TMI Blog2024 (1) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n April 2016, Bharti Airtel Limited and Bharti Hexacom Limited For short- The appellants or Airtel entities entered into eight spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited For short- Aircel entities for purchase of the right to use the spectrum allocated to the latter in the 2300 MHz band. The agreement was contingent on approval of the Department of Telecommunications For short- DoT , Government of India. The DoT for grant of approval demanded bank guarantees in relation to certain licence dues and spectrum usage dues from the Aircel entities. Challenging this direction, the Aircel entities approached the Telecom Disputes Settlement and Appellate Tribunal For short- the TDSAT . By the interim order dated 3rd June 2016, TDSAT directed Aircel entities to submit the bank guarantees. As the Aircel entities did not have the means to procure and submit the bank guarantees for approximately Rs.453.73 crores, they approached the Airtel entities to submit bank guarantees on their behalf to the DoT. 2.2 In terms of the eight spectrum transfer agreements, the Airtel Entities were to pay Rs.4,022.75 crores to the Aircel entities. The Airtel e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, 2013 (18 of 2013). , Mumbai Bench, admitted the petitions against Aircel Limited and Dishnet Wireless Limited vide the orders dated 12th March 2018 and 19th March 2018. 2.8 Claims on account of the interconnect charges were filed by Bharti Airtel Limited, including the claim on behalf of Telenor (India) Communications Private Limited For short- Telenor India , in light of Telenor s merger with Bharti Airtel Limited, effective from 14th May 2018. Claim was also filed by Bharti Hexacom Limited. The total claim by the Airtel Entities was Rs.203.46 crores. However, the Airtel entities also owed Rs.64.11 crores towards interconnect charges to the Aircel entities. 2.9 The claims submitted by the Airtel entities were admitted by the Resolution Professional to the extent of Rs.112 crores. Claim on account of receivable of about Rs.5.85 crores owed by Aircel entities to Telenor India, which had been merged with Bharti Airtel Limited, was not accepted. 2.10 By the letter dated 12th January 2019, the Resolution Professional for Aircel Limited, Dishnet Wireless Limited and Aircel Cellular Limited, wrote to Bharti Airtel Limited, stating that they had suo moto adjuste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off pleaded as a defence to a claim, albeit not as a sword . 4. Set-off is given legal preference for three reasons. First, in economic terms, set-off is a form of security recognised in law. It is, however, not a security in a strict sense, but a right that enhances provision of credit and acts as a stimulus to trade and commerce by giving a degree of confidence to parties dealing with each other. Secondly, it helps reduce litigation, promotes economy of time and is an efficient method in resolving debt between parties. Thirdly, natural equity requires that cross-demands should compensate each other by deducting the lesser sum from the greater. 5. At least five different meanings can be ascribed to the term set-off , namely, (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off. Jurong Aromatics Corporation Pte Ltd. and Others v. BP Singapore Pte Ltd. and Another, (2018) SGHC 215. (High Court of Republic of Singapore) It is observed that the streams of common law and equity on the right of set-off have flown together and have so combined as to be in the modern era indistinguishable from one anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a statute. For example, Order VIII Rule 6 of the Code of Civil Procedure, 1908 Order VIII Rule 6. Particulars of set-off to be given in written statement. (1) Where in a suit for the recovery of money the defendant claims to set-off against the plaintiff's demand any ascertained sum of money legally recoverable by him from the plaintiff, not exceeding the pecuniary limits of the jurisdiction of the Court, and both parties fill the same character as they fill in the plaintiff's suit, the defendant may, at the first hearing of the suit, but not afterwards unless permitted by the Court, present a written statement containing the particulars of the debt sought to be set-off. (2) Effect of set-off. The written statement shall have the same effect as a plaint in a cross-suit so as to enable the Court to pronounce a final judgment in respect both of the original claim and of the setoff, but this shall not affect the lien, upon the amount decreed, of any pleader in respect of the costs payable to him under the decree. (3) The rules relating to a written statement by a defendant apply to a written statement in answer to a claim of set-off. states that where a suit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al provisions on set-off in case of insolvency. We need not examine in detail the law as applicable to insolvency set-off in the United Kingdom for the present decision, albeit it is relevant to state that they are broader and wider than the provisions of equitable set-off. 