LI Network
Published on: January 4, 2024 at 21:40 IST
The Supreme Court has declared that statutory or insolvency set-offs do not apply to Corporate Insolvency Resolution Process (CIRP) proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).
Additionally, the Court clarified that Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, governing mutual dealing and set-offs, does not extend to Part II of the IBC, specifically addressing CIRP.
The principle of set-off, allowing debtors to adjust smaller claims against larger creditor claims, was examined by the bench, which outlined two exceptions to the rule’s application within CIRP.
Contractual set-off, effective before or at the initiation of CIRP, and ‘equitable set-off’ linking claims and counterclaims based on related transactions were acknowledged as exceptions.
Justices Sanjiv Khanna and S.V.N. Bhatti observed that Section 30(2)(b) doesn’t support insolvency set-offs, as it concerns amounts payable to creditors rather than by creditors to the Corporate Debtor.
They emphasized that the IBC’s provisions governing CIRP don’t endorse the principle of insolvency set-off explicitly and thus can’t be extended by implication.
The case revolved around agreements between Bharti Airtel Limited and Bharti Hexacom Limited (Airtel Entities) with Aircel Limited and Dishnet Wireless Limited (Aircel Entities) for spectrum trading.
Despite obligations arising from these agreements, disputes arose during the CIRP initiated against Aircel Entities in 2018, leading to conflicting claims and the issue of set-offs.
The Court upheld that set-offs post the commencement of CIRP are not permissible, dismissing Airtel’s plea for set-offs since the amounts became payable after the initiation of CIRP.
The Supreme Court affirmed the National Company Law Appellate Tribunal’s order, maintaining that allowing set-offs during the moratorium period, as per Section 14(4) of IBC, would contradict the law’s intent and the separate nature of the transactions involved.
In conclusion, the Court’s verdict emphasized the limitations of set-off applications within CIRP proceedings, setting precedents and clarifications in alignment with the IBC’s specific provisions for such insolvency processes.
