2024 INSC 15

C.A. Nos. 3088-3089 of 2020 Page 1 of 41

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 3088-3089 OF 2020

BHARTI AIRTEL LIMITED AND ANOTHER ..... APPELLANTS

VERSUS

VIJAYKUMAR V. IYER AND OTHERS ..... RESPONDENTS

SANJIV KHANNA, J.

The present appeals raise an interesting question on the right

to claim set-off in the Corporate Insolvency Resolution Process,

when the Resolution Professional proceeds in terms of clause (a)

to sub-section (2) of Section 25 of the Insolvency and Bankruptcy

Code, 2016

1

to take custody and control of all the assets of the

corporate debtor.

2. In order to decide the issue raised in these appeals, we are required

to refer to the facts in brief:

2.1 In April 2016, Bharti Airtel Limited and Bharti Hexacom Limited

2

1

For short, ‘IBC’.

2

For short- ‘The appellants’ or ‘Airtel entities’. J U D G M E N T

C.A. Nos. 3088-3089 of 2020 Page 2 of 41

entered into eight spectrum trading agreements with Aircel Limited

and Dishnet Wireless Limited

3

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

4

, 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

5

. By the interim order dated 3

rd

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 the Airtel entities agreed to furnish the

bank guarantees to the DOT on behalf of the Aircel entities. The

Airtel entities were to deduct Rs.586.37 crores from the

3

For short- ‘Aircel entities’.

4

For short- ‘DoT’.

5

For short- ‘the TDSAT’.

C.A. Nos. 3088-3089 of 2020 Page 3 of 41

consideration payable to the Aircel entities under the spectrum

transfer agreements. On the Aircel entities replacing the bank

guarantees furnished by the Airtel entities and the Airtel entities

receiving the bank guarantees from the DOT, Rs.411.22 crores

were payable by the Airtel entities to the Aircel entities.

2.3 TDSAT vide order dated 9

th

January 2018 held that the DOT’s

demand of Rs.298 crores against the Aircel entities was untenable,

and directed the DoT to return the bank guarantees to the Aircel

entities. However, the bank guarantees were not returned by the

DoT, which preferred Civil Appeal No. 5816 of 2018 before this

Court. Cross-appeals were filed by Aircel entities.

2.4 This Court by order dated 28

th

November 2018 held at the interim

stage, that the order of the TDSAT dated 9

th

January 2018, insofar

as bank guarantees are concerned, shall be given effect to.

However, the DoT did not return the bank guarantees.

2.5 In view of the aforesaid, the Airtel entities wrote to the bank seeking

confirmation of cancellation of the bank guarantees. As the banks

were reluctant, the Airtel entities approached this Court, which vide

order dated 8

th

January 2019, directed that the bank guarantees

shall be cancelled and shall not be used for any purpose

whatsoever.

C.A. Nos. 3088-3089 of 2020 Page 4 of 41

2.6 Thereupon the Airtel entities made a payment of Rs.341.80 crores

due to the Aircel entities on 10

th

January 2019. The balance amount

of Rs.145.20 crores was set-off by the Airtel entities on the ground

that this amount was owed by the Aircel entities to the Airtel entities.

According to Airtel entities, Rs.145.20 crores was the adjusted or

the net amount payable by the Aircel entities towards operational

charges, SMS charges and interconnect usage charges

6

to the

Airtel entities.

2.7 In the meanwhile, Corporate Insolvency Resolution Process was

initiated against Aircel entities, namely Aircel Limited and Dishnet

Wireless Limited. The Adjudicating Authority

7

, Mumbai Bench,

admitted the petitions against Aircel Limited and Dishnet Wireless

Limited vide the orders dated 12

th

March 2018 and 19

th

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

8

, in light of Telenor’s merger with

Bharti Airtel Limited, effective from 14

th

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

6

For short- ‘interconnect charges’.

7

Section 5(1) of IBC– “Adjudicating Authority”, for the purposes of this Part, means National Company

Law Tribunal constituted under Section 408 of the Companies Act, 2013 (18 of 2013).

8

For short- ‘Telenor India’.

C.A. Nos. 3088-3089 of 2020 Page 5 of 41

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 12

th

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 entities,

consequent to the discharge and cancellation of the bank

guarantees. Bharti Airtel Limited was asked to pay Rs.112.87

crores to Aircel entities, which were undergoing Corporate

Insolvency Resolution Process, failing which the Resolution

Professional would be obligated to take steps for recovery. The

Airtel entities objected on several 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. Their reply and claim for set-

off was rejected by the Resolution Professional.

C.A. Nos. 3088-3089 of 2020 Page 6 of 41

2.11 The Airtel entities thereupon approached the Adjudicating Authority

in Mumbai, who, vide order dated 1

st

May 2019 held that the Airtel

entities had a right to set off Rs.112.87 crores from the payment,

which was retained, and due and payable to Aircel entities.