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. We shall subsequently examine the term mutual dealings as applicable to liquidation proceedings in India. Analysis of the provisions of IBC relating to the Corporate Insolvency Resolution Process, liquidation proceedings and application to the facts of present case. 11. In the present case we are examining and concerned with the provisions as applicable to the Corporate Insolvency Resolution Process in Chapter II Part II of the IBC, which consists of the compendium of Sections from 6 to 32A of the IBC. In the course of our discussion, we would also be referring to Section 53 of the IBC, which is a part of Chapter III Part II, and relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 29. Mutual credits and set-off. Where there are mutual dealings between the corporate debtor and another party, the sums due from one party shall be set off against the sums due from the other to arrive at the net amount payable to the corporate debtor or to the other party. The title of the Liquidation Regulations states that they shall apply to the process under Chapter III Part II of the IBC. In other words, the Liquidation Regulations are not applicable to Chapter II Part II of the IBC, which relates to the Corporate Insolvency Resolution Process. 14. Section 36(4) in Chapter III Part II of the IBC Section 36 (4). The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation (a) assets owned by a third party which are in possession of the corporate debtor, including (i) assets held in trust for any third party; (ii) bailment contracts; (iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund; (iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and (v) such o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is different from contractual, statutory and equitable set-off. 17. Insolvency set-off under the United Kingdom insolvency law was examined in Re.: Bank of Credit and Commerce International SA (No. 8) [1996] Ch. 245. (Appeal Committee of the House of Lords) , to imply that the set-off must relate to dealings prior to bankruptcy. It states in explicit terms that the requirement of mutuality is central to bankruptcy set-off and must be rigorously enforced. It is held that it is not the function of an insolvency set-off to confer a benefit to a debtor who has not been a part of mutual dealings, or to give preference to a creditor who has secondary or no liability. The insolvency set-off regime in the United Kingdom is wider than statutory/legal set-off or equitable set-off. However, there is a requirement that the debt should have been provable in the insolvency process. 17.1 An earlier decision in Stein v. Blake [1996] A.C. 243. (House of Lords) had held that the bankruptcy set-off applies to all claims from mutual credits or dealings prior to bankruptcy, including claims, which at the time of bankruptcy were due but not payable, unascertained or contingent. This is supplem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inistration cannot be set-off against the debtor s cross-claim for lack of mutuality. A claim against the debtor after initiation of administration is not against the corporate debtor itself. 18. The High Court of Australia in Gye v. McIntyre (1991) 171 CLR 609 states that the word mutual conveys the notion of reciprocity rather than that of correspondence. Mutuality means that the demands must be between the same parties and they must be held in the same capacity, or right or interest. Mutuality is concerned with the status of the parties and their relationship with each other, and not with the nature of the claims themselves. There must be identity between the persons beneficially interested in the claims and the person against whom the claim existed. Therefore, an obligation arising out of an instrument may be set-off against a simple contract debt, and a secured debt may be set-off against an unsecured creditor. The court, however, expressed that the requirement of same parties means that A s right to sue B cannot be set-off against A s debt to C or that a joint demand cannot be set-off against a separate demand. 19. The Court of Appeal of Republic of Singapore in BP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed to be adjusted against each other. 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. 23. The relationship and the nature of identity of the Corporate Debtor undergo a change on the commencement of the Corporate Insolvency Resolution Process. Set-off of the dues payable by the Corporate Debtor fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal treatment. As set-offs can mitigate against the pari passu principle, they should be allowed when mandated, or can be justified by law. 25. Apart from the pari passu principle which refers to treating creditors of the same class in the same manner, the United Kingdom insolvency law also relies on the common law principle of antideprivation. The principle encapsulates that a person cannot contract to obtain a more beneficial position in the event of bankruptcy, than what the law otherwise provides. A contract which states that a man s property shall remain his until his bankruptcy, and in that event shall go to someone else, is not a valid contract. Both, the pari passu principle and the anti-deprivation principle sprout from the common ground that parties cannot contract out of an insolvency legislation. Their distinction lies in their impacts. The pari passu principle is aimed at ensuring that all creditors get their proportional dues by preventing any one creditor from getting more than their deserved share. Belmont Park Investments v. BNY Corporate Trustee Services Ltd. [2012] 1 AC 383 The anti-deprivation principle on the