Bharti Airtel LTD and Ors Vs Vijaykumar V Iyer (MA230) PDF

MANU/NC/0017/2019
Equivalent Citation: [2019]150C LA419
IN THE NATIONAL COMPANY LAW TRIBUNAL

MUMBAI BENCH
MA 230/2019 in CP No. 302/IBC/NCLT/MB/MAH/2018 and MA 219/2019 in CP No.
298/1BC/NCLT/MB/MAH/2018
Decided On: 01.05.2019
Appellants: Bharti Airtel Ltd. and Ors.
Vs.
Respondent: Vijaykumar V. Iyer
Hon'ble Judges/Coram:
M.K. Shrawat, Member (J)
Counsels:
For Appellant/Petitioner/Plaintiff: Navroz Seervai, Darrius Khambata, Senior
Advocates, Vividh Tandon, Mehak Suri, Diason Wagdi and Nupur Jalan
For Respondents/Defendant: Janak Dwarkadas, Ravi Kadam, Senior Advocates,
Prateek Seksaria, Meghna Rajadhyaksha, Anoop Rawal, Malak Mhatt, Salonee Kulkarni,
Gourav Mohanty, Shardul Amarchand and Vijaykumar Iyer
Case Note:
Insolvency - Mutual dealings - Set off - Present application filed for
direction to resolution professional (RP) to honour legal and equitable right
of Airtel entities to apply set off on account of mutual dealings for amount
of approximately INR 112 crore during corporate insolvency resolution
process (CIRP) - Whether applicant made out case for set off on account of
mutual dealings as prayed -Held, several distinct or independent
transactions entered between same parties enough to permit adjustment so
as to arrive at net figure of payment - Not necessary that set off is
permissible in respect of same nature of transaction - Terminology mutual
dealings is conscious legislation - While deciding such disputes revolving
around claim or counter-claim or set off, it is expected to give due regards
to mutual dealings - Applicant is legally entitled under Insolvency Code to
set off amount in question - Application allowed. [26]
ORDER
M.K. Shrawat, Member (J)
1 . There are two joint miscellaneous applications (MA No. 219/2019 and MA No.
230/2019} submitted by Bharti Airtel Ltd. and Bharti Hexacom Ltd. ('Airtel Entities')
on 14th January, 2019 raising identical issue of 'Set Off' under insolvency
proceedings based upon analogous facts and circumstances, respectively against the
corporate debtors, viz., Aircel Ltd. and Dishnet Wireless Ltd. ('Aircel Entities'), hence,
clubbed together and decided by this common order.
1.1. The corporate insolvency resolution process of Dishnet Wireless Ltd. ('the
corporate debtor') began on 19th March, 2018, pursuant to admission of section 10
of IBC application (CP 302/I&BP/NCLT/MB/2018).
26-11-2019 (Page 1 of 29) www.manupatra.com Symbiosis Law School

1.2. Likewise, corporate insolvency resolution process commenced in the case of
Aircel Ltd. ('the corporate debtor') vide an order dated 12th March, 2018 pursuant to
admission of the petition filed under section 10 of IBC [CP (IBJ-298/MB/2018].
2 . The present miscellaneous applications in hand are filed by the operational
creditors Bharti Airtel Ltd. and Bharti Hexacom Ltd. (collectively Airtel entities),
which entered into "Spectrum Trading Agreements" with Aircel Ltd. and Dishnet
Wireless Ltd. (collectively Aircel Entities) for the transfer of right to use the Spectrum
in the 2300 MHz band in favour of Airtel Entities. This application is filed for a
direction to the resolution professional ('RP') to honour the legal and equitable right
of Airtel entities to apply set off on account of mutual dealings for an amount of
approximately INR 112 crore during the corporate insolvency resolution process.
(A) Brief background of the case
3. In April 2016, the Aircel Entities (corporate debtor/seller) entered into "Spectrum
Trading Agreements" ('STAs') with Airtel Entities (operational creditor/buyer) to
transfer the right to use the spectrum by Aircel Entities in favour of Airtel Entities.
The approval of Department of Telecommunications ('DoT') was required for
implementing the STAs.
4 . The DoT demanded bank guarantees in relation to certain licence dues and
spectrum usage charges from Aircel Entities (corporate debtor/seller) as a condition
for granting the requisite approval. Aircel Entities approached the hon'ble TDSAT
(Telecom Disputes Settlement and Appellate Tribunal) against the DoT's condition.
However, the hon'ble TDSAT passed an interim order dated 3rd June, 2016 affirming
the DoT's condition and directed the Aircel Entities (seller) to furnish bank
guarantees.
5. Pursuant to TDSAT's order, Aircel entities (corporate debtor/seller) approached the
Airtel Entities (buyer) for submitting bank guarantees on behalf of Aircel Entities for
the consummation of the transaction of spectrum trading. For this purpose, Airtel
Entities and Aircel Entities entered into Letters of Understanding ('LoUs') dated 6th
July, 2016 wherein the parties agreed that an amount of approx. Rs. 453.73 crore
would be retained by Airtel Entities from the total consideration amount of
approximately Rs. 4,022.75 crore under the STAs. Airtel Entities (buyer) to submit
bank guarantees of approx. Rs. 453.73 crore to the DoT on behalf of the Aircel
Entities (seller). Under the said LoU, Airtel Entities (buyer) were required to make
payment of retained amount of approximately Rs. 453.73 crore only on fulfillment of
the following conditions:
(i) the Aircel Entities to replace the bank guarantees furnished by the Airtel
Entities to the DoT; and
(ii) the Airtel Entities to receive back the original bank guarantees from the
DoT.
5.1. For the sake of ready reference, the impugned LoU dated 6th July, 2016 is
reproduced below:
'6th July, 2016
To,
Aircel Limited
5th Floor Building No. 10-A&B