2.12 This order was challenged by the Resolution Professional before

the National Company Law Appellate Tribunal

9

. The NCLAT vide

order dated 17

th

May 2019 allowed the appeal, inter alia, holding

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.

Meaning of set-off and types and principles of set-off.

3. Set-off in generic sense recognises the right of a debtor to adjust

the smaller claim owed to him against the larger claim payable to

his creditor.

10

Philip R. Wood

11

calls it a form of payment. Palmer

12

9

For short- ‘NCLAT’.

10

Philip R. Wood, Set-off and Netting, Derivatives, Clearing Systems, (Sweet & Maxwell 2007).

11

Ibid.

12

Kelly R. Palmer, The Law of Set Off in Canada (Canada Law Book 1993).

C.A. Nos. 3088-3089 of 2020 Page 7 of 41

notes a distinction between ‘set-off’ as in accounting, and ‘set-off’

as a defence. The former focuses on the practical effect of set-off

which results in discharge of reciprocal obligations, while the latter

focuses on set-off pleaded as a defence to a claim, albeit not as a

‘sword’.

4. Set-off is given legal preference for three reasons. First, 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.

13

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

13

Jurong Aromatics Corporation Pte Ltd. and Others v. BP Singapore Pte Ltd. and Another, (2018)

SGHC 215. (High Court of Republic of Singapore)

C.A. Nos. 3088-3089 of 2020 Page 8 of 41

in the modern era indistinguishable from one another.

14

It is

necessary to briefly explain the contours of contractual set-off,

statutory/legal set-off, equitable set-off and insolvency set-off.

6. Contractual set-off is a matter of agreement, rather than a separate

application of set-off. The parties are free to mutually agree on the

outcomes they desire. Being consensual, when expressly stated,

the normal rules of set-off regarding mutuality of credits or debts,

liquid debts, and connected debts – aspects relevant and noticed

below while dealing with statutory/legal set-offs or even insolvency

set-off – may not apply. The contract, however, should be within

bounds of legality and public policy.

15

Further, the normal

requirements of the law of contracts, viz. intention to create legal

relationship, acceptance, consideration etc. should be established

for a valid contractual set-off.

16

7. Ascertaining the applicability of contractual set-off requires an

assessment of the understanding whether the right is conferred by

the agreement, as the court gives effect to the intention of the

parties as to how they should deal.

17

The right to set-off may be

explicit in the words of the agreement, or can be gathered by

14

Federal Commerce and Navigation Co. v. Molena Alpha Inc., (1978) Q.B. 927. (Lord Denning)

15

Palmer, supra note 12, at 263.

16

Palmer, supra note 12, at 263.

17

Ministre du Revenu national c. Caisse Populaire du bon Conseil, 2009 SCC 29 (S.C.C.) (Supreme

Court of Canada)

C.A. Nos. 3088-3089 of 2020 Page 9 of 41

existence of oral or implied agreement to set-off, reflecting an

understanding to the said effect. There are earlier judgments in

common law countries that suggest that courts may rely on the

equitable foundations of set-off to relax the evidentiary burden

required to prove an agreement to set-off.

18

It is suggested that

courts accept slighter evidence of agreement to set-off than is

usually required in order to establish disputed facts,

19

but this is too

broad a statement. Rather, the courts should consider that netting

of cross dues is both legitimate and equitable, and in that context

make an assessment of the relevant facts to decide whether or not

the set-off rights are conferred.

8. Statutory or legal set-off is created by a statute. For example, Order

VIII Rule 6 of the Code of Civil Procedure, 1908

20

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

18

Jeffs v. Wood, [1723] 2 Eq Ca. Ab. 10.

19

Canadian Encyclopedic Digest, Release 3, “Personal Property” by Gloria Mintah, § 187, CD-ROM

(Thomson Reuters Canada Limited, August 2009); See also Palmer, supra note 12, at 263.

20

Order VIII Rule 6. Particulars of set-off to be given in written 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 set-

off, 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.

C.A. Nos. 3088-3089 of 2020 Page 10 of 41

legally recoverable by the defendant from the plaintiff, but not

exceeding the pecuniary limits of the jurisdiction of the court. It

requires that both the parties should fill the same character as they

fill in the plaintiff’s suit. The defendant may, at the first hearing of

the suit, and not afterwards, unless permitted by the court, present

the written statement containing particulars of debts sought to be

set-off.

21

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.

22

9. A few judgments of this Court and the High Courts allow the

defendant to claim equitable set-off in respect of an unascertained

sum of money payable as damages. Equitable set-off can also be

claimed in respect of an ascertained sum of money.

23

However, the

claim for an equitable set-off must have a connection between the

plaintiff’s claim for the debt and the defendant’s claim to set-off,

which would make it inequitable to drive the defendant to a separate

suit.