other hand aims at conservation of the insolv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Regulations can be applied to the Corporate Insolvency Resolution Process. The aforesaid rule would be, however, subject to two exceptions or situations. The first, if at all it can be called an exception, is where a party is entitled to contractual set-off, on the date which is effective before or on the date the Corporate Insolvency Resolution Process is put into motion or commences. The reason is simple. The Corporate Insolvency Resolution Process does not preclude application of contractual set-off. During the moratorium period with initiation of the Corporate Insolvency Resolution Process, recovery, legal proceedings etc. cannot be initiated, enforced or remain in abeyance. Besides the moratorium effect, the terms of the contract remain binding and are not altered or modified. 31. The foundation of contractual set-off is based on the same ground as in the case of equitable set-off, which is impeachment of title, albeit contractual set-off is a result of mutual agreement that permits set-off and adjustment. Therefore, if a debtor s title to sue is impeached before the Corporate Insolvency Resolution Process is set into motion, so should the title of the Resolution P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fessional, is by way of a defence to protect the legitimate expectation and respect legal certainty. 34. Thus, while accepting contractual and transactional set-off on the conditions specified, we have struck a balance with the doctrines of pari passu and anti-deprivation, which we believe is just and fair. Insolvency set-off in terms of Regulation 29 of the Liquidation Regulations is statutory. 35. In the context of the present case, the aforesaid legal position takes care of the argument raised on behalf of the appellant Airtel entities that the Resolution Professional had allowed set-off of about Rs. 64 crores which was due and payable by the corporate debtor Aircel entities under the operational services agreement, the SMSs services agreement, and the interconnect usage agreements prior to commencement of the Corporate Insolvency Resolution Process from the dues payable by the corporate debtor (Aircel entities) to the Airtel entities. The contractual set-off had occurred prior to the commencement date. This aspect has been further elucidated in paragraph 50 below. 36. The decision of the House of Lords in British Eagle International Airlines Ltd v. Compagnie Nationale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than xx xx xx (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of Section 53, xx xx xx 53. Distribution of assets. (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely (a) the insolvency resolution process costs and the liquidation costs paid in full; (b) the following debts which shall rank equally between and among the following (i) workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52; (c) wages and any unp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, if the Resolution Professional proceeds in terms of Section 25 and secures the assets from the creditors, the creditors would not be entitled to claim set-off during the course of the Corporate Insolvency Resolution Process, which is earlier in the point of time. 40. The arguments are fallacious and should not be accepted. 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 manda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and how the process of filing an application for initiating the resolution process is distinct viz. the financial creditors and operational creditors under the IBC. Whether the set-off should be considered at the stage of filing of proof of claims during the resolution process was not an issue before the court in Swiss Ribbons (supra). These observations are not ratio decidendi when we apply the inversion test and other tests for the issue in question. Career Institute Educational Society v. Om Shree Thakurji Educational Society, 2023 SCC OnLine SC 586. 44. The judgment of this Court in The Official Liquidator of High Court of Karnataka v. Smt. V. Lakshmikutty (1981) 3 SCC 32 had applied Section 46 of the Provincial Insolvency Act, 1920 and had accordingly permitted insolvency set-off on interpretation and application of Sections 529 and 530 of the Companies Act, 1956. In that context, it is observed that the English courts, on interpretation of corresponding provisions of the English Companies Act, had taken a similar view. In the present matter, we are dealing with the provisions of the IBC. Secondly, the corporate debtor is not an insolvent company undergoing liquidation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured. (11) debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. The argument is self-serving and evasive because neither clause uses the expression set-off , nor is it implied. We would not extend on and remodel the definitions on the basis of predisposed and selfserving suppositions. 48. Therefore, 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. 49. Reference is also made to the UNCITRAL Legislative Guide on Insolvency Law UNCITRAL Legislative Guide on Insolvency Law, Chapter G. p.155-156 (2005) which states that right to set-off is essential to avoid misuse of insolvency proceedings by a corporate debtor. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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