DLF Cyber City
Gurgaon -122002
Subject: Trading of spectrum in 2300 MHz bond by Aircel Ltd. (seller) and
Bharti Airtel Ltd. (buyer) in respect of the Service Area of Andhra Pradesh.
Ref: 1. Guidelines for Trading of Access Spectrum dated 12th October, 2015
('Trading Guidelines')
2 . Spectrum Trading Agreement dated 8th April, 2016 in respect of the
Licence Service Area of Andhra Pradesh ("Agreement")
3. Joint Trading Intimation date 6th June, 2016
4. DoT Letter No. 1000/21/2016-WR dated 22nd June, 2016
Dear Sir,
This is in reference to above referred letter referred to in SI. No. 4 ("DoT
Letter") sent by the hon'ble Department of Telecommunications ("DoT") on
the captioned subject, inter alia, calling upon the Seller for payment of the
provisional dues as noted therein.
In line with the DoT Letters, the seller are directed to pay a sum of Rs.
57,55,47,354 towards total outstanding licence fee and Rs. 1,08,19,419
towards total outstanding SUC.
In this regard, as agreed we as Buyer on your behalf would be:
1 . paying the said Rs. 18,21,49,187 towards principle licence fees
dues vide pay order;
2 . furnishing a bank guarantee in respect of the said Rs.
39,33,98,168 towards interest, penalty and interest on penalty
pertaining to the licensee fee dues vide bank guarantee; and
3 . paying the said Rs. 1,08,19,419 towards SUC dues vide pay
order.
It is agreed and understood that upon the Effective Date being achieved and
the spectrum trade having been completed, Buyer shall be entitled to deduct
an amount of Rs. 58,63,66,774 from the transfer consideration payable to
seller by buyer as envisaged under the agreement or transfer consideration
under any other spectrum trading agreement executed between the buyer and
the seller in respect to any other licensed service area. Subject to the buyer
having deducted the said amount, an amount of Rs. 39,33,98,168 shall be
paid to the sellers upon sellers replacing the bank guarantee furnished by the
buyers to DoT and the buyers receiving back the original bank guarantee
from DoT.
This letter shall be read along with the agreement and shall not be in conflict
thereof.
Capitalised terms used herein but not defined, shall have the same meaning
as given in the agreement.
The provisions of clause 13 (Governing law and dispute resolution) of the

