| Headnote |
Issue for Consideration The present appeals raise a 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 s.25 of the Insolvency and Bankruptcy Code, 2016 to take custody and control of all the assets of the corporate debtor. Insolvency and Bankruptcy Code, 2016 – clause (a) to subsection (2) of s.25, s.238, s.243 – Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 – Regn. 29 – The appellant- Airtel entities argued 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:Insolvency and Bankruptcy Code, 2016 – Difference between the Corporate Insolvency Resolution Process and the liquidation process: Held: 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. [Para 12] Insolvency and Bankruptcy Code, 2016 – Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 – Regn. 29 – Code of Civil Procedure, 1908 – Or. VIII, r.6 – Application of the Provisions of statutory set-off to Corporate Insolvency Resolution Process: Held: The provisions of statutory set-off in terms of Or. VIII, r. 6 of CPC or insolvency set-off as permitted by Regulation 29 of the Liquidation Regulations cannot 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 – 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. [Paras 30 and 32] Words and Phrases – Set-off – Meaning of: Held: 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 – 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 crossdemands should compensate each other by deducting the lesser sum from the greater – 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. [Paras 3, 4 and 5] Words and Phrases – Contractual set-off – Meaning of: Held: 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 – 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 – 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 – The right to set-off may be explicit in the words of the agreement, or can be gathered by existence of oral or implied agreement to set-off, reflecting an understanding to the said effect. [Paras 6 and 7] Words and Phrases – Statutory or legal set-off: Held: Statutory or legal set-off is created by a statute – For example, Order VIII Rule 6 of the CPC 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 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. [Para 8] Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 – Regn. 29 – Mutual dealings: Held: 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. [Para 22] |