24

It has been accordingly held that the claim for set-off should

21

For the purpose of the present decision, we need not examine the contours and conditions of Order

VIII Rule 6 CPC.

22

Citibank Canada v. Confederation of Life Insurance Company, 42 CRB (3)(d) 288.

23

Ramdhari v. Premanand, 19 Cal WN 1183.

24

Maheswari Metals & Metal Refinery, Bangalore v. Madras State Small Industries Corporation, AIR

1974 Mad 39.

C.A. Nos. 3088-3089 of 2020 Page 11 of 41

arise out of the same transaction, or transactions which can be

regarded as one transaction. Equitable set-off is allowed in

common law, as distinguished from legal set-off, which is allowed

by the court only for an ascertained sum of money and is a statutory

right. We shall be subsequently examining the right to equitable set-

off while examining the provisions of the IBC.

10. Rory Derham on the law of set-offs observes that insolvency set-

offs should not be equated with equitable set-offs.

25

This statement

reflects the development of law in the United Kingdom, which has

resulted in enactment of special provisions on set-off in case of

insolvency. We need not examine in detail the law as applicable to

insolvency set-off in the United Kingdom for the present decision,

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.

25

Rory Derham, Derham on the Law of Set-Off (Oxford University Press 4

th

ed. 2010).

C.A. Nos. 3088-3089 of 2020 Page 12 of 41

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 IBC. The Corporate Insolvency Resolution Process

focuses on and fosters rehabilitation, revival and resolution of the

corporate debtor, whereas the liquidation process focuses on the

constellation of assets of the company in liquidation, and

distribution and payment to the creditors from the liquidation estate

in terms of the order of preference set out in the insolvency statute.

13. Unlike the provisions of the Companies Act, 1956 or the Companies

Act, 2013, IBC in the case of Corporate Insolvency Resolution

Process does not give the indebted creditors the right to set-off

against the corporate debtor. The earlier enactments – the

C.A. Nos. 3088-3089 of 2020 Page 13 of 41

Companies Act, 1956 vide Section 529, and the Companies Act,

2013 vide Section 325 (now omitted) – did permit set-off per the

Provincial Insolvency Act, 1920, which enactment is now repealed.

Accordingly, under the Companies Acts, in terms of the provisions

of Section 46 of the Provincial Insolvency Act, 1920, indebted

creditors’ right to set-off against the corporate debtor was statutorily

recognised subject to satisfaction of certain conditions.

Significantly, in the case of partnerships and individual

bankruptcies, Section 173

26

of the IBC permits set-off. Regulation

29 of the Insolvency and Bankruptcy Board of India (Liquidation

Process) Regulations, 2016

27

provides for mutual credits and set-

off and reads:

“29. Mutual credits and set-off.— Where there are

mutual dealings between the corporate debtor and

another party, the sums due from one party shall be set

off against the sums due from the other 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

26

Section 173. Mutual credit and set-off.—(1) Where before the bankruptcy commencement date,

there have been mutual dealings between the bankrupt and any creditor, the bankruptcy trustee shall—

(a) take an account of what is due from each party to the other in respect of the mutual dealings and

the sums due from one party shall be set-off against the sums due from the other; and

(b) only the balance shall be provable as a bankruptcy debt or as the amount payable to the bankruptcy

trustee as part of the estate of the bankrupt.

(2) Sums due from the bankrupt to another party shall not be included in the account taken by the

bankruptcy trustee under sub-section (1), if that other party had notice at the time they became due

that an application for bankruptcy relating to the bankrupt was pending.

27

For short- ‘the Liquidation Regulations’.

C.A. Nos. 3088-3089 of 2020 Page 14 of 41

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

28

deals with the

exclusion of assets that do not form part of the liquidation estate.

Section 36(4) permits the Insolvency and Bankruptcy Board of

India

29

to specify assets which could be subject to set-off on account

of mutual dealings between the corporate debtor and the creditor.

When an asset is excluded from the liquidation estate, it is not

available for distribution in the liquidation process. It follows that if

a creditor exercises and is allowed set-off, then in terms of Section

36(4) of the IBC this creditor is given a preferred status over others,

including the secured creditors, to the extent of the set-off value.

28

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 set-

off in multilateral trading or clearing transactions;

(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided

such assets are not held on account of avoidance transactions that may be avoided under this Chapter;

(d) assets of any Indian or foreign subsidiary of the corporate debtor; or

(e) any other assets as may be specified by the Board, including assets which could be subject to set

off on account of mutual dealings between the corporate debtor and any creditor.

29

For short- ‘the Board’.

