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TMI Blog2024 (1) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... - '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 entities and Aircel entities entered into three Letters of Understanding whereby th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adjusted an amount of Rs.112.87 crores from the amount of Rs.453.73 crores payable by Airtel entities to Aircel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 another. Federal Commerce and Navigation Co. v. Molena Alpha Inc., (1978) Q.B. 927. (Lord Denning) It is necessary to briefly explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten 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 for recovery of money is filed, the defendant can claim set-off against the plaintiff's demand for any ascertained sum of money legally recoverable by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 the liquidation process. 12. At the outset we should record, that there is a difference between the Corporate Insolvency Resolution Process and the liquidation process of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 other assets as may be notified by the Central Government in consultation with any financial sector regulator; (b) assets in security collateral held by financial services providers and are subject to netting and setoff in mul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 supplemented by the United Kingdom insolvency set-off regime permitting the estimation of liabilities and calculation of trends. The parties are not required at any particular time to meet and calculate the extent of each other's liabilities. Further, the account i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tates 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 Singapore Pte Ltd v. Jurong Aromatics Corp Pte Ltd and Others (2020) SGCA 09 observes that the requirement of mutuality will fail in respect of prior claims against the debtor company, where the receiver (read - Resolution Professional) carries on business of the debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for a period prior to the commencement of the Corporate Insolvency Resolution Process cannot be made and is not permitted in law from the dues payable to the Corporate Debtor post the commencement of the Corporate Insolvency Resolution Process. The position may be different where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 insolvent estate for the benefit of the creditors. In the present decision, we are not examining the extent of, and the manner in which the antideprivation principle is applicable in India. 26. Having examined the different concepts of set-off including insolvency set-off, we would now like to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 Professional, who in terms of Section 25 of the IBC has the duty to preserve and protect assets of the corporate debtor, including continuing the business operations of the corporate debtor. The Resolution Professional takes the debtor's property subject to all clogs and fetters affecting it in the hands of the debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 Air France 1975 1 WLR 758 demonstrates the interaction between the contractual set-off mechanism and the set-off rules as applicable to insolvency in the United Kingdom. In this case, the company under liquidation was a member of International Airport Transport Association which had a clearing house system for ticket sales by me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date; (d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and among the following:- (i) any amount due to the Central Government and the State Government including the amount to be received on account of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. 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 mandatory. 41. There are several reasons why in our opinion clause (ii) to subsection (2)(b) of Section 30 does not support the plea of insolvency set-off. 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 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 process, but is undergoing the Corporate Insolvency Resolution Process. 45. Similarly, the reliance placed by Airtel entities on Section 60(5) Section 60 Adjudicating authority for corporate persons.- (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of- (a) any application or proceeding by or agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial 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 guide states that insolvency law of set-off of mutual obligations arising out of pre-commencement transactions or activities of the debtor leads to commercial predictability and availability of credit. It checks strategic misuse of the insolvency proceedings. In the context of Chapter II Part II of the IBC, we are not concerned with the liquidation estate or the liquidation process. At this stage, we are examining the question of rehabilitation and revival of the corporate debto ..... X X X X Extracts X X X X X X X X Extracts X X X X
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