agreement shall apply mutatis mutandis in this letter as if specifically
incorporated in full in this letter.
You are requested to countersign this letter in token of your confirmation and
agreement of the contents of this letter....'
5.2. That due compliance of the terms and conditions of LoU was made, accordingly
the Airtel Entities (buyer) has procured three bank guarantees for a total amount of
Rs. 453.73 crore from Axis Bank and tendered to DoT.
6. There was one more transaction. The Aircel Entities (seller/corporate debtor) owed
a total of approx. INR 139.34 crore to the Airtel Entities (buyer/operational creditor)
pursuant to unpaid invoices under various service and inter-connection agreements
between the parties. Pursuant to initiation of CIRP of Aircel and Dishnet on 12th
March, 2018 and 19th March, 2018, the Airtel Entities filed their respective claim
forms against Aircel and Dishnet (corporate debtors) on 28th March, 2018 and 11th
March, 2018 respectively. A chart is on record, a portion for ready reference is
reproduced below:
7 . The Aircel Entities (seller/corporate debtor) also owed an amount of INR 5.85
crore to Telenor, which was merged with Bharti Airtel Ltd. vide order dated 8th
March, 2018 passed by the hon'ble NCLT, Principal Bench, New Delhi, effective from
14th May, 2018. Therefore, the total amount owed by Aircel Entities (seller) to the
Airtel entities (buyer) was approx. INR 145.20 crore (i.e., INR 139.34 crore owed to
the Airtel Entities + INR 5.85 crore owed to Telenor). To summarise, the Aircel
Entities (seller) is to pay a sum of Rs. 139.34 crore to Airtel Entities (buyer) in
respect of Unpaid-Invoices which were in the nature of operational debt being related
to services provided and interconnection agreements executed between the parties.
Under the Insolvency Code, the Airtel Entities (buyer) have to be treated as
"operational creditor" in respect of operational debt of Rs. 139.34 crore to be paid by
the corporate debtor, Aircel Entities (seller).
7.1. In view of the above admitted factual position that the Aircel Entities (corporate
debtor) had to make a total payment of approximately Rs. 145.20 crore to Airtel
Entities (operational creditor) pertaining to alleged unpaid Invoices for certain
services provided, the Airtel Entities (operational creditor) lodged claim on the
requisite Form on 28th March, 2018 and 11th April, 2018 respectively in the cases of
Aircel Ltd. and Dishnet Wireless Ltd., both corporate debtors under corporate
insolvency resolution process. The miscellaneous application contains Form B as
prescribed under the Insolvency Code which is a "proof of claim by operational
creditor except Workmen and Employees" under regulation 7 of IBBI (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016, addressed to Mr.
Vijaykumar Iyer, IRP/RP describing the unpaid Invoices to be paid by the corporate
debtor as an operational debt.
7.2. At this juncture, it is also worth to place on record, so that the figures of
respective claims must match, there was an amount of Rs. 5.85 crore owed by Aircel
Entities (corporate debtor) to a creditor, viz., Telenor. It is informed that a merger

took place of Telenor with Bharti Airtel Ltd. vide an order of 8th March, 2018 of
NCLT, Principal Bench, New Delhi, having effective date of merger from 14th May,
2018. As a consequence, the said amount owed by the Aircel Entities was payable to
the account of Bharti Airtel Ltd. In respect of this claim as well, the requisite Form B
had also been submitted dated 28th March, 2018.
8. On one hand the Aircel Entities had gone under insolvency, simultaneously there
was a fall out of the Spectrum Trading Arrangement ('STA'), as discussed above,
wherein Aircel Entities (corporate debtor/seller) had transferred the right to use
Spectrum 2300 Mhz band in favour of Airtel Entities (operational creditor/buyer). Due
to differences on certain points the matter had gone before respected TDSAT. On 9th
January, 2018, the hon'ble TDSAT directed the DoT to return the bank guarantees
within four weeks. However, the DoT did not return the bank guarantees (BGs). It
was ordered by TDSAT that in the event of failure on the part of the DoT to return the
BGs, the BGs would stand cancelled and the parties would not be able to use the BGs
for any purpose whatsoever.
8.1. Consequently, the RP of the Aircel Entities (corporate debtor) being aware of the
aforesaid order of the TDSAT, pursued the Airtel Entities to release the BGs. On 31st
July, 2018, the Airtel Entities (buyer/operational creditor) communicated their
willingness to pay the BG amounts immediately upon the return of the BGs by the
DoT and the release of their credit lines by Axis Bank, subject to their right to claim
set off of the net undisputed principal amounts owed by the Aircel Entities (corporate
debtor) to the Airtel Entities (operational creditor), i.e., approx, 112 crore. The
hon'ble TDSAT's order dated 9th January, 2018 regarding release of bank guarantees
was upheld by the hon'ble Supreme Court on 28th November, 2018 and then on 8th
January, 2019.
9 . The Airtel Entities (buyer/operational creditor), acting in compliance with the
Supreme Court's order, released the withheld amount of approximately INR 453.73
crore in the following manner:
(i) Payment of INR 341.80 crore (i.e., 75 per cent of the withheld amount) to
Aircel Entities on 10th January, 2019; and
(ii) Application of the balance amount (i.e., approx. INR 112 crore) for set
off against the dues of approx. INR 145.20 crore owed by Aircel Entities to
Airtel Entities.
9.1. To understand the transaction it is appropriate to put the figures on record,
hence, it is clarified that out of the withheld amount of Rs. 453.73 crore which was to
be paid by the Airtel Entities to Aircel Entities, the Airtel Entities had retained a sum
of Rs. 112 crore and balance Rs. 341.80 crore was remitted by the Airtel Entities to
the account of Aircel Entities. Since the Airtel Entities (operational creditor/buyer)
have retained Rs. 112 crore by setting off against the total claim of Rs. 453.73 crore
and paid only balance Rs. 341.80 crore to Aircel Entities, therefore, this application is
moved with the purpose to get an affirmation order about the action of the
operational creditor of adjustment on net payment to corporate debtor.
10. A letter dated 10th January, 2019 was sent to the RP of corporate debtor (Aircel
Entities) apprising him of the remittance as also the Airtel Entities' legal and
equitable right to claim the set off. In turn, the RP replied on 11th January, 2019
denying the legal and equitable right of set off of Airtel Entities. This denial of RP is
in question in the present MA.
1 1 . Therefore, it is seen that the Airtel Entities (buyer/operational creditor), on