C.A. Nos. 3088-3089 of 2020 Page 15 of 41

15. The Liquidation Regulations have been framed in exercise of

powers conferred on the Board by Sections 5, 33, 34, 35, 37, 38,

39, 40, 41, 43, 45, 49, 50, 51, 52, 54, 196 and 208 read with Section

240 of the IBC. Notwithstanding the omission in the Liquidation

Regulations to refer to Section 36(4) of the IBC, set-off on account

of mutual dealings is permitted in terms of Regulation 29 of the

Liquidation Regulations. The sums due mutually can be set off to

arrive at the net amount payable to the corporate debtor or the other

party. The exclusion will result in reduction of the liquidation estate

and therefore has consequences as noticed above. In the present

case, we are not concerned with what is to be included and is a

part, or not a part of the liquidation estate.

16. The expression ‘mutual dealings’ is the condition to be satisfied for

insolvency set-off under Regulation 29. We will examine what is

meant by the expression ‘mutual dealings’, and how insolvency set-

off is different from contractual, statutory and equitable set-off.

17. Insolvency set-off under the United Kingdom insolvency law was

examined in Re.: Bank of Credit and Commerce International

SA (No. 8)

30

, to imply that the set-off must relate to dealings prior

to bankruptcy. It states in explicit terms that the requirement of

30

[1996] Ch. 245. (Appeal Committee of the House of Lords)

C.A. Nos. 3088-3089 of 2020 Page 16 of 41

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

31 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 is a

deemed account by which the claim and counterclaim are

automatically reduced to a net balance. The original choses in

action, that is, the claim and the counterclaim, are in effect replaced

by a claim to a net balance. We must also note that the provisions

31

[1996] A.C. 243. (House of Lords)

C.A. Nos. 3088-3089 of 2020 Page 17 of 41

of Section 323 of the Insolvency Act, 1986, as applicable in the

United Kingdom uses the expressions “mutual credits, mutual

debts, or other mutual dealings between the bankrupt and any

creditor of the bankrupt, proving or claiming to prove for a

bankruptcy debt.” Further, Rule 2.85 of the Insolvency Rules, 1986,

applicable to the administration, which is similar to the Corporate

Insolvency Resolution Process, states that at the time of

distribution, only the balance (if any) of the account held by the

creditor is provable in the administration. Alternatively, the balance

(if any) owed to the company is payable to the administrator as a

part of the assets, subject to the exceptions as provided.

17.2 There are also decisions as in the case of National Westminster

Bank Ltd. v. Halesowen Presswork & Assemblies Ltd.

32

, which

highlight the mandatory nature of insolvency set-off in the United

Kingdom. The Insolvency Rules, 1986 imply that the right to set-off

co-exists with the moratorium during administration, because of the

time at which the dues owed to each party are calculated.

33

The set-

off does not occur automatically once the company enters into the

administration process. It applies once the intention to distribute the

assets is announced by the administrator. Also, the doctrine of set-

32

1972 AC 785.

33

Derham, supra note 25, ¶6.124.

C.A. Nos. 3088-3089 of 2020 Page 18 of 41

off does not apply in case of company voluntary arrangement under

Part I of the Insolvency Act, 1986. Rory Derham observes that the

insolvency set-off section not being expressly applicable to a

company voluntary arrangement, any set-off, in the absence of

contractual right of set-off, does not apply. He observes that the

right to set-off in the absence of contractual right to set-off depends

on the statute of set-off and equitable set-off. Further, a claim

against the corporate debtor incurred after initiation of the

administration cannot be set-off against the debtor’s cross-claim for

lack of mutuality. A claim against the debtor after initiation of

administration is not against the corporate debtor itself.

18. The High Court of Australia in Gye v. McIntyre

34

states 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

34

(1991) 171 CLR 609.

C.A. Nos. 3088-3089 of 2020 Page 19 of 41

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

35

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 company under a

specific agreement to which the creditor and the corporate debtor

are also parties.

20. The Court of Appeal of Republic of Singapore in BP Singapore Pte

Ltd. (supra) had also examined whether the claim of set-off in the

said case was available under the head ‘equitable set-off’. The

court observed that it is not necessary that the claim and cross-

claim should arise on the same contract, albeit it should be a close

and inseparable relationship or connection between the dealings

and the transactions which give rise to the respective claims, such

that it would offend one’s sense of fairness or justice to allow one’s

35

(2020) SGCA 09.

C.A. Nos. 3088-3089 of 2020 Page 20 of 41

claim to be enforced without regard to the other. The law relating to

equitable set-off in India is explained in paragraph 9 supra. Claim

for equitable set-off should arise out of the same transaction, or

transactions that can be regarded as one transaction. There should

be a connection between the plaintiff’s claim for the debt and the

defendant’s claim for set-off, which would make it inequitable to

drive the defendant to a separate suit.

