Introduction

The Supreme Court of India, in the case of Bharti Airtel Limited v. Vijaykumar V. Iyer (2024 INSC 15), addressed a pivotal issue concerning the right to claim set-off within the framework of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The dispute arose between Bharti Airtel Limited (“Airtel”) and Aircel Limited alongside Dishnet Wireless Limited (“Aircel entities”), revolving around complex financial transactions and the applicability of set-off mechanisms during insolvency proceedings.

Summary of the Judgment

The Supreme Court reviewed the appeals filed by Airtel challenging the Resolution Professional’s decision to reject their set-off claims of ₹64.11 crores against Aircel entities’ claims of ₹112 crores in the CIRP of Aircel. The core issue was whether Airtel could employ set-off in this insolvency context. After an extensive examination of legal principles surrounding set-off, the Court held that the IBC’s CIRP does not inherently recognize insolvency set-off except under specific exceptions, namely contractual and transactional set-off. Consequently, the Court dismissed Airtel’s appeals, upholding the Resolution Professional’s stance.

Analysis

Precedents Cited

The Judgment delved into various precedents and legal doctrines to elucidate the applicability of set-off in insolvency proceedings. Noteworthy references include:

• Stein v. Blake: Emphasized that bankruptcy set-off applies to mutual credits or dealings prior to bankruptcy, including ascertained, unascertained, or contingent claims.
• National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd.: Highlighted the mandatory nature of insolvency set-off in the UK context.
• BP Singapore Pte Ltd v. Jurong Aromatics Corp Pte Ltd and Others: Explored the concept of mutuality and equitable set-off in insolvency proceedings.
• British Eagle International Airlines Ltd v. Compagnie Nationale Air France: Discussed the interaction between contractual set-off and insolvency set-off mechanisms.

These precedents provided a foundational understanding of set-off principles, particularly distinguishing between contractual, equitable, and insolvency set-offs.

Legal Reasoning

The Court’s legal reasoning was methodical, focusing on the statutory framework of the IBC and the specific provisions governing CIRP. Key points include:

• IBC's Primacy: Under Section 238 of the IBC, its provisions override any inconsistent laws, establishing it as a complete code for insolvency and bankruptcy.
• Types of Set-Off: The Court differentiated between contractual set-off (based on mutual agreement) and insolvency set-off (arising from mutual dealings prior to insolvency), emphasizing that the latter is not inherently recognized in CIRP under the IBC.
• Mutual Dealings: For set-off to be applicable, claims must arise from mutual dealings in the same capacity or right, ensuring reciprocity rather than mere correspondence.
• Exceptions: The Court acknowledged exceptions where set-off could be permissible, such as contractual agreements established before the commencement of CIRP.
• Pari Passu and Anti-Deprivation Principles: Highlighted the importance of treating creditors equally and preventing the erosion of the insolvent estate, respectively, reinforcing the Court’s reluctance to endorse broad set-off rights in CIRP.

The Court meticulously parsed the IBC’s provisions, determining that the Corporate Insolvency Resolution Process does not provide for a broad insolvency set-off, except within the stipulated exceptions.

Impact

This Judgment significantly influences future insolvency proceedings by clarifying the boundaries of set-off rights under the IBC. Key impacts include:

• Limitation on Set-Off: Creditors can no longer assume an inherent right to set-off during CIRP unless explicitly covered under contractual or transactional exceptions.
• Certainty in CIRP: By restricting set-off rights, the Judgment ensures a more predictable and equitable distribution process, aligning with the IBC’s objectives of maximizing asset value and fostering timely resolution.
• Judicial Guidance: Provides clear judicial directives on interpreting set-off clauses within CIRP, guiding Resolution Professionals and creditors in navigating financial claims.
• Protection of Insolvent Estate: Upholds the principles of pari passu and anti-deprivation, ensuring the insolvent estate remains intact for equitable distribution among all creditors.

Complex Concepts Simplified

Set-Off

Set-off refers to the legal mechanism where two parties offset mutual debts, allowing one to deduct what it owes from what is owed to it. It ensures that only the net amount is paid, reducing the need for multiple transactions.

Types of Set-Off

• Contractual Set-Off: Based on mutual agreement within a contract, allowing parties to adjust debts as per their terms.
• Equitable Set-Off: Relies on fairness, allowing set-off when claims are interconnected and treating the debtor unjustly without adjustment.
• Insolvency Set-Off: Arises from mutual dealings before insolvency, permitting creditors to adjust their claims against the debtor's claims.

Corporate Insolvency Resolution Process (CIRP)

The CIRP is a structured process under the IBC aimed at the rehabilitation and resolution of insolvent corporate entities. It involves the appointment of a Resolution Professional who oversees asset management and remuneration to creditors, ensuring a time-bound resolution.

Pari Passu Principle

Pari Passu means “equal footing” in Latin. In insolvency, it ensures that all creditors of the same class are treated equally, receiving proportional repayments without preference.

Anti-Deprivation Principle

Anti-Deprivation is a common law doctrine preventing parties from excluding assets from the insolvent estate through contractual arrangements, ensuring that the estate remains available for equitable distribution among creditors.

Conclusion

The Supreme Court’s decision in Bharti Airtel Limited v. Vijaykumar V. Iyer establishes a clear boundary for set-off rights within the Corporate Insolvency Resolution Process under the IBC. By delineating the non-applicability of broad insolvency set-off, the Court reinforces the IBC’s framework for equitable and predictable insolvency resolutions. This Judgment underscores the necessity for creditors and Resolution Professionals to navigate set-off mechanisms within the confines of contractual and transactional exceptions, ensuring alignment with statutory mandates and foundational insolvency principles.

Ultimately, this decision upholds the integrity of the CIRP by safeguarding the insolvent estate and promoting fair treatment of all creditors, thereby enhancing the efficacy and reliability of India’s insolvency resolution regime.