cancellation of bank guarantee, returned the balance after setting off the amount
(under consideration) owed by Aircel Entities (corporate debtor/seller) towards the
unpaid invoices to Airtel Entities. Thus, hereinabove summarily narrated the nature of
the dispute to facilitate adjudication.
12. Thus, prima facie a question arises that whether the set off is allowable under
insolvency proceedings?
(B) Submissions by the applicant
13. Learned senior advocate Mr. Darius Khambatta, and senior counsel, Mr. Navroz
Seervai appeared for the applicant and drew the attention of this Bench towards
certain provisions of the Code to show that the Code itself provides for set off of the
claim. It is pleaded that what the applicant had done is clearly permissible under the
Code. The relevant provisions are as follows:
(i) Section 14 of IBC - Moratorium. There is no provision of set off in section
14 which means that there is no effect of moratorium on the claims of the
creditors which can be set off. It is pleaded that the Aircel Entity had failed
to identify that which particular sub-section or sub-clause of section 14
restricts the set off as claimed. According to the arguments it is nothing but a
moonshine defence without any legal basis. Further clarified that the retained
amount of Rs. 453.73 crore was not in the nature of security interest, hence,
set off of the retained amount cannot be subjected to moratorium.
(ii) Claim Form B under the IBBI (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016 : This form was submitted as a lodgement of
claim wherein set off of mutual credits or mutual debits are to be informed
and accordingly to be claimed during Corporate Insolvency Resolution
Proceedings. Relevant portion of the claim form is referred as under:
"Entry 8" : details of any mutual credit, mutual debts, or other
mutual dealings between the corporate person and the operational
creditor which may be set off against the claim.
Declaration : [Please state details of any mutual credit, mutual debts,
or other mutual dealings between the corporate person and the
operational creditor which may be set off against the claim.]"
(iii) According to the arguments the meaning of "debt" as defined under
section 3(11) of the Code has an inbuilt provision of set off because of the
terminology "claim" and "due" is used. The arguments can be summarised as
under:
'(A) Meaning and concept of debt:
(i) The term "debt" is defined in the IBC in section 3(12), as
reproduced below:
"3(21) "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;"
(ii) This is a two-way definition, i.e., it includes both a debt
due from the corporate debtor (financial as well as
operational) or a debt due to a corporate debtor.