21. On the question of mutual dealings, Airtel entities have referred to

the judgment of the High Court of Kerala in Gokul Chit Funds and

Trades Private Ltd. v. Thoundasseri Kochu Ouseph Vareed

and Others

36

, which we believe allows set-off in terms of the Kerala

Insolvency Act, 1955. In the context of mutual dealings, it observes

that mutuality can exist when there are even several distinct and

independent transactions, albeit between the same parties

functioning in the same right or capacity. It is not necessary that the

same should arise out of a single transaction. When the

transactions between the parties, which are connected, give rise to

reciprocal claims and demands on account of the parties acting on

the same right or capacity, principle of mutuality will be satisfied.

Thus, the contention that each kuri is a distinct and separate

transaction was not accepted so as to defeat the mandatory right

36

AIR 1977 Ker 68.

C.A. Nos. 3088-3089 of 2020 Page 21 of 41

to set-off observing that rights and liabilities arising out of the

different chit fund transactions should be allowed to be adjusted

against each other.

22. In light of the aforesaid discussion, the expression ‘mutual dealings’

for the purpose of Regulation 29 of the Liquidation Regulations, is

wider than the statutory set-off postulated under Order VIII Rule 6

of CPC, as well as, 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

C.A. Nos. 3088-3089 of 2020 Page 22 of 41

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.

37

Further, a debtor cannot, after notice of assignment of

his debt by the creditor, improve his position as regards set-off by

acquiring debts incurred by the assignor creditor which are payable

to a third party. This will not meet the mandate of mutual dealing.

This will be contrary to equity and would amount to misuse of the

provision for insolvency set-off.

38

One must also be on guard

against misuse of insolvency set-off in case of voluntary winding

up.

24. Insolvency set-off as a proposition mitigates against the doctrine of

pari passu. Insolvency set-off gives primacy and an overriding

effect to the creditor who is entitled to set-off mutual credits. When

cross demands are set-off, the assets available for distribution

amongst the general body of creditors, would be depleted in favour

of a single creditor with a set-off entitlement. This consequently

37

The position may be different where the dues are payable by the debtor to the Corporate Debtor, in

which case the liquidator may seek adjustment as a form of payment by the debtor. The reason is that

the liquidator is under a statutory obligation to recover the dues from the debtor. Adjustment in such

cases is statutory or legal set-off under the IBC/Companies Act. Insolvency set-off in Regulation 29 will

not apply for want of mutuality.

38

This will not satisfy the requirements of legal/statutory set-off and equitable set-off under the Code

of Civil Procedure, 1908.

C.A. Nos. 3088-3089 of 2020 Page 23 of 41

results in reduction of the dividend payable. In other words, it puts

and grants priority to the creditor, even an operational creditor, to

the extent of the set-off. Some jurists have doubted the efficacy of

the justification that right to set-off acts as a stimulus to trade and

commerce on the ground that rarely any party would treat the

possibility of set-off as a form of security. The principle of pari passu

though not explicitly mentioned in the IBC, is apparent as the edifice

of Section 53 read with Section 52 of the IBC, as these provisions

create a liquidation hierarchy with the stipulation that each class of

creditors shall rank equally among each other. The same class of

creditors should be given equal treatment. As set-offs can mitigate

against the pari passu principle, they should be allowed when

mandated, or can be justified by law.

25. Apart from the pari passu principle which refers to treating creditors

of the same class in the same manner, the United Kingdom

insolvency law also relies on the common law principle of anti-

deprivation. 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

C.A. Nos. 3088-3089 of 2020 Page 24 of 41

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.

39

The anti-deprivation principle on the

other hand aims at conservation of the insolvent estate for the

benefit of the creditors.

40

26. Having examined the different concepts of set-off including

insolvency set-off, we would now like to examine the contentions

raised by the parties with reference to the provisions of the

Corporate Insolvency Resolution Process under the IBC.

27. The IBC is an Act to consolidate and amend the laws relating to

reorganisation and insolvency resolution of corporate persons,

partnership firms and individuals in a time bound manner for

maximisation of value of assets of such persons, to promote

entrepreneurship, availability of credit and balance the interest of

stakeholders, etc. The IBC codifies the law of insolvency and

bankruptcy. The IBC is a complete code in itself, except where it

refers and permits application of the provisions of other

39

Belmont Park Investments v. BNY Corporate Trustee Services Ltd. [2012] 1 AC 383.

40

In the present decision, we are not examining the extent of, and the manner in which the anti-

deprivation principle is applicable in India.

C.A. Nos. 3088-3089 of 2020 Page 25 of 41

enactments, as has been consistently held by this Court in Indian

Overseas Bank v. RCM Infrastructure Ltd. and Another

41

,

Innoventive Industries Limited v. ICICI Bank and Another

42

,

Embassy Property Developments Private Limited. v. State of

Karnataka and Others

43

, and V. Nagarajan v. SKS Ispat and

Power Limited and Others

44

.

