SUPREME COURT REJECTS CLAIM FOR SETTING-OFF MUTUAL DEBTS ARISING BETWEEN BHARTI AIRTEL AND AIRCEL, IN INSOLVENCY PROCEEDINGS
In a recent matter of Bharti Airtel Limited and Another Vs Vijaykumar V. Iyer and Others Civil Appeals No. 3088 – 3089 / 2020, a two Judge Bench of the Supreme Court comprising of Justice Sanjiv Khanna and Justice S.V.N. Bhatti passed a Judgment dated 03-01-2024 and made observations regarding the right of a creditor to claim set-off of any amount that it owes to a corporate debtor against the debt owed by the corporate debtor to such creditor, post commencement of insolvency proceedings.
i) In the present case, the Appellants, Bharti Airtel Limited and Bharti Hexacom Limited (Airtel Entities) executed eight Spectrum Trading Agreements with Aircel Limited and Dishnet Wireless Limited (Aircel Entities) in April 2016 for purchase of right to use the spectrum allotted to the latter in the 2300 MHz band against payment of Rs. 4,022.75 Crores (Rupees Four Thousand and Twenty-Two Crores approximately) to the Aircel Entities.
ii) However, the said Agreements were contingent to the approval of the Department of Telecommunications, Government of India.
iii) The Telecom Department demanded bank guarantees in relation to certain licence dues and spectrum usage dues from the Aircel Entities.
iv) Aggrieved by such demand, the Aircel Entities approached the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).
v) TDSAT, vide Order dated 03-06-2016, directed the Aircel Entities to submit the bank guarantees.
vi) But the Aircel Entities did not have the means to procure and submit bank guarantees worth approximately Rs. 453.73 Crores (Rupees Four Hundred and Fifty-Three Crores approximately), hence, they approached the Airtel Entities for submission of such bank guarantees on behalf of the Aircel Entities to the Telecom Department.
vii) The Airtel Entities executed three Letters of Undertaking, whereby, they agreed to furnish the bank guarantees to the Telecom Department on behalf of the Aircel Entities, provided the latter deducted Rs. 586.37 Crores (Rupees Five Hundred and Eighty-Six Crores approximately) from the amount of consideration payable by the Airtel Entities under the Spectrum Trading Agreements.
viii) Later, TDSAT, vide Order dated 09-01-2018, directed the Telecom Department to return the Bank Guarantees to the Aircel Entities.
ix) However, the Bank Guarantees were not returned and the Telecom Department filed Civil Appeal No. 5816 of 2018 before the Supreme Court. The Aircel Entities also filed Cross-Appeals before the Apex Court.
x) The Supreme Court, vide Interim Order dated 28-11-2018, directed the Telecom Department to return the Bank Guarantees to the Aircel Entities, as per TDSAT Order dated 09-01-2018. But the Telecom Department did not return the Bank Guarantees.
xi) In view of the aforesaid, the Airtel Entities approached the Banks seeking cancellation of Bank Guarantees. As the Banks were reluctant, the Airtel Entities approached the Apex Court, which, vide Order dated 08-01-2019, directed that the Bank Guarantees must be cancelled and the same cannot be used for any purpose.
xii) Thereafter, the accounts between the Airtel Entities and Aircel Entities were settled, and as per the Airtel Entities, Rs. 145.20 Crores (Rupees One Hundred and Forty-Five Crores approximately) was the net amount payable by the Aircel Entities towards operational charges, SMS charges and interconnect usage charges to the Airtel entities.
xiii) In the meantime, a Corporate Insolvency Resolution Process (CIRP) was initiated in respect of the Aircel entities (Corporate Debtor) before the Hon’ble National Company Law Tribunal, Mumbai Bench (NCLT) in P. (IB) / 298 (MB) / 2018 under Section 10 of the Insolvency and Bankruptcy Code 2016 (IBC) (Initiation of corporate insolvency resolution process by corporate applicant).
