The Supreme Court in Bharti Airtel Ltd & Anr. v. Vijaykumar V. Iyer & Ors. (Civil Appeals nos. 3088-89 of 2020) clarified the law on permissibility of set-off of claims under Insolvency and Bankruptcy Code, 2016 ("The Code") at the stage of Corporate Insolvency Resolution Process ("CIRP") when the Resolution Professional ("RP") proceeds under Section 25 (2)(a) of the Code.
In 2016, Bharti Airtel and Bharti Hexacomm ("Appellants") entered into 8 agreements for the right to use of spectrum with Aircel and Dishnet ("Respondents") subject to approval of the DoT. The DoT demanded bank guarantees from the Respondents for approval. The Respondents approached the TDSAT against the demand. The parties entered into 3 letters of understanding whereby they agreed the Appellant would furnish the bank guarantees in favour of DoT on behalf of the Respondent. However, the same were cancelled by the Supreme Court1, therefore, the money was returned, and the Appellants became liable (after initiation of CIRP) to pay the balance amount in terms of the letters of understanding to the Respondents.
In 2018, the Respondents faced insolvency proceedings before NCLT Mumbai. By a letter dated 12/01/2019, the RP asked the Appellants to pay an amount of Rs. 112.87 Cr that they had suo moto adjusted from the amount of Rs. 453.73 Cr payable by Appellant on account of cancellation of the Bank Guarantees. The Appellants replied to the letter inter alia stating that they were entitled to the set-off on account of the amounts owed by the Respondent under the agreements for interconnect charges. The NCLT allowed the set-off. Whereas the NCLAT disagreed, stating that such a set-off claim is not permissible at the stage of CIRP. Hence, an appeal was filed before the Supreme Court.
Before the Supreme Court, the Appellants argued that Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016 allow for set-off and is applicable to CIRP and therefore, the Appellants were entitled to set-off. The Supreme Court analysed Regulation 29 and found that it cannot be applied to CIRP as the title to the Regulations specifically mentions that they are applicable to Chapter III Part II which covers the liquidation process, it does not mention Chapter II Part II of the Code (CIRP). The Court also took note of the decision in - Gokul Chit Funds & Trades (P) Ltd. v. Thoundasseri Kochu Ouseph Vareed10, where it was held that "mutuality can exist when there are even several distinct and independent transactions, albeit between the same parties functioning in the same right or capacity", - to hold that a set-off can be permitted if the transaction happened between the same parties, that is to say that the identities of the parties must remain the same at the time of set-off.
The Court further pointed out that the identity of a corporate debtor undergoes a change at the commencement of CIRP. The RP takes control of all the affairs of the corporate debtor to protect the assets and resolve all debts. Therefore, a set-off of dues payable by the corporate debtor prior to the commencement of CIRP cannot be made from dues payable after the commencement of CIRP.
Allowing such a set-off would violate moratorium and would be contrary to the doctrine of Pari Passu as it would have the effect of giving primacy to a mutual creditor over other creditors which would defeat the legislative intent behind the enactment of the Insolvency and Bankruptcy Code.
In the present case, the Court noted that telephone service providers generally enter into an agreement for interconnect charges to use each other's service as the caller/receiver may be using different providers. RP had allowed set-off claims in the case of interconnect charges as they had become payable prior to the initiation of CIRP, however, it was found that the agreements for purchase of right to use the spectrum is separate and unconnected and that the amounts payable under the letters of understanding, signed by the parties, became payable after the initiation of CIRP, and they were related to a separate, unconnected contract, which is why set-off as claimed by the Appellants cannot be allowed. Hence the appeal was dismissed.
By - Ansh Mittal