SET OFF DURING CIRP: AN ANALYSIS

[Akshay Sharma is a Delhi-based lawyer and Lavanya Pathak is a final-year student at National University For Study And Research In Law, Ranchi]

Recently, the National Company Law Appellate Tribunal (NCLAT) on 13.07.2020 in the case of Vijay K. Aiyer v. Bharti Airtel Ltd. held that dues cannot be set off during the Corporate Insolvency Resolution Process (CIRP) of a Corporate Debtor under the Insolvency and Bankruptcy Code, 2016 (IBC Code). This being a much-required clarification to the pertinent legal conundrum, upholds the legislative intent of the code and protects the rights of other creditors as well. The authors thus, seek to highlight the judiciousness of the judgment in light of the legislative intent and the implications of allowing setoff during the CIRP.

Factual Matrix

The CIRP of Aircel Limited was initiated on 12.03.2018. Aircel Limited entered into a Spectrum Trade Agreement with Bharti Airtel (Airtel) in April 2016. Airtel was directed to make a payment of Rs. 453 Crore to the Aircel as per the Supreme Court order dated 08.01.2019 in Contempt Petition No. 271/2019. However, Airtel only paid an amount of Rs. 341 Crore and Set off a sum of Rs. 112 Crore (Set off amount) on the account of dues owed by the Aircel to Airtel.

Resolution Professional of Aircel denied Airtel its right to set off the amount of Rs.112 Crore. Supreme Court vide its order dated 12.02.2019 in Civil Appeal No. 5744/2018 directed the Adjudicating Authority i.e. National Company Law Tribunal (NCLT) Mumbai to decide whether Airtel can set off the amount during the CIRP. NCLT Mumbai answered in affirmative that Airtel can set off its due during the CIRP and against this decision, an appeal was filed before the NCLAT.

Analysis of the Judgment

NCLAT held that no dues can be recovered from the corporate debtor when the moratorium imposed under Section 14 of the code is in force. It further held that accounting conventions cannot supersede the express provisions laid down in the code as the code has an overriding effect vide Section 238 of the Code.

Legislative Intent and Scheme of Code

A cursory glance at the scheme of the code will reveal that the code is primarily divided into three parts i.e. Corporate Insolvency Resolution Process, Liquidation, and Personal Insolvency. Liquidation of a corporate debtor is governed by IBBI (Liquidation Process) Regulations, 2016. Regulation 29 of the same provides for the mutual set off between the creditor and the corporate debtor. Furthermore, Section 173 of the code also provides for mutual credits and set off in case of Personal Insolvency.

However, no provision either under Part II of the code or IBBI (CIRP) Regulations, 2016 prescribes for the set off during the CIRP. It is pertinent to mention that this differential treatment concerning the set-off is primarily due to the reason that during the CIRP, the proceedings against the corporate debtor are collective in nature. Claims of all creditors are addressed altogether in the resolution plan. This is substantially different from liquidation wherein the creditors have the liberty to proceed individually against the corporate debtor, they have the right under Section 52 of the code not to relinquish their security and proceed against the corporate debtor under relevant laws.

At this juncture, it is also pertinent to mention that the Supreme Court in the case of Swiss Ribbon v Union of India made certain observations towards the set-off of claim at the resolution stage. It noted that;

“61. Insofar as set-off and counterclaim are concerned, a set-off of amounts due from financial creditors is a rarity. Usually, financial debts point only in one way—amounts lent have to be repaid. However, it is not as if a legitimate set-off is not to be considered at all. Such set-off may be considered at the stage of filing of proof of claims during the resolution process by the resolution professional, his decision being subject to challenge before the adjudicating authority under Section 60.”

This observation was made in the context of argument raised by the corporate debtor that they are not allowed to set off the claims at the admission stage of the insolvency petition. Therefore, the abovementioned observation by the Supreme Court cannot be construed for the benefit of a creditor who can set off its claims against the corporate debtor during the CIRP. Thus, the NCLAT was right in upholding the legislative intent and the scheme of the code by not allowing the Airtel to set off its dues.

Rights of Other Creditor

In the instant case, the dues which were set off by Airtel was in its capacity of an operational creditor. Under normal circumstances, Airtel would have to file its claim of Rs. 112 Crore as an operational creditor and it will be upon the resolution applicant to allocate the amount against airtel’s claim. As per Section 30(2) of the code operational creditor is only entitled to liquidation amount and any amount above that is at the discretion of the Resolution Applicant subject to confirmation of the Committee of Creditor (COC). However, by allowing the set-off, NCLT Mumbai has given preferential treatment to Airtel over other operational creditors as it was able to recover its dues in totality whereas payment to other operational creditors will be dependent on the resolution plan. NCLT Mumbai failed to appreciate the fact that airtel being an operational creditor is to be treated at par with other operational creditors and cannot be given preferential treatment.

No Recovery during Moratorium

Section 14 of the code provides the moratorium prohibiting recovery against the corporate debtor. The Bankruptcy Law Reforms Committee, 2015 which recommended the framework of the Code has also prescribed the reasons for the provision of the moratorium of the code. The Committee states that; (Section 5.3.1 of the Report)

“The motivation behind the moratorium is that it is value maximizing for the entity to continue operations even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP. The order for the moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or expected claims from old lawsuits, or on new lawsuits, for any manner of recovery from the entity”

The moratorium has been given the widest meaning by including the term any manner of recovery, which will include set off of earlier dues as well. Furthermore, Delhi High Court in the case of Power Grid Corporation of India v. Jyoti Infrastructure held that proceedings under Section 14 of the Code would those proceedings which will have a dissipating or diminishing effect upon the assets of the corporate debtor. In the instant case, set off of dues by the Airtel amounts to recovery from the Aircel which cannot since the moratorium is in force. Therefore, NCLAT had rightly denied the Airtel right to set off during the moratorium.

Conclusion

The implications of the NCLT Mumbai’s decision of allowing set-off by Airtel would have huge implications for the Aircel and any other corporate debtor in other cases. It would not only create chaos by impliedly going against the whole purpose of the moratorium but also create an imbalance in favor of the creditor who has been allowed to set off the claims. It is pertinent to mention that the Corporate Resolution Process has been designed as a collective resolution process, failing which Liquidation is allowed. The nature of the process seeks to create parity between various creditors and no preference cannot be given to any similarly situated creditors. Consequently, allowing set-off at this stage would have completely thrown off the balance, design, and intent of the process and the same was rightly averted by NCLAT.