28. Section 238

45

of the IBC states that the provisions of the Code

would override other laws. The provisions of this Code shall have

effect, notwithstanding anything inconsistent therewith contained in

any other law for the time being in force.

29. Section 243 deals with the repeal of certain enactments and also

incorporates the savings clause. Sub-section (1) states that

Provincial Insolvency Act, 1920 is hereby repealed. Sub-section (2)

does not apply in the present case. Provincial Insolvency Act, 1920

did not apply to the Corporate Insolvency Resolution Process

stage.

30. Given the aforesaid legal position, we do not think that the

provisions of statutory set-off in terms of Order VIII Rule 6 of CPC

41

(2022) 8 SCC 516.

42

(2018) 1 SCC 407.

43

(2020) 13 SCC 308.

44

(2022) 2 SCC 244.

45

Section 238. Provisions of this Code to override other laws.—The provisions of this Code shall

have effect, notwithstanding anything inconsistent therewith contained in any other law for the time

being in force or any instrument having effect by virtue of any such law.

C.A. Nos. 3088-3089 of 2020 Page 26 of 41

or insolvency set-off as permitted by Regulation 29 of the

Liquidation Regulations can be applied to the Corporate Insolvency

Resolution Process. The aforesaid rule would be, however, subject

to two exceptions or situations. The first, if at all it can be called an

exception, is where a party is entitled to contractual set-off, on the

date which is effective before or on the date 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

C.A. Nos. 3088-3089 of 2020 Page 27 of 41

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.

32. The second exception will be in the case of ‘equitable set-off’ when

the claim and counter claim in the form of set-off are linked and

connected on account of one or more transactions that can be

treated as one. 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. Set-off of

this nature does not require legal proceedings. Further, set-off of

money is to be given against money alone. It will not apply to

assets. Lastly, being an equitable right, it can be denied when grant

of relief will defeat equity and justice.

33. We would in fact borrow the term ‘transactional set-off’

46

instead of

equitable set-off, when we describe the second exception. The

46

See Derham, supra note 25 and Gerard McCormack, Set-off under the European Insolvency

Regulation (and English Law), 29 IIR 100, 100-117 (2020).

C.A. Nos. 3088-3089 of 2020 Page 28 of 41

reason is that the second exception refers to an ascertained

amount, which is a requirement for legal set-off under Order VIII

Rule 6 of CPC and at the same time relies on equitable right when

the statute is silent and there is no reason to deny set-off under the

common law. It is an equitable right because the transactions are

close and connected, harbingering the claim and the counterclaim.

It would be manifestly unjust to bifurcate the connected

transactions to accept and enforce the claim of one party without

adjusting the amount due to the second party. This, in our opinion,

does not contradict the eclipse by way of moratorium, because the

transactions are treated as singular and one. When transactions

are closely connected, a claim for transactional set-off during the

moratorium period on a claim by the Resolution Professional, is by

way of a defence to protect the legitimate expectation and respect

legal certainty.

34. Thus, while accepting contractual and transactional set-off on the

conditions specified, we have struck a balance with the doctrines of

pari passu and anti-deprivation, which we believe is just and fair.

Insolvency set-off in terms of Regulation 29 of the Liquidation

Regulations is statutory.

C.A. Nos. 3088-3089 of 2020 Page 29 of 41

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

47

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 member airlines. All payments

were channelised through the clearing house and at the end of the

accounting period, all debits and credits due to transactions were

47

1975 1 WLR 758.

C.A. Nos. 3088-3089 of 2020 Page 30 of 41

totalled to arrive at a figure for a net debit or credit. In the said case,

British Eagle went into liquidation and were net debtors to the

clearing house. They had a claim against Air France. The House of

Lords held that Air France was bound to pay the liquidator the

money owed to British Eagles.

48

The majority judgment also

observed that the clearing house medium was possibly analogous

to that of secured creditors, albeit without creation and registration

of security interests. Therefore, preference to the clearing house

agent would be contrary to public policy.

49

37. Our finding that the IBC is a complete code relying upon the

opening part of the enactment and Sections 238 and 243 takes care

and nullifies the argument raised by the appellant Airtel entities that

they are entitled to statutory set-off or insolvency set-off, in the

Corporate Insolvency Resolution Proceedings under Chapter II

Part II of the IBC. Regulation 29 of the Liquidation Regulations does

not apply to Part II of the IBC. The legislation or even the legislative

intent permits neither statutory set-off, nor insolvency set-off. In

support of our conclusion, we would like to refer to the statutory

48

McCormack, supra note 46.

49

The contractual and consequently the legal position has undergone a change as the IATA clearing

house rules have since been amended. Therefore, this judgment should be read and understood with

caution.

C.A. Nos. 3088-3089 of 2020 Page 31 of 41

provisions, and meet the arguments to the contrary raised by the

appellants.

