Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others (2024)

Introduction 

This landmark Supreme Court case addresses the right to claim set-off during the Corporate Insolvency Resolution Process (CIRP) initiated under the Insolvency and Bankruptcy Code, 2016 (IBC). The case arose from Civil Appeal Nos. 3088-3089 of 2020 and examined whether a debtor of the Corporate Debtor, upon commencement of CIRP and invocation of Section 25(2)(a), retains the right to unilaterally adjust cross-claims arising from separate transactions. 

• The ruling establishes the scope of permissible set-off during the moratorium period, balancing creditor protection with the core objective of the IBC—reorganization and revival. 

Facts 

• Bharti Airtel Limited and Bharti Hexacom Limited (Airtel entities) entered into eight spectrum trading agreements in April 2016 with the Corporate Debtors—Aircel Limited and Dishnet Wireless Limited (Aircel entities). When the Department of Telecommunications (DoT) demanded bank guarantees (BGs) related to license dues totaling approximately Rs. 453.73 crores, the Aircel entities, lacking financial means, requested Airtel entities to furnish these BGs on their behalf. Pursuant to Letters of Understanding, Airtel entities agreed to furnish the BGs and deduct Rs. 586.37 crores from the consideration payable to Aircel entities. 
• CIRP was initiated against the Aircel entities in March 2018. Following judicial intervention, the BGs furnished by Airtel entities were cancelled in January 2019. Airtel entities had paid Rs. 341.80 crores, but sought to set off the balance amount of Rs. 145.20 crores, claiming this outstanding debt was owed to them by Aircel entities for operational charges, SMS charges, and interconnect usage charges. The total claim filed by Airtel entities was Rs. 203.46 crores. 
• The Resolution Professional (RP) rejected the unilateral set-off claim, demanding payment of Rs. 112.87 crores into the Corporate Debtor's account, deeming set-off violative of insolvency law. The Adjudicating Authority (NCLT) permitted the set-off, but the National Company Law Appellate Tribunal (NCLAT) overturned this decision, holding that set-off is "antithetical to the objective of the IBC." 

Court's Observations 

The Supreme Court dismissed the appeals, establishing significant precedents regarding permissible set-offs during CIRP. 

IBC as a Complete Code: 

• The Court emphasized that the IBC is a complete code that overrides inconsistent provisions in other laws.  
• When IBC provisions conflict with other statutes, the IBC must prevail to maintain the integrity of the insolvency resolution framework. 

Exclusion of Insolvency Set-off during CIRP: 

• The Court confirmed that the IBC does not grant creditors the right to insolvency set-off against the corporate debtor during CIRP. Regulation 29 of the Liquidation Regulations concerning "Mutual credits and set-off" applies exclusively to the liquidation process (Chapter III, Part II), not to CIRP.  
• Allowing insolvency set-off during CIRP would contravene the pari passu principle by giving preferred status to the set-off creditor, disrupting equitable distribution among creditors. 

Permissible Set-off Exceptions: 

The Court recognized two limited exceptions where set-off would be permissible during CIRP: 

• Contractual Set-off: Permissible if the contractual right to set-off was effective before or on the CIRP commencement date. The terms of validly executed contracts are not altered by the commencement of the moratorium under Section 14 of the IBC. 
• Transactional Set-off (Equitable Set-off): Permissible when the claim and counterclaim are so inextricably linked and connected on account of one or more transactions that they can be treated as a single integrated transaction, and denial would be inequitable. This exception applies only to ascertained and unquestionable monetary claims, not to assets or disputed claims. 

Application to Facts: 

• The Court found that the attempted set-off of Rs. 145.20 crores related to the spectrum transaction and bank guarantees was not justified.  
• The spectrum trading agreements constituted an entirely different and unconnected transaction from the interconnect charges, operational charges, and SMS charges. These transactions arose from separate contractual arrangements and served different commercial purposes. 
• Critically, the amount due to Aircel entities became payable after CIRP commencement in January 2019, when the bank guarantees were cancelled. Allowing set-off of post-CIRP obligations would infringe the moratorium provisions under Section 14, which protects the Corporate Debtor's assets during the resolution process. 

Ratio Decidendi: 

• Set-off during CIRP is restricted strictly to: (1) pre-CIRP contractual arrangements that explicitly provide for set-off rights, and (2) claims arising from inextricably linked transactions where denial would be fundamentally inequitable (transactional set-off). Set-off for unconnected claims, particularly those crystallizing post-CIRP commencement, is explicitly prohibited as it violates the foundational principles of the IBC, undermines the statutory moratorium, and disrupts the pari passu treatment of creditors. 

Conclusion 

The Supreme Court concluded that the NCLAT correctly held that insolvency set-off provisions do not apply to CIRP under the IBC. The claim for set-off of Rs. 145.20 crores relating to the spectrum trading deal failed the test for transactional set-off, as the underlying transactions—spectrum trading agreements and interconnect/operational charges—were fundamentally distinct and independent. Moreover, the payment obligations arose after CIRP commencement, making the claim antithetical to the purpose of the moratorium under Section 14.