xiv) The CIRP was initiated by the Corporate Debtor itself, in view of the Reserve Bank of India (RBI) Guidelines dated 12-02-2018, which was issued with the aim of resolution of stressed assets in the economy and which required the lender to identify and report the stressed assets / non-performing assets and take steps to cure the default under the IBC framework or outside IBC.
xv) The Corporate Debtor was then facing a law-and-order issue, as its bank accounts had been frozen in various other matters, as a result of which, it was not in a position to pay salaries, not able to operate its bank accounts, etc. Hence, as per the Corporate Debtor, in the event CIRP is initiated and admitted, the Insolvency Resolution Professional would at least take charge of the affairs of the Company and then the Company can run its business. Otherwise, owing to the several problems created by the Financial and the Operational Creditors, the Corporate Debtor would have to shut down the business or the business may be suspended by operation of law or the Telecom Department may itself order for suspension of banking license due to non-operation of bank accounts and non-payment of salaries, etc.
xvi) Thus, the Corporate Debtor, by initiating CIRP under Section 10 IBC, took steps to overcome the stressed finances.
xvii) Hence, the NCLT admitted the CIRP against the Aircel Entities, vide Order dated 12-03-2018, as it became impossible for the Corporate Debtor to run the business. Moreover, the procedure laid down under Section 10 IBC would facilitate restructuring of stressed assets, maximisation of value of assets, and reorganisation of finances of the defaulting Company.
xix) The Airtel Entities submitted their claims before the Resolution Professional (RP), which were admitted to the extent of Rs. 112 Crores (Rupees One Hundred and Twelve Crores).
xx) However, by Letter dated 12-01-2019, the RP sought from the Airtel Entities a sum of Rs. 112.87 Crores (Rupees One Hundred and Twelve Crores approximately) payable to the Aircel Entities under the Spectrum Trading Agreements, consequent to the discharge and cancellation of the Bank Guarantees furnished by the Airtel Entities, failing which the RP would take steps for recovery.
xxi) The Airtel Entities objected to the RP’s demands on various grounds and also claimed set-off of the amount due to them by the Aircel Entities from the amount payable by them to the Aircel Entities. However, the Airtel Entities’ claim for set-off was rejected by the RP.
xxii) Aggrieved, the Airtel Entities approached the NCLT, which, vide Order dated 01-05-2019, held that the Airtel Entities had a right to set off Rs. 112.87 Crores (Rupees One Hundred and Twelve Crores approximately) that was payable to the Aircel Entities from the amount due and payable by the Aircel Entities to the Airtel Entities.
xxiii) Aggrieved by the NCLT Order dated 01-05-2019, the RP, Mr. Vijay Kumar V Iyer filed an Appeal before the National Company Law Appellate Tribunal (NCLAT) in Company Appeal (AT) (Ins) No.530 & 700 of 2019.
xxiv) The NCLAT, vide Order dated 13-07-2020, allowed the Appeal against the Airtel Entities and held that “set-off is violative of the basic principles and protection accorded under any insolvency law. Set-off is antithetical to the objective of the IBC. Reference was made to the non-obstante provisions in the form of Section 238 of the IBC. As moratorium under Section 14(4) applies till the date of completion of the Corporate Insolvency Resolution Process, which is till the resolution plan is approved or the liquidation order is passed, to permit set-off will be contrary to law. Further, the set-off being claimed is in respect of two separate and unrelated transactions.”
Supreme Court Observations
Aggrieved by the NCLAT Order dated 13-07-2020, the Airtel Entities filed Civil Appeals No. 3088 – 3089 / 2020 before the Supreme Court. The Apex Court passed an Order dated 03-01-2024 and made the following observations:
1) That the term ‘set-off’ generally recognises the right of a debtor to adjust the smaller claim owed to him against the larger claim payable to his creditor.
2) The right to set-off may either be explicit in the words of the agreement or can be implied by existence of oral / indirect agreement to set-off, thereby, reflecting an understanding / arrangement between the parties to the said effect.