38. This brings us to the argument raised by the Airtel entities who have

placed reliance on Section 30(2)(b)(ii) and Section 53 of the IBC.

The relevant provisions of the said Sections read as under:

“30. Submission of resolution plan. –

xx xx xx

(2) The resolution professional shall examine each

resolution plan received by him to confirm that each

resolution plan-

(b) provides for the payment of debts of operational

creditors in such manner as may be specified by the

Board which shall not be less than—

xx xx xx

(ii) the amount that would have been paid to such

creditors, if the amount to be distributed under the

resolution plan had been distributed in accordance with

the order of priority in sub-section (1) of Section 53,

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—

C.A. Nos. 3088-3089 of 2020 Page 32 of 41

(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 Consolidated Fund of

India and the Consolidated Fund of a State, if any,

in respect of the whole or any part of the period of

two years preceding the liquidation commencement

date;

(ii) debts owed to a secured creditor for any amount

unpaid following the enforcement of security

interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients

under sub-section (1) with equal ranking, if disrupting

the order of priority under that sub-section shall be

disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted

proportionately from the proceeds payable to each

class of recipients under sub-section (1), and the

proceeds to the relevant recipient shall be distributed

after such deduction.

Explanation.—For the purpose of this section—

C.A. Nos. 3088-3089 of 2020 Page 33 of 41

(i) it is hereby clarified that at each stage of the

distribution of proceeds in respect of a class of

recipients that rank equally, each of the debts will either

be paid in full, or will be paid in equal proportion within

the same class of recipients, if the proceeds are

insufficient to meet the debts in full; and

(ii) the term “workmen's dues” shall have the same

meaning as assigned to it in Section 326 of the

Companies Act, 2013 (18 of 2013).”

39. The Airtel entities have contested the conclusion by urging that

Section 30 of the IBC seeks to ensure that the assets and liabilities

of the corporate debtor, as recorded in the resolution plan,

correspond to the liquidation estate of the corporate debtor in the

event of liquidation. The provision is to ensure smooth transition

between reorganisation under the Corporate Insolvency Resolution

Process and the liquidation process. In case a contrary view is

taken, anomalies will arise. In the event the corporate debtor

undergoes liquidation, Section 36(4)(e) and Regulation 29 would

apply. However, if the Resolution Professional proceeds in terms of

Section 25 and secures the assets from the creditors, the creditors

would not be entitled to claim set-off during the course of the

Corporate Insolvency Resolution Process, which is earlier in the

point of time.

40. The arguments are fallacious and should not be accepted. Sub-

section (2)(b)(ii) to Section 30 does not support the contention of

C.A. Nos. 3088-3089 of 2020 Page 34 of 41

the Airtel entities. 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 sub-

section (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 creditors and not the amount payable by the creditors

to the corporate debtor. Thirdly, clause (ii) to Section 30(2)(b) has

appliance when the resolution plan is being considered for

approval. Fourthly, and for the reasons elaborated earlier, and in

C.A. Nos. 3088-3089 of 2020 Page 35 of 41

view of the specific legislative mandate as incorporated and

reflected in Chapter II Part II of the IBC, we should hold that the

provisions of the IBC relating to Corporate Insolvency Resolution

Process do not recognise the principle of insolvency set-off. We

would not extend it by implication, when the legislature has not

accepted applicability of mutual set-off at the initial stage, that is,

the Corporate Insolvency Resolution Process stage.

42. The judgment of this Court in Ebix Singapore Private Limited v.

Committee of Creditors of Educomp Solutions Limited and

Another.

50

, that one of the objects of the IBC is to provide for a

comprehensive and a time-bound framework with smooth transition

in between organisation and liquidation, has no application and

relevance to the context and issue in question. The observations

were made in the context of the time bound framework specified in

the IBC and the need to adhere to the timelines. Reorganisation or

resolution process should not get prolonged or continued

indefinitely.

43. Similarly, the decision in Swiss Ribbons Private Limited and

Another v. Union of India and Others

51

, which refers to a claim

for set-off being considered by the Resolution Professional during

50

(2022) 2 SCC 401.

51

(2019) 4 SCC 17.

C.A. Nos. 3088-3089 of 2020 Page 36 of 41

the resolution process, is an obiter dicta and not a ratio decidendi

to the issue in question. The judgment states that a set-off between

the corporate debtor and a financial creditor is a rarity. It also

observes that it is not the case that legitimate set-offs may not be

considered at all, and that they can be considered at the stage of

filing proof of claims. These observations were made to differentiate

between financial and operational creditors, and how the process

of filing an application for initiating the resolution process is distinct

viz. the financial creditors and operational creditors under the IBC.

Whether the set-off should be considered at the stage of filing of

proof of claims during the resolution process was not an issue

before the court in Swiss Ribbons (supra). These observations are

not ratio decidendi when we apply the inversion test and other tests

for the issue in question.

