the person against whom the claim exists. Even when there are several distinct and independent transactions, mutuality can exist between the same parties functioning in the same right or capacity. Mutual dealings are not so much concerned with the nature of the claims, but with the relationship and apposite identity of the parties giving rise to the respective claims, such that it would offend one’s sense of fairness or justice to allow one to be enforced without regard to the other.

The Supreme Court observed that set off  of the dues payable by the Corporate Debtor for a period prior to the commencement of the Corporate Insolvency Resolution Process cannot be made and is not permitted in law from the dues payable to the Corporate Debtor post the commencement of the Corporate Insolvency Resolution Process. Further, a debtor cannot, after notice of assignment of his debt by the creditor, improve his position as regards set-off by acquiring debts incurred by the assignor creditor which are payable to a third party. This will not meet the mandate of mutual dealing. This will be contrary to equity and would amount to misuse of the provision for insolvency set-off.

The Supreme Court held that the provisions of statutory set-off in terms of Order VIII Rule 6 of CPC or insolvency set-off under Regulation 29 of the Liquidation Regulations cannot be applied to the Corporate Insolvency Resolution Process. The court noted two exceptions to this rule. Firstly, Contractual set off  which is effective before or on the date the Corporate Insolvency Resolution Process is put into motion or commences. Secondly ‘equitable set-off’ when the claim and counter claim in the form of set-off are linked and connected on account of one or more transactions that can be treated as one.

Dispelling the arguments of Airtel entities, the Hon’ble Supreme Court reiterated that CIRP does not recogonise concept of insolvency set off.

41. There are several reasons why in our opinion clause (ii) to subsection (2)(b) of Section 30 does not support the plea of insolvency set-off. 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, we should hold that the provisions of the IBC relating to Corporate Insolvency Resolution Process do not recognise the principle of insolvency set-off. We would not extend it by implication, when the legislature has not accepted applicability of mutual set-off at the initial stage, that is, the Corporate Insolvency Resolution Process stage.

The Supreme Court also rejected the argument that insolvency set off is automatic and self- executing.

The Supreme Court held that set off regarding inter-connect charges was permissible as same was subject of separate and distinct agreement. Such set off can be treated as contractual as well as equitable set off. But the transaction for purchase of spectrum was an entirely different and unconnected transaction as such set off was not permissible.  Relevant para is as under:

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. The agreement to purchase the spectrum encountered obstacles because the DoT had required bank guarantees to be furnished. Accordingly, Airtel entities, on the request of Aircel entities had furnished bank guarantees on their behalf. The bank guarantees were returned and accordingly Airtel entities became liable to pay the balance amount in terms of the letters of understanding. The amounts have become payable post the commencement of the Corporate Insolvency Resolution Process. For the same reason, we will also reject the argument that by not allowing set-off, new rights are being created and, therefore, Section 14 of the IBC will not be operative and applicable. 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.

The Supreme Court did not find merit in the appeal  and dismissed the same.

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