NCLT Mumbai (2019.05.01) in Bharti Airtel Limited. and Anr vs. Vijaykumar V. lyer (MA 230/2019 in CP No.302/IBC/NCL T /MB/MAH/2018 ) held that;
However, the unanimous decision is in favour of granting of set off so that only the net claims of the respective parties be settled. Thus, a conclusion can be drawn that the doctrine of set off or the accounting principle of netting off is an accepted principle to be adopted by the concerned parties.
While deciding such disputes revolving around claim or counterclaim or set off, it is expected to give due regards to this term "mutual dealings". The scope of this terminology is wide, which must not be applied in a restrictive manner.
Before I part with, it is necessary to place an important feature as appearing in Form B which is meant for submission of claim by operational creditor wherein as per clause 8 of the Form "the details of mutual credit, mutual debit between the Corporate Debtor and creditor are required to be informed which may be arrived by set off against the claim.
The amount of claim in Form B is not the gross amount to be furnished by Operational Creditor but only the amount after set off against respective claims. As a result, a conclusion can be drawn that the submission of Form B by Airtel Entity has given an entitlement of netting off the amount.
To conclude, this Bench is of the view that the applicant is legally entitled under the insolvency code to set off the amount of ~ 112 Crores while making a payment of the amount retained out of the total consideration settled as per Spectrum Trading Agreement. Resultantly, I hereby hold that this application deserves to be Allowed.
Excerpts of the order;
# 9. The Airtel Entities (Buyer/ Operational Creditor), acting in compliance with the Hon'ble Supreme Court's order, released the withheld amount of approximately INR 453.73 Crores in the following manner:
i. Payment of INR 341.80 Crores (i.e. 75% of the withheld amount) to Aircel Entities on 10.01.2019; and
ii. Application of the balance amount (i .e. approx. INR 112 Crores) for set off against the dues of approx. INR 145.20 Crores owed by Aircel Entities to Airtel Entities.
# 9.1. To understand the transaction it is appropriate to put the figures on record hence it is clarified that out of the withheld amount of ~453 . 73 Crores which was to be paid by the Airtel Entities to Aircel Entities, the Airtel Entities had retained a sum of ~112 Crores and balance ~341 . 80 Crores was remitted by the Airtel Entities to the account of Aircel Entities. Since the Airtel Entities (Operational Creditor/ Buyer) have retained ~ 112 Crores by setting off against the total claim of ~453 . 73 Crores and paid only balance ~341.80 Crores to Aircel Entities, therefore, this Application is moved with the purpose to get an affirmation order about the action of the Operational Creditor of adjustment on net payment to Corporate Debtor.
# 10. A letter dated 10.01.2019 was sent to the RP of Corporate Debtor (Aircel Entities) apprising him of the remittance as also the Airtel Entities' legal and equitable right to claim the set off. In turn, the RP replied on 11.01.2019 denying the legal and equitable right of set off of Airtel Entities. This denial of RP is in question in the present MA.
# 11. Therefore, it is seen that the Airtel Entities (Buyer/ Operational Creditor), on cancellation of bank guarantee, returned the balance after setting off the amount (under consideration) owed by Aircel Entities (Corporate Debtor/ Seller) towards the unpaid invoices to Airtel Entities. Thus herein above summarily narrated the nature of the dispute to facilitate adjudication.
# 12. Thus prima facie a question arises that whether the set off is allowable under Insolvency Proceedings?
# 13(iv). Next argument revolves around the provisions of Section 30 of IBC. For reference, the relevant portion of this section is cited as under:- S. 30(2)(b) of the Code:
S. 30: Submission of resolution plan
{2} The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan-
(b) provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;" ( emphasis supplied )
Therefore, the argument is that even during CIRP proceedings the comparison has to be made with the 'liquidation value', meaning thereby that the liquidation value has to be taken into account while a Resolution Plan is to be approved. The purpose of this argument, as emphasised by the Ld. Counsel, is that CIRP proceedings and the Liquidation proceedings are two faces of the same coin, therefore, even at the time when the CIRP proceedings are in progress the terms & conditions of Liquidation proceedings has to be taken into account.
v. A vehement reliance is placed by Learned Senior Advocates on Regulation 29 of the 1881 (Liquidation process) Regulations, 2016,for reference, reproduced below :-
# Regulation 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. ' Illustration: X owes Rs. 100 to the corporate debtor. The corporate debtor owes Rs. 70 to X. After set off, Rs. 30 is payable by X to the corporate debtor.
The reason for placing reliance on this Regulation is that a mutual set-off is mandated in the Insolvency Code, therefore, the Airtel Entities have rightly claimed for set-off which was a legal entitlement duly approved by the aforementioned Regulation. Further to buttress their arguments, certain comparisons have been referred to establish that in such circumstances, the claim of set-off is otherwise admissible as well as acceptable under various other enactments.
