Mutual set-off prevents the initiation of insolvency proceedings
Future Consumer Ltd v. Aussee Oats India Ltd
National Company Law Tribunal, Mumbai | Company Petition (Insolvency) No. 538 of 2024
The National Company Law Tribunal, Mumbai (NCLT) rejected the initiation of insolvency in a case where the financial creditor owed a larger amount to the corporate debtor than its claimed default. The judgment rightly clarifies that insolvency under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) is not intended to serve as a recovery mechanism, particularly where mutual financial dealings exist and legally sustainable set-offs are in place.
The decision also affirms that a valid and legally enforceable set-off can override even the unconditional or absolute nature of a repayment obligation. Where mutual claims are supported by clear financial documentation, such as admitted, audited statements and internal acknowledgements, the existence of debt cannot be viewed in isolation. Such an approach introduces an essential element of equity into insolvency jurisprudence, which is crucial when the outcome involves depriving a company of its management and operations. The principle may also apply where a financial creditor's own default, such as failure to disburse sanctioned funds, causes financial strain on the corporate debtor. This ruling highlights the importance for debtors to maintain robust financial documentation, assert valid set-offs clearly and in a timely manner, and ensure consistency across disclosures and records to effectively safeguard against premature or unwarranted insolvency proceedings.
SUMMARY OF FACTS
Aussee Oats India Ltd (AOIL) was formed as a joint venture between the Future Group and the Gupta Group. Future Consumer Ltd (FCL), through its associate company FCL Tradevest Pvt Ltd, held a majority stake in AOIL, with the remaining shares held by SVA, which is owned by the Gupta Group. Members of FCL were appointed as nominee directors in AOIL.
FCL, responsible for debt funding and marketing, extended financial assistance of INR 2 crore under an Inter- Corporate Deposit (ICD) to AOIL. As AOIL did not repay the entire amount, FCL filed a petition under Section 7 of the Code seeking the initiation of insolvency evidenced by a term sheet and promissory note.
AOIL contended that the outstanding amount had been legally set off against dues payable by FCL under other commercial arrangements, including unpaid invoices and losses on custom packaging materials. AOIL also highlighted that FCL itself had not reported any receivables from related parties in its own disclosures.
DECISION OF THE TRIBUNAL
The NCLT dismissed the Section 7 petition despite an admitted debt and default since FCL owed a larger (admitted) amount to AOIL.
The ICD's provision stipulating that AOIL's obligation to repay the outstanding amount along with interest was absolute, unconditional, and not dependent on or linked to any other transaction, would not take away AOIL's right to claim appropriation of the amount receivable from FCL. As such, it would be inequitable to initiate insolvency in such a case.
The audited financials of AOIL, which did not reflect any outstanding liability, had been signed by its nominee director, who was also serving as the chief financial officer of FCL. This suggested knowledge and implied acceptance of AOIL's position that the due amount had been set off against AOIL's claims.
Ex post facto Environmental Clearance is not permissible
Vanashakti v. Union of India
Supreme Court of India | 2025 SCC OnLine SC 1139
In a significant decision for the real estate, infrastructure, and power sectors, the Supreme Court prohibited the grant of ex post facto Environmental Clearance (EC), mandating the requirement of prior EC for various projects and activities. This ruling follows another recent decision wherein the Supreme Court reaffirmed that unauthorised constructions must be demolished without leniency, and Courts should not entertain requests for regularisation, as doing so undermines the rule of law and promotes a culture of impunity.1 This decision signals a decisive shift in judicial attitude toward environmental violations, placing developers under heightened scrutiny. Prior EC is now a strict legal requirement, not a post facto formality, as violations will not be excused through regularisation. Companies should reinforce internal environmental governance frameworks and engage early with the Environmental Impact Assessment (EIA) process to mitigate legal, financial, and reputational risks.
SUMMARY OF FACTS
On September 14, 2006, the Ministry of Environment, Forest, and Climate Change (MoEFCC, previously Ministry of Environment and Forests) had issued a notification mandating prior EC for certain categories of projects and activities including mining, power generation, material production and processing, manufacturing, transportation, storage, and infrastructure (EIA Notification).
In 2017, another notification was issued enabling the ex post facto grant of EC to projects existing as on March 14, 2017, as a 'one-time measure' (2017 Notification).
In 2021, the MoEFCC issued an Office Memorandum (2021 OM) providing a Standard Operating Procedure (SOP) for grant of ex post facto EC, providing for demolition of projects that would not have been eligible for grant of prior EC, and temporary closure of projects that would be so eligible until the EC has been granted.
A non-profit organisation, Vanashakti, challenged the validity of the 2017 Notification and the 2021 OM before the Supreme Court of India as being violative of the EIA Notification as well as the fundamental right to a clean environment guaranteed under the Constitution of India.
DECISION OF THE COURT
The Supreme Court set aside the 2017 Notification and the 2021 OM and held that post facto grant of EC is not a concept permissible under environmental law as the grant of an EC requires a careful application of mind, entailing public hearing, screening, scoping, and appraisal, to appropriately consider the environmental consequences of an activity. Further, if the EC was to be ultimately refused, irreparable harm would have been caused to the environment.
The 2017 Notification was issued as a one-time measure to protect defaulters of the EIA Notification, which had been in existence since 2006.
Similarly, though the Government had been directed to formulate an SOP for grant of ex post facto EC under the 2017 Notification (a 'one-time measure'), the 2021 OM essentially allowed the Government to consider the grant of ex post facto EC for all projects and not just those that were subject to the 2017 Notification.
The Court noted this ulterior objective underlying the 2017 Notification and the 2021 OM to protect the industries that wilfully violated the EIA Notification by bringing in an overarching ex post facto regime.
While preserving the ECs that had already been granted, the Court barred the Government from granting any further retrospective EC or introducing any legal framework that provides for the same, and reiterated the compelling necessity to adopt a strict stance on environmental violations.
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Footnote
1. Kaniz Ahmed v. Sabuddin, 2025 SCC OnLine SC 995
Dispute Resolution & ADR Newsletter - June 2025
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