3) In law, Order 8 Rule 6 of the Code of Civil Procedure 1908 (CPC) (New ground of defence) provides that where a suit for recovery of money has been filed, the defendant can claim a set-off against the plaintiff’s demand, for an ascertained sum of money that is legally recoverable by the defendant from the plaintiff. Provided that the claim for set-off arises out of the same transaction.
4) The defendant may also claim an equitable set-off for an ascertained sum of money, wherein, such claim must have a connection between the plaintiff’s claim for the debt and the defendant’s claim to set-off. However, legal set-off, as distinguished from equitable set-off, is allowed by court only for an ascertained sum of money and is a statutory right.
5) “For set-off in law, the obligations existing between the two parties must be debts which are for liquidated sums or money demands which can be ascertained with certainty. Both the debts must be mutual cross-obligations, that is, cross-claims between the parties in the same right.”
6) On the other hand, insolvency set-offs are applicable when demands for the claim for debt and the claim for set-off against such debt are between the same parties and there is a commonality of identity between the person making the claim and the person against whom the claim is made.
7) However, upon commencement of CIRP process, the identity of a corporate debtor changes and as a result, the set-off of the dues payable by the corporate debtor, prior to the commencement of CIRP cannot be made from the dues payable to the corporate debtor, post commencement of CIRP.
8) Otherwise, in the event that cross demands are set-off, the assets available for distribution amongst various classes of creditors, would be depleted in favour of a single creditor with a set-off entitlement. “In other words, it puts and grants priority to the creditor, even an operational creditor, to the extent of the set-off.” This cannot be allowed as it would be contrary to the pari passu principle embedded in IBC such as in Section 53 of IBC (Distribution of assets) that creates a hierarchy of stakeholders with the stipulation that each class of creditors shall rank equally among each other and shall be given equal treatment as the creditors of such class.
9) Thus, the right to set-off, being an equitable right, can be denied if such grant of relief would defeat equity and justice. However, in exceptional circumstances, if at all set-off is to be allowed after commencement of CIRP, “the set-off should be genuine and clearly established on facts and in law, so as to make it inequitable and unfair that the debtor be asked to pay money, without adjustment sought that is fully justified and legal. The amount to be adjusted should be a quantifiable and unquestionable monetary claim, as the Corporate Insolvency Resolution Process is a time-bound summary procedure. It is not a civil suit where disputed questions of law and facts are adjudicated after recording evidence.”
10) Furthermore, the Bench held that the set-off obligations maturing prior to the commencement of CIRP may only be allowed, whereas, the set-off obligations arising after the commencement of CIRP should be disallowed or allowed to a limited extent, in order to ensure smooth insolvency resolution process and rehabilitation and revival of the corporate debtor.
Therefore, applying the aforesaid principles to the present case, the Supreme Court held that consequent to the Orders passed by the Apex Court vide Orders dated 28-11-2018 and 08-01-2019 in respect of cancellation and return of Bank Guarantees to the Airtel Entities, the latter became liable to pay the Aircel Entities in terms of the Letters of Undertaking. Further, such amounts became payable post – commencement of CIRP i.e. after 12-03-2018. Thus, the Bench held that the relief of set-off cannot be granted to the Airtel Entities. As a result, the Appeals filed by the Airtel Entities were dismissed.
The civil law recognises the principle of set-off if the party claiming set-off has debts for an ascertained sum which can be claimed with certainty. Further, in a set-off, both the debts must be mutual cross-obligations, i.e. cross-claims in the same transaction and with the same right.
However, in the case of proceedings in insolvency matters, set-offs cannot be claimed as a right as it would prejudice the rights of the other creditors. This is because the assets available for distribution amongst various classes of creditors, would be depleted in favour of a single creditor with a set-off entitlement. This would obviously be against the principles of natural justice as no party in an insolvency matter can be given priority over the others, keeping in view Section 53 of IBC (Distribution of assets) that creates a hierarchy of stakeholders with the stipulation that each class of creditors shall rank equally among each other and shall be given equal treatment as the creditors of such class.
The Indian Lawyer
Sushila Ram Varma
The Indian Lawyer