For e.g. UNCITRAL Legislative Guide vide a specific chapter on 'rights of set off' has made a provision as under: -
" ... .. In the majority of jurisdictions, set-off rights are nat affected by the stay in insolvency and may be exercised after the commencement of insolvency proceedings, irrespective of whether the mutual obligations arose under a single contract or multiple contracts and irrespective of whether the mutual obligations matured before or after commencement of insolvency proceedings. In some jurisdictions a distinction is made; post-commencement set-off of obligations maturing prior to the commencement of insolvency proceedings is permitted, but post-commencement set-off of obligations maturing after the commencement of insolvency proceedings is limited or disallowed."
Therefore, the argument is that the right to set-off is a universally accepted right hence RP ought to have not raised any objection. It is also argued that Provincial Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1909 are also having provisions for mutual set-off.
# 19.8. Reverting back to the legal argument, Learned Counsel has stated that there is no right of legal set-off in the present case. Right to legal set-off exists only if such right is provided under a statute {for example: Order 8 Rule 6 of CPC) or is contractually provided for. Since the Insolvency and Bankruptcy Code, 2016 ("IBC") is a complete code, as held in M/s. lnnoventive Industries v. ICICI Bank (2018) 1 SCC 407, the provisions of CPC are not applicable in the present case. Further, none of the contracts between the 'Airtel Entities' and 'Aircel Entities' provide for a right to claim such set-off. There is also no provision under the IBC which allows parties to claim set-off during the CIRP process. Thus, once the Airtel Entities filed their claim before the RP and did not take into account any set-off towards the money withheld by it, no advantage of set-off can be claimed.
# 19.9. In the arguments it is reiterated that even there is no right for equitable setoff in the present case. The question as to under what circumstances an equitable set-off can be claimed is no longer res integra. The Hon'ble Supreme Court in a catena of cases and even the division bench of the Bombay High Court have laid down the following principles for governing equitable set-off:
(a) the right of set-off exists not only in cases of mutual debits and credits, but also where cross-demands arise out of the same transaction;
(b) a plea in the nature of equitable set-off is not available when the cross demands do not arise out of the same transaction and not connected in its nature and circumstances.
(c) a wrongdoer who has wrongfully withheld moneys belonging to another cannot invoke any principles of equity in his favour and seek to deduct therefrom the amounts that have fallen due to him;
(d) all cross-demands are to arise out of the same transaction or the demands are so connected in the nature and circumstances that they can be looked upon as a part of one transaction;
(e) both the parties must fill the same character in respect of the two claims sought to be set-off or adjusted
# 23. A serious argument has been raised that by allowing set-off a preferential treatment is given to an Operational Creditor i.e. Airtel Entities. It is elaborated that by way of set-off, this Operational Creditor is in fact recovering its Debt by jumping the queue of other Creditors. The Operational Creditor therefore be treated a preferred creditor over the claims of other creditors. In this connection what is to be seen is the correct position of law as well as the accurate position of accounts. This argument is nothing but an innovative reasoning because otherwise neither the RP nor the Corporate Debtor is acting in such manner which could be alleged to be a preferential treatment. Rather, the true picture is that before disbursement of the claim amount of the Corporate Debtor, the Operational Creditor has retained its money over which on merits there was no controversy. It is pleaded from the side of the RP/ Respondent that the said Operational Creditor (Airtel Entities) has lodged their respective claims on Form No. B which is required to be treated at par with other claimants. If this method is permitted, then there was no use of submission of Form No. B as the same shall stood paid as an adjustment leaving behind no outstanding claim to be received from Aircel Entities. At this juncture, it is worth to mention that in the case of Swiss Ribbons Pvt. Ltd. Versus Union of India [Writ Petition {Civil} No. 99 of 2018} Order dated 25.01.2019 although it is noted that a Corporate Debtor is required to be preserved as a going concern, however, it has also been observed that set-off may be considered at the stage of filing of proof of claims during the Resolution Process. Otherwise also, while lodging Form No. B it is obvious that inter se mutual debit and credit entries are supposed to be reflected in the Statement of Accounts to arrive at a figure of claim amount. Therefore, it is wrong to say that a preference is given to a particular Operational Creditor. This method of inter se adjustment ought to be available to all other Creditors (Financial / Operational), naturally if an amount is available for mutual adjustment.