(iii) There is admittedly both an amount due from the Airtel
Entities to the Aircel Entities (i.e., INR 453 crore) as well as
an undisputed amount payable by the Aircel Entities.
(iv) Thus, the actual "debt" due (i.e., the liability or
obligation) from the Airtel Entities to the Aircel Entities is
the net amount of approximately INR 341 crore.
(v) The application of set off by the Airtel Entities, in the
instant case, would amount to extinguishment of the Aircel
Entities' debt owed to them to the extent of the set off
applied, i.e., the liability of Aircel Entities would stand
extinguished to the extent of INR 112 crore.'
(iv) Next argument revolves around the provisions of section 30 of IBC. For
reference, the relevant portion of this section is cited as under:
Section 30(2)(b) of the Code:
"30. Submission of resolution plan. -.... (2) The resolution
professional shall examine each resolution plan received by him to
confirm that each resolution plan -....
(b) provides for the repayment of the debts of operational
creditors in such manner as may be specified by the Board
which shall not be less than the amount to be paid to the
operational creditors in the event of a liquidation of the
corporate debtor under section 53;"
(emphasis supplied)
Therefore, the argument is that even during CIRP proceedings the
comparison has to be made with the "liquidation value", meaning thereby
that the liquidation value has to be taken into account while a resolution plan
is to be approved. The purpose of this argument, as emphasised by the
learned counsel, is that CIRP proceedings and the liquidation proceedings are
two faces of the same coin, therefore, even at the time when the CIRP
proceedings are in progress the terms and conditions of liquidation
proceedings has to be taken into account.
(v) A vehement reliance is placed by learned senior advocates on regulation
29 of the IBBI (Liquidation Process) Regulations, 2016, for reference,
reproduced below:
"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.
Illustration : X owes Rs. 100 to the corporate debtor. The corporate
debtor owes Rs. 70 to X. After set off, Rs. 30 is payable by X to the
corporate debtor."
The reason for placing reliance on this regulation is that a mutual set off is
mandated in the Insolvency Code, therefore, the Airtel Entities have rightly
claimed for set off which was a legal entitlement duly approved by the

aforementioned regulation.
(vi) Further to buttress their arguments, certain comparisons have been
referred to establish that in such circumstances, the claim of set off is
otherwise admissible as well as acceptable under various other enactments.
For, e.g., UNCITRAL Legislative Guide vide a specific chapter on "rights of
set off" has made a provision as under:
".....In the majority of jurisdictions, set off rights are not affected by
the stay in insolvency and may be exercised after the commencement
of insolvency proceedings, irrespective of whether the mutual
obligations arose under a single contract or multiple contracts and
irrespective of whether the mutual obligations matured before or
after commencement of insolvency proceedings. In some
jurisdictions a distinction is made; post-commencement set off of
obligations maturing prior to the commencement of insolvency
proceedings is permitted, but post-commencement set off of
obligations maturing after the commencement of insolvency
proceedings is limited or disallowed."
Therefore, the argument is that the right to set off is a universally accepted
right, hence, RP ought to have not raised any objection. It is also argued that
Provincial Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1909
are also having provisions for mutual set off.
Case laws relied upon by the applicant:
(vii) Official Liquidator v. Pusha Mai Narendra Kumar [MANU/RH/0416/1985 :
1986 (1) WLN 148], Rajasthan High Court: it was held that,-
"in winding up proceedings set off can be claimed under section 46
of the Provincial Insolvency Act, 1920 in respect of claims arising out
of mutual dealings and the said mutual dealings need not be
confined to one and the same transaction but would cover several
distinct or independent transaction entered into between the same
parties functioning in the same right or capacity".
(viii) CRB Capital Markets Ltd. v. Bimla Devi Sahney MANU/DE/0791/2005 :
[2007] 76 CLA (Snr.) 6 (Del.)/[2006] 71 SCL 460 (Del.),
"The view of the Legislature evidently is that it would be unjust if the
Official Liquidator could demand and recover in full moneys due by a
debtor, but that very debtor, if he happens to be a creditor of the
company for an equal sum, must rest content with a dividend
representing a fraction of the debt due to him from the company.
The principle is the same whether this right of the creditor to a set
off is ascertained before the Official liquidator or in answer to a
claim of the Official Liquidator in a suit filed by him."
14. The applicant justifies its act of setting off by placing further reliance on the
judgment dated 2nd December, 1998 of Gujarat High Court in the matter of Bank of
Maharashtra v. Official Liquidator, Navjivan Trading Finance (P.) Ltd.
MANU/GJ/0049/1998 : [1999] 96 Comp Cas 234 (Guj.), it was held that:
"[T]he question of fraudulent preference also cannot depend on the fact
whether the demand is made by the creditor of the company (in liquidation)

