Insolvency set-off is neither automatic nor self-executing under IBC: SC

The Supreme Court in a recent judgement rejected telecom firm Bharti Airtel’s appeal against an NCLAT order dated 17 May 2019, wherein the latter had denied the request by Airtel for set-off of an amount of Rs 112.87 crore due to Aircel, which was undergoing the corporate insolvency resolution process. While rejecting the appeal of Airtel, the apex court of the country said that it did not agree with Airtel’s plea 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,” said the Court in its order.

Airtel had 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. On this the SC said that 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. Therefore, we would reject the argument that insolvency set-off is automatic and self-executing,” it said adding that self-execution of set-off may be acceptable in cases of contractual set-off.

The Supreme Court order defined a contractual set-off as a matter of agreement, rather than a separate application of set-off. According to it, in a contractual set-off the parties are free to mutually agree on the outcomes they desire.

It further says that being consensual, when expressly stated, the normal rules of set-off regarding mutuality of credits or debts, liquid debts, and connected debts – as in case of 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

On the aspect of mutual dealings and also equity, the court noted that 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,” said the court.

It, however, averred that 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 Department of Telecom 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 and applicable.

It concluded by saying that 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.

Details of the Matter

Airtel entities buy spectrum rights from Aircel entities in April 2016. The deal needed approval from the Department of Telecommunications (DoT). DoT demanded bank guarantees of Rs Rs.453.73 crores from Aircel, who lacked the funds and get Airtel to provide them. Airtel deducts some money from the payment to Aircel to cover the guarantees.

A court orders DoT to return guarantees, but DoT doesn’t comply. Airtel requests banks to cancel guarantees, which takes court intervention.

Thereupon, Airtel entities made a payment of Rs.341.80 crores due to the Aircel entities on 10th 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.

Meanwhile, Aircel entities enter Corporate Insolvency Resolution Process (CIRP). Airtel claims debts owed by Aircel as part of CIRP. Aircel claims Airtel owes them money after adjusting for cancelled guarantees. Resolution Professional rejects Airtel’s set-off claim and demands payment.

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