Paragraph numbers below are the court’s original numbering, recovered from the source text.
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. Citibank Canada v. Confederation of Life Insurance Company, 42 CRB (3)(d) 288. Ramdhari v. Premanand, 19 Cal WN 1183. Maheswari Metals & Metal Refinery, Bangalore v. Madras State Small Industries Corporation, AIR 1974 Mad 39. Rory Derham, Derham on the Law of Set-Off (Oxford University Press 4 th ed. 2010). 152 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 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 17326 of the IBC 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 bank- ruptcy 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. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS permits set-off. Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 201627 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 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 IBC28 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 India29 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. For short- ‘the Liquidation Regulations’. 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. For short- ‘the Board’. 154
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 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. Blake31 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 [1996] Ch. 245. (Appeal Committee of the House of Lords) [1996] A.C. 243. (House of Lords) [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS 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 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-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 1972 AC 785. Derham, supra note 25, ¶6.124. 156 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. McIntyre34 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 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 Others35 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 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 (1991) 171 CLR 609. (2020) SGCA 09. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS 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 Others36, 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 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 Corporate AIR 1977 Ker 68. 158 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 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 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. This will not satisfy the requirements of legal/statutory set-off and equitable set-off under the Code of Civil Procedure, 1908. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS 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 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 enactments, as has been consistently held by this Court in Indian Overseas Bank v. RCM Infrastructure Ltd. and Another41, Innoventive Industries Limited v. ICICI Bank and Another42, Embassy Property Developments Private Limited. v. State of Karnataka and Others43, and V. Nagarajan v. SKS Ispat and Power Limited and Others44. Belmont Park Investments v. BNY Corporate Trustee Services Ltd. [2012] 1 AC 383. In the present decision, we are not examining the extent of, and the manner in which the anti-depriva- tion principle is applicable in India. (2022) 8 SCC 516. (2018) 1 SCC 407. (2020) 13 SCC 308. (2022) 2 SCC 244. 160
28. Section 23845 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 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 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. 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. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS
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 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. See Derham, supra note 25 and Gerard McCormack, Set-off under the European Insolvency Regula- tion (and English Law), 29 IIR 100, 100-117 (2020). 162
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 France47 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 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 1975 1 WLR 758. McCormack, supra note 46. 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. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS 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 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— 164 (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. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS Explanation.—For the purpose of this section— (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 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. 166 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 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 Others51, which refers to a claim for set-off being considered by the Resolution Professional during 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 (2022) 2 SCC 401. (2019) 4 SCC 17. [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS 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. Lakshmikutty53 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 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 Career Institute Educational Society v. Om Shree Thakurji Educational Society, 2023 SCC OnLine SC 586. (1981) 3 SCC 32. 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 reso- lution or liquidation proceedings of the corporate debtor or corporate person under this Code. 168 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. 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. 49. Reference is also made to the UNCITRAL Legislative Guide on Insolvency Law56 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 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. UNCITRAL Legislative Guide on Insolvency Law, Chapter G. p.155-156 (2005). [2024] 1 S.C.R. BHARTI AIRTEL LIMITED AND ANOTHER v. VIJAYKUMAR V. IYER AND OTHERS 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 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 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. Ibid. 170 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. Headnotes prepared by: Ankit Gyan Result of the case: Appeals dismissed.