52

44. The judgment of this Court in The Official Liquidator of High

Court of Karnataka v. Smt. V. Lakshmikutty

53

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

52

Career Institute Educational Society v. Om Shree Thakurji Educational Society, 2023 SCC OnLine

SC 586.

53

(1981) 3 SCC 32.

C.A. Nos. 3088-3089 of 2020 Page 37 of 41

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)

54

of

the IBC, which confers jurisdiction on the Adjudicatory Authority to

entertain and dispose of any application or proceeding by or against

a corporate debtor, including claims against any of the subsidiaries

or any question of priority or question of law and facts, arising out

of or in relation to insolvency resolution or liquidation proceeds of

the corporate debtor, does not come to the aid of the Airtel entities.

These are enabling provisions which entitle the Adjudicating

Authority to go into several aspects to aid and assist the Corporate

Insolvency Resolution Process. They cannot be read as allowing a

creditor/debtor to claim set-off in the Corporate Insolvency

Resolution Process.

54

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 against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or

against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency

resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

C.A. Nos. 3088-3089 of 2020 Page 38 of 41

46. Relying upon several decisions under the United Kingdom

Insolvency Act and Rules, it has been argued that insolvency set-

off is self-executing. Reliance is placed on Innoventive Industries

Ltd. (supra), wherein it is observed that the English Insolvency Act

has served as a model for the IBC. We do not agree that insolvency

set-off under the IBC is automatic and self-executing. We do not

find any provision in the IBC which states so. In the context of the

IBC, insolvency set-off is neither automatic, nor self-executing.

47. Airtel entities have also argued that the definitions of ‘claim’ and

‘debt’ in sub-sections (6) and (11) of Section 3 of the IBC buttress

the argument that set-off under the IBC is self-executing.

55

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 self-

serving 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.

55

Section 3 Definitions. —

(6) “claim” means—(a) a right to payment, whether or not such right is reduced to judgment, fixed,

disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives

rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured,

disputed, undisputed, secured or unsecured.

(11) “debt” means a liability or obligation in respect of a claim which is due from any person and

includes a financial debt and operational debt.

C.A. Nos. 3088-3089 of 2020 Page 39 of 41

49. Reference is also made to the UNCITRAL Legislative Guide on

Insolvency Law

56

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 debtor. The focus and objective is entirely different.

Therefore, in our opinion, the said guide is of no avail or instructive

to us. Further, the provisions relating to Chapter II Part II being

explicit and not ambiguous, do not require purposive interpretation.

We should, however, take on record that the UNCITRAL guide

does distinguish between the set-off obligations maturing prior to

the commencement of the insolvency proceedings and set-off

obligations after the commencement of the insolvency

proceedings.

57

Only the former should be permitted in insolvency

56

UNCITRAL Legislative Guide on Insolvency Law, Chapter G. p.155-156 (2005).

57

Ibid.

C.A. Nos. 3088-3089 of 2020 Page 40 of 41

proceedings, while the latter should be disallowed or allowed to a

limited extent.

50. On the aspect of mutual dealings and also equity, it is to be noted

that adjustment of the inter-connect charges are under a separate

and distinct agreement. The telephone service providers use each

other’s facilities as the caller or the receiver may be using a different

service provider. Accordingly, adjustments of set-off are made on

the basis of contractual set-off. These are also justified on the

ground of equitable set-off. The set-off to this extent has been

permitted and allowed by the Resolution Professional. The

transaction for purchase of the right to use the spectrum is an

entirely different and unconnected transaction. The agreement to

purchase the spectrum encountered obstacles because the DoT

had required bank guarantees to be furnished. Accordingly, Airtel

entities, on the request of Aircel entities had furnished bank

guarantees on their behalf. The bank guarantees were returned

and accordingly Airtel entities became liable to pay the balance

amount in terms of the letters of understanding. The amounts have

become payable post the commencement of the Corporate

Insolvency Resolution Process. For the same reason, we will also

reject the argument that by not allowing set-off, new rights are being

created and, therefore, Section 14 of the IBC will not be operative

C.A. Nos. 3088-3089 of 2020 Page 41 of 41

and applicable. Moratorium under Section 14 is to grant protection

and prevent a scramble and dissipation of the assets of the

corporate debtor. The contention that the “amount” to be set-off is

not part of the corporate debtor’s assets in the present facts is

misconceived and must be rejected.

Conclusion

51. Having considered the contentions raised by the appellant Airtel

entities in detail, and in light of the provisions of the IBC relating to

the Corporate Insolvency Resolution Process, we do not find any

merit in the present appeals and the same are dismissed. There

will be no order as to costs.

......................................J.

(SANJIV KHANNA)

…...................................J.

(S.V.N. BHATTI)

NEW DELHI;

JANUARY 03, 2024.