Introduction
In a significant decision delivered on January 3, 2024, the Supreme Court of India in Bharti Airtel Limited & Anr. v. Vijaykumar V. Iyer & Ors. (Civil Appeal Nos. 3088–3089 of 2020) examined whether set-off claims—statutory, legal, or equitable—can be invoked during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court ruled that statutory and insolvency set-off are not permissible during CIRP, while leaving limited scope for contractual and transactional set-off.
Factual Background
- In April 2016, Airtel entities (Bharti Airtel Ltd. and Bharti Hexacom Ltd.) entered into agreements with Aircel entities (Aircel Ltd. and Dishnet Wireless Ltd.) for the purchase of spectrum usage rights, contingent on approvals from the Department of Telecommunications (DoT).
- Aircel entities requested Airtel to furnish bank guarantees on their behalf. Airtel complied and subsequently deducted ₹586.37 crores from the agreed consideration.
- In March 2018, CIRP was initiated against Aircel entities. Airtel claimed set-off of ₹145.20 crores against its payable amounts, citing mutual dealings.
- The Resolution Professional (RP) rejected this claim.
- While the NCLT allowed the set-off, the NCLAT reversed this decision, prompting an appeal before the Supreme Court.
Key Legal Issues
- Is set-off—whether statutory, legal, equitable, or insolvency-based—permissible during CIRP under the IBC?
- Does Section 238 of the IBC override other statutory provisions or contracts permitting set-off?
- Were Airtel’s claims of mutual obligations sufficient to meet the legal criteria for set-off?
Arguments Advanced
Airtel Entities’ Submissions
- Mutual obligations existed between the parties, justifying set-off under general principles.
- Denying set-off would result in unjust enrichment of the corporate debtor.
- International insolvency norms, including UK law and UNCITRAL guidelines, recognize the legitimacy of set-off in insolvency.
Resolution Professional’s Position
- IBC does not recognize set-off during CIRP, and permitting it would disrupt the insolvency framework.
- Set-off contradicts the pari passu principle, which requires equal treatment of all creditors.
- The alleged transactions lacked mutuality, being distinct and independent.
Supreme Court’s Findings and Analysis
1. No Insolvency Set-Off in CIRP
The Court held that insolvency set-off, as mentioned in Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016, is limited to liquidation proceedings and not applicable to CIRP, which is geared toward revival, not distribution of assets.
2. Mutuality Requirement Not Met
Set-off requires mutual dealings—cross-claims must be between the same parties in the same legal capacity.
The Court found no mutuality between the separate agreements for spectrum sale and interconnect usage charges, disqualifying Airtel’s set-off claim.
3. Overriding Nature of IBC (Section 238)
The IBC, by virtue of Section 238, overrides any other inconsistent laws, including statutory provisions allowing set-off under the Companies Acts (both 1956 and 2013). These earlier provisions were explicitly repealed, evidencing a legislative intent to exclude set-off from CIRP.
4. Pari Passu and Anti-Deprivation Principles
Allowing set-off during CIRP would violate the principle of equal treatment of creditors and result in preferential treatment, undermining the core objectives of the IBC’s collective resolution process.
5. Limited Exceptions: Contractual and Transactional Set-Off
The Court made a narrow exception:
- Contractual set-off—if agreed to prior to CIRP—may be honored.
- Transactional set-off may be permitted where closely connected transactions exist, and denying set-off would result in unjust enrichment.
In Airtel’s case, neither exception applied.
Conclusion
The Supreme Court’s ruling in Bharti Airtel Ltd. v. Vijaykumar V. Iyer brings much-needed clarity to the non-applicability of set-off during CIRP. By affirming the supremacy of the IBC and prioritizing the pari passu treatment of creditors, the Court has reinforced the foundational principle of collective insolvency resolution.
While creditors are precluded from invoking statutory or insolvency set-off during CIRP, the Court has preserved space for contractual or transactional set-off in well-defined, narrow circumstances. This judgment ensures that pre-insolvency commercial arrangements are respected without compromising the integrity of the insolvency process.
FAQs:
1. Is set-off allowed during CIRP under the IBC?
No. The Supreme Court has ruled that statutory and insolvency set-off are not permissible during the CIRP stage.
2. Can parties rely on contractual set-off clauses during CIRP?
Yes, but only if the contractual set-off was agreed before the commencement of CIRP and satisfies the mutuality requirement.
3. What is mutuality in the context of set-off?
Mutuality exists when cross-claims arise between the same parties in the same capacity, forming the basis for valid set-off.
4. Does IBC override other laws allowing set-off?
Yes. Section 238 of the IBC gives it an overriding effect over any other inconsistent laws or contracts, including those allowing set-off.
5. Can set-off be claimed during liquidation under the IBC?
Yes. Regulation 29 of the Liquidation Regulations allows insolvency set-off during liquidation, but not during CIRP.
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