Landmark Ruling by Supreme Court: Set-off Unavailable in Corporate Insolvency Proceedings

In a groundbreaking decision, the Supreme Court has ruled that statutory set-off or insolvency set-off does not apply to the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The court emphasized that Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, which pertains to mutual dealing and set-off, does not extend to Part II of the IBC, dealing specifically with CIRP.

The essence of the Set-off principle, recognizing a debtor’s right to offset a smaller claim against a larger debt owed to the creditor, was explored by the bench. Justices Sanjiv Khanna and S.V.N. Bhatti, presiding over the case, outlined two exceptions to the application of statutory or insolvency set-off in CIRP proceedings.

Firstly, contractual set-off is permitted if it is effective before or on the date of CIRP commencement. Secondly, ‘equitable set-off’ is applicable when the claim and counterclaim, in the form of set-off, are intertwined through one or more transactions treated as a unified entity.

The court clarified that Section 30(2)(b) does not support the plea of insolvency set-off, as it deals with amounts to be paid to creditors rather than the amount payable by creditors to the Corporate Debtor. Referring to the legislative mandate in Chapter II Part II of IBC, the bench asserted that insolvency set-off is not recognized in CIRP provisions, and they wouldn’t extend it by implication.

The case involved Bharti Airtel Limited and Bharti Hexacom Limited, which entered spectrum trading agreements with Aircel Limited and Dishnet Wireless Limited. Aircel Entities entered CIRP in 2018, leading to a dispute over set-off claims by the Airtel Entities. The National Company Law Tribunal (NCLT) initially ruled in favor of Airtel, but the National Company Law Appellate Tribunal (NCLAT) reversed the decision.

The Supreme Court upheld the NCLAT’s decision, emphasizing that set-off is incompatible with the objectives of IBC, and allowing it during the moratorium would contradict the law. The ruling clarified that unlike other laws, IBC does not grant the right to set-off against the Corporate Debtor in CIRP. The court dismissed Airtel’s plea for set-off, stating that the amounts became payable post the commencement of CIRP.