Case Note & Summary
The appeal before the Supreme Court involved a dispute between Bharti Airtel Limited and Bharti Hexacom Limited (Airtel entities) and Aircel Limited and Dishnet Wireless Limited (Aircel entities) regarding the right to claim set-off during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016. The background stemmed from spectrum trading agreements in April 2016, where Airtel entities agreed to purchase spectrum from Aircel entities, contingent on Department of Telecommunications approval. DoT demanded bank guarantees for licence dues, leading Aircel entities to seek Airtel entities' assistance in providing bank guarantees of approximately Rs.453.73 crores. In return, Airtel entities were to deduct Rs.586.37 crores from the consideration payable under the spectrum agreements. After TDSAT and Supreme Court orders, bank guarantees were cancelled, and Airtel entities paid Rs.341.80 crores to Aircel entities, setting off Rs.145.20 crores for interconnect charges owed by Aircel entities. CIRP was initiated against Aircel entities in March 2018, and Airtel entities filed claims for interconnect charges totaling Rs.203.46 crores, while owing Rs.64.11 crores to Aircel entities. The Resolution Professional admitted claims of Rs.112 crores and adjusted Rs.112.87 crores from amounts payable by Airtel entities, demanding payment. Airtel entities claimed set-off, which was rejected by the Resolution Professional. The Adjudicating Authority allowed set-off, but NCLAT reversed, holding set-off violative of insolvency principles and the moratorium under Section 14 of IBC. The legal issue was whether set-off is permissible during CIRP. Arguments centered on set-off as a legal right versus its conflict with insolvency objectives. The court analyzed set-off types, emphasizing its economic and equitable benefits. It held that IBC does not prohibit set-off, and the moratorium does not automatically bar it if claims are mutual and connected. The court allowed the appeal, permitting set-off of Rs.112.87 crores, and set aside the NCLAT order.
Headnote
A) Insolvency Law - Corporate Insolvency Resolution Process - Set-Off Rights - Insolvency and Bankruptcy Code, 2016, Sections 14, 25, 238 - The appeal raised the issue of whether set-off is permissible during CIRP when the Resolution Professional takes custody of assets under Section 25(2)(a). The court examined the nature of set-off, including contractual, statutory, equitable, and insolvency set-off, and held that set-off is a recognized legal right that promotes efficiency and equity. The court found that the IBC does not prohibit set-off, and the moratorium under Section 14 does not automatically bar it. The set-off claim involved mutual debts from interconnect charges and spectrum trading agreements, which were closely connected. The court allowed the appeal, permitting set-off of Rs.112.87 crores. (Paras 1-2, 5-8) B) Insolvency Law - Moratorium - Set-Off and Moratorium Interaction - Insolvency and Bankruptcy Code, 2016, Section 14 - The NCLAT had held that set-off violates the moratorium under Section 14, which applies till CIRP completion. The Supreme Court disagreed, reasoning that set-off is not antithetical to insolvency law objectives and that the non-obstante clause in Section 238 does not preclude set-off. The court held that set-off can be permitted if the claims are mutual and arise from connected transactions, and the moratorium does not automatically prohibit such adjustments. (Paras 2.12, 5-8) C) Contract Law - Set-Off - Contractual Set-Off Principles - Not mentioned - The court discussed contractual set-off as a matter of agreement between parties, where normal rules of mutuality and liquidity may not apply if expressly stated. It emphasized that contractual set-off requires valid contract elements like intention, acceptance, and consideration, and courts should assess the agreement to determine if set-off rights are conferred, considering equitable foundations. (Paras 6-7)
Issue of Consideration
Whether the right to claim set-off is permissible during the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016, particularly when the Resolution Professional takes control of assets under Section 25(2)(a)
Final Decision
The Supreme Court allowed the appeal, permitting set-off of Rs.112.87 crores, and set aside the order of the NCLAT
Law Points
- Set-off is a recognized legal right that promotes economic efficiency
- reduces litigation
- and ensures natural equity by allowing cross-demands to compensate each other
- The Insolvency and Bankruptcy Code
- 2016 does not prohibit set-off
- and the right to set-off can be exercised during the Corporate Insolvency Resolution Process if the claims are mutual and arise from the same transaction or closely connected transactions
- The moratorium under Section 14 of the IBC does not automatically bar set-off
- and the Resolution Professional must consider set-off claims on their merits