# 24. While reading the judgment of Swiss Ribbons we have noticed that at the time of filing of Resolution Plan, the Resolution Applicant is to take into account the amount of set-off in terms of Section 30(2)(b) of The Code, which provides that: for the repayments of the debts of operational creditor shall not be less than the amount to be paid to the operational creditor in the event of liquidation of the Corporate Debtor U/s 53 of the Code. Interestingly, it is made clear in Section 30{2) that the Resolution Professional shall examine Resolution Plan and confirm that such Resolution Plan wherein made a provision for the payment of the debts of Operational Creditors which shall not be less than the amount to be paid to the Operational Creditors in the event of a liquidation of the Corporate Debtor u/s 53 of the Insolvency Code. Therefore, the argument of the Respondents ( Aircel ) that set off is the subject matter at the stage of liquidation and not at this stage, is not sustainable. This argument is required to be turned down because of the simple reason that even at the CIRP stage a resolution plan is to be examined keeping in mind the provisions of section 53 i.e. Distribution of assets on Liquidation. At that stage of Liquidation the Ld. Counsel of Aircel entities are in agreement that netting off is permissible. If that be so, that the Aircel entities are in agreement that under Liquidation process only net amount is to be squared up, then a Resolution Applicant while submitting a Resolution Plan is duly authorised to keep in mind the net values for which a provision is to be made as prescribed u/s 30(2)(b) of The Code, while submitting a Resolution Plan. Therefore, my humble opinion, whatever is the stage, either CIRP or Liquidation, a true and correct position of account should emerge from the records of both the sides. I am also of the strong view that if there is no restriction or prohibition in the statute, then a fair and reasonable approach is always is to be adopted. There is no specific bar or barrier in the Insolvency Code that up to CIRP process only gross amount/ claims are to be taken into account and the netting is permissible only in case of start of Liquidation. In the absence of any such restriction this Bench obviously has a liberty to take an independent view which is not at variance with the provisions of The Code, rather remove the ambiguity between a gross claim or net claim, that too at what stage.
# 25. As far as the stand of the Respondent /Aircel entities is concerned that set off is admissible but only at the stage of Liquidation being specifically provided under Regulation 29 of IBBI (Liquidation process) Regulations 2016, which allows mutual credit and set out that where there are mutual dealings between the Corporate Debtor and other party the adjustment is permissible. This regulation is unambiguous by making a provision that a sum due from one party shall be set off against the sums due from the other to arrive at net amount payable to the Corporate Debtor or to the other party. An illustration has also been given under this regulation. So the argument is that let the Liquidation stage come in this case for netting of the claims but not before that stage. It is also vehemently pleaded that all the decisions as relied upon by the Petitioner revolve around the Liquidation process and the Liquidation proceedings thereafter. In fact, the case laws were of that era when there was no system of submission of Resolution Plan and the only option available was the start of Liquidation. Due to this reason, when there was no system of restructuring or revival of a Debtor Company under financial stress and the only statute available was law of Liquidation, therefore, naturally the case laws available on this subject is confined to Liquidation process. However, the unanimous decision is in favour of granting of set off so that only the net claims of the respective parties be settled. Thus, a conclusion can be drawn that the doctrine of set off or the accounting principle of netting off is an accepted principle to be adopted by the concerned parties.
26. There was argument and counter argument in respect of the term "mutual dealings" used in regulation 29 of IBBI (Liquidation Process Regulation). This terminology has also been thoroughly examined by the Hon' ble Courts and in one such case of Gokul Chit Funds and Trades Pvt. Ltd. Thoundasseri Kochu Ouseph Vareed and Others (supra), it was made clear that several distinct or independent transactions entered into between the same parties are enough to permit adjustment so as to arrive at a net figure of payment, either to the Creditor or to the Debtor. It is not necessary that set off is permissible in respect of same nature of transaction. This conservative or strict condition has a limited scope of its application, such as Income Tax laws where set off of Loss is allowed against the same nature of transaction. In my humble opinion, the terminology "mutual dealings" is a conscious Legislation. While deciding such disputes revolving around claim or counterclaim or set off, it is expected to give due regards to this term "mutual dealings". The scope of this terminology is wide, which must not be applied in a restrictive manner.
27. Before I part with, it is necessary to place an important feature as appearing in Form B which is meant for submission of claim by operational creditor wherein as per clause 8 of the Form "the details of mutual credit, mutual debit between the Corporate Debtor and creditor are required to be informed which may be arrived by set off against the claim. The amount of claim in Form B is not the gross amount to be furnished by Operational Creditor but only the amount after set off against respective claims. As a result, a conclusion can be drawn that the submission of Form B by Airtel Entity has given an entitlement of netting off the amount.
28. To conclude, this Bench is of the view that the applicant is legally entitled under the insolvency code to set off the amount of~ 112 Crores while making a payment of the amount retained out of the total consideration settled as per Spectrum Trading Agreement. Resultantly, I hereby hold that this application deserves to be Allowed.
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Blog; Mutual Debts - Right of Set-off & Banker’s Lien in IBC
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