Set Off Under The IBC Regime: Analysing The Judgment In Bharti Airtel vs Vijaykumar v. Iyer

Set off is one of the most widely used remedies by legal professionals. It finds its place in equity law principles as well as various statutes. In India, setoffs can be availed as per terms of a contract in which setoff provision is already incorporated, as per the provisions of an existing statute, or as a matter of equity. This article will discuss "Set off under India's insolvency law regime". The Insolvency and Bankruptcy Code of 2016 (IBC) is the law relating to the insolvency regime in India. It provides for two types of remedies for struggling entities, i.e., either they undergo the Corporate Insolvency Resolution Process (CIRP) or they have to undergo liquidation (in which either the corporate debtor is sold as a going concern or their assets are sold to pay off the debt).

Considering these existing legal provisions, the Hon'ble Supreme Court gave a landmark ruling in Bharati Airtel and Others vs. Vijaykumar V. Iyer and Ors.¹ In this case, the appellants (Bharati Airtel and Bharati Hexacon Limited) had entered multiple contracts with Aircel Limited and its related entities (collectively referred to as Aircel entities) whereby certain bank guarantees had to be furnished by Aircel entities which they were unable to do, so the appellants did it in their place. In exchange, the appellants deducted this amount from what they owed the Aircel entities in the deal. However, the bank guarantees were eventually extinguished, so the appellants lost the right to claim set off on the amount they owed to the Aircel entities.

In the meantime, the Aircel entities underwent CIRP. The appellants claimed INR 230 Cr during the process, but only 112 Cr was admitted by the Resolution Professional. This 112 Cr. was unilaterally adjusted by the resolution professional from the amount the appellants paid to the Aircel entities. This setoff was sanctioned by the Hon'ble NCLT, Mumbai bench, but was rejected by the Hon'ble National Company Law Appellate Tribunal (NCLAT). An appeal was filed before the Hon'ble Supreme Court which discussed in detail the concept of setoff in insolvency law disputes.

The main issue discussed by the Hon'ble Supreme Court was whether allowing setoff would be against the doctrine of pari passu enshrined under the IBC, which prohibits discrimination within the same class of creditors. If setoffs are permitted, then even an operational creditor to whom a debt is owed may get preference over financial creditors.

The Hon'ble Supreme Court clarified that while statutory set off (as provided under Order 8 Rule 6 of CPC)² or insolvency set off (as provided under Regulation 29 of Liquidation Regulations) cannot be permitted after the imposition of a moratorium under Section 14 of IBC. Contractual set offs, however, will be allowed since they are decided according to the terms of the contract, which remain unaffected by the moratorium under IBC.

Further, equitable setoff can also be granted if denying such setoff will defeat the very purpose of equity and justice. This is done in rare circumstances, and only wherein there are no disputed questions of laws and facts as far as validity of debt is concerned. This is also called transactional set off by the Hon'ble Court due to the requirement that the claim and counterclaims to be adjusted must be arising out of one or more than one related transaction.

The appellants attempted to argue that Regulation 29 of Liquidation Regulations will be applicable to not just liquidation but also at the CIRP stage, as per Section 30³, which seeks to conserve assets for liquidation. Basically, the appellants attempted to argue that since assets must be kept in the same situation during the CIRP stage as they need to be when and if an entity finally enters liquidation, that must mean that if any of the creditors have a set-off claim, then they must be given preference over even secured financial creditors, and assets are to be conserved to protect the interests of these creditors having a set-off claim. This argument was rejected by the Hon'ble Supreme Court, after which it proceeded to hold that Section 30 is with respect to the amount payable to creditors, not to debtors.

Finally, the apex court ruled that setoff cannot be claimed as insolvency setoff during CIRP but only as contractual or equitable setoff.

It needs to be noted that the jurisprudence on this particular issue in India is still in a premature stage, primarily due to the fact that IBC in itself is a relatively young statute. In the landmark case of Swiss Ribbons Private Limited and Another v. Union of India and Others⁴ The Hon'ble Apex Court clarified that it is not the case that a legitimate set-off is not to be considered at all; per contra, such set-off may be considered at the stage of filling of proof of claims during CIRP by the Resolution Professional.

In Re: State Bank of India⁵, the corporate debtor claimed that it was owed a sum of money by the financial creditor (a bank). The corporate debtor attempted to use this obligation of the financial creditor as a means to dispose of the insolvency application. The NCLT held that since the corporate debtor had committed a default, the bank's insolvency application had to be admitted. The NCLT then remarked that any counterclaims or set-offs would have to be disclosed under Form C (or Form B, in case of an operational creditor) and that the insolvency resolution process of the IBC provided a mechanism to deal with this situation. It is important to note that this decision did not involve the actual exercise of set off as it was made at the stage of admitting an application.

Meanwhile, in the present case, the apex court herein noted itself that the issue at hand was an interesting one due to a technical novelty. The IBC's prevalence over other statutes, provided for in Section 238, has given rise to such disputes in the past as well, but whether parties can avail setoffs while IBC is in application or not was a novel question to which no definite answer existed yet in India's insolvency law regime.

Further, the Hon'ble Supreme Court also made sure that no Corporate Debtor can take advantage of the remedy of contractual or equitable set off. This is by holding that only those counterclaims will be adjusted which have arisen before the initiation of CIRP. This would mean that the Corporate Debtor will not be able to reduce its liability to creditors by acquiring the debt which is owed by creditor to a third party.

Another amount of INR 64 Cr. which was owed by the Aircel entities to the appellants, was adjusted from the amount payable by the appellants, as the same was covered under the definition of equitable setoff, also referred to as 'transactional' set off by the Court in the present case. This was because the claim and counterclaim were both part of the same transaction and were owed by both parties to each other in the same capacity.

The Hon'ble Supreme Court made sure that while the fundamental principles governing IBC are not interfered with, either party's legitimate right to adjust any sum which it is owed to, from the amount which it needs to pay off, is also secured through this judgment. In the present case, however, the amount which appellants wanted to adjust from the amount which was owed by it to Aircel entities could not be set off as the same was claimed either through statutory set-off or insolvency set off, both of which are not applicable in India's insolvency law regime on account of IBC's overriding effect.

In essence, it has been established that while IBC does overrides setting off counter claims, the same can be allowed in exceptional circumstances, but only for transactions taking place before commencement of CIRP. This is to prevent the Corporate Debtor from using the remedy of setting off to reduce its own liability at the cost of the creditor, who is expecting legitimate compensation through the IBC's resolution process.

Footnotes

1. Bharati Airtel and Other vs. Vijaykumar V. Iyer and Ors, Civil Appeal No. 3088-3089 of 2020.

2. Civil Procedure Code, 1908, Order 8 Rule 6.

3. Insolvency & Bankruptcy Code, Section 30.

4. Swiss Ribbons Private Limited and Another v. Union of India and Others, (1991) 171 CLR 609.

5. Re: State Bank of India, Company Appeal (AT) (Insolvency) No. 49 of 2018.

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