or a demand is first made by the company (in liquidation) in respect of its
claims and the set off is pleaded by the company's debtor in respect of
amounts due from the company to it. In the present circumstances,
obviously, had the Bank demanded for payment of sum due to it under
overdraft, the company, (in liquidation) was entitled to claim set off against
the amount due under the FDRs notwithstanding that the same were not
hypothecated as security for discharge of the debts due. If that could be
done we see no reason, why the bank could not claim the set off because the
company (in liquidation) has taken the initiative to call upon the bank to pay
the amount due under the FDRs. "
1 5 . In the matter of Gokul Chit Funds & Trades (P.) Ltd. v. Thoundasseri Kochu
Ouseph Vareed MANU/KE/0023/1977 decided on 25th August, 1976 it was held:
'The "mutual dealings" referred to in the section may consist of several
distinct or independent transactions entered into between the same parties
functioning the same right or capacity. It is not, therefore, necessary that the
debts or claims sought to be set off against each other should have arisen
out of the one and the some transactions. As observed by Montague Smith,
J., in the leading case Naoroji v. Chartered Bank of India [1868] 3 CP 444,
"to bring a case within the act, it is not necessary that the credits should be
dependent the one upon the other, nor that there should have been any
agreement before hand". Thus it has been held that where a surety who is
under an obligation to pay to the insolvent company the debts of another
person has some money owing to himself from the insolvent company in a
totally separate transaction the monies due to the surety on the one hand
and from him to the insolvent company on the other are "mutual dealings" as
contemplated by section 47 and the two amounts can be set off against each
other under the section.'
[emphasis supplied]
16. It is further contended by the applicant that the meaning of "mutual dealings"
although not defined specifically in any of the provisions of the Code, however, the
regulation 29 (supra) contain the same. The Regulations in a statute are a part and
parcel of the Code and Insolvency Code is no exception. Quoting the judgment of
Supreme Court in the matter of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.
MANU/SC/1609/2017 : [2018] 142 CLA 1 (SC)/Civil Appeal No. 15135 of 2017
wherein the decision of State of UP v. Babu Ram is quoted MANU/SC/0312/1960 :
[1961] 2 SCR 679. It is stated:
".... Rules made under a statute must be treated for all purposes of
construction or obligation exactly as if they were in the Act and are to be of
the same effect as if contained in the Act, and are to be judicially noticed for
all purposes of construction or obligation..."
17. The applicant states that it can never be the intent of the hon'ble Legislatures
while framing the code that all the receivables of the corporate debtor be
collected/honoured and what is payable by the corporate debtor is to be held in
abeyance.
As if that it will be paid later on when resolution applicant shall come in picture or
otherwise during the waterfall mechanism if the Company goes into liquidation. As
held in the case of MS Fashions Ltd. v. Bank of Credit & Commerce International S.A.
(In liquidation) [MANU/UKCH/0033/1992 : 1992 M. No. 4775]:
'The statutory set off is not something which BCCI can, as it were, place in a

'The statutory set off is not something which BCCI can, as it were, place in a
suspense account. It operates to reduce or extinguish the liability of the
guarantor and necessarily, therefore, operates as in effect a payment by him
to be set against the liability of the principal debtor. A creditor cannot sue
the principal debtor for an amount of the debt which the creditor has already
received from a guarantor. This is subject, however, to one point, which has
been called "the charge point" to which I now turn.'
18. That in addition to the case laws referred above, from the side of the applicant
few more case laws have also been referred from where relevant portions also read
during the course of hearing, however, keeping brevity in mind those paragraphs not
reproduced but citations quoted are as hereunder:
Case laws referred
(1) Ex parte Barnett. In re Deveze Bankruptcy-Mutual Credits-Set-off-Secured
Debt- Bankruptcy Act, 1869, s. 39. L.C. and L. JJ. 1874 Jan. 16.
(2) King's Bench Division Bankers v. Jarvis 1908 Jan 28
(3) MANU/KA/0048/1958 : AIR 1958 Mys. 126 Mysore High Court Paschal
Nazereth v. Denis Lobo Civil Revn. Petition. No. (M) 13 of 1956, against
judgment and decree of Dist. Munsiff, Mangalore, D 23rd March, 1955,
decided on 19th November, 1957.
(4) The Andhra Paper Mills Co. Ltd. (in liquidation) by its Official Liquidator
v. Anand Brothers [OSA No. 62 of 1950] Appeal disposed of on 1st
November, 1950.
(5) Supreme Court of India Civil Original/Appellate Jurisdiction Writ Petition
(Civil) No. 99 of 2018 [Swiss Ribbons (P). Ltd. v. Union of India order dated
25th January, 2019 {MANU/SC/0079/2019 : [2019] 148 CLA 419 (SC)}.
(6) Official Liquidator of High Court of Karnataka v. Smt. V. Lakshmikutty
MANU/SC/0057/1980 : [1981] 3 SCC 32 decided on 12th December, 1980
Equivalent Citation : AIR 1981 SC 1483, [1981] 3 SCC 32, [1981] 2 SCR
349, 1981 (13) UJ 495.
(7) High Court of Bombay, Appeal No. 334 of 2005, in Notice of Motion No.
3185 of 2004, in Suit No. 3121 of 2004, and Cross Appeal (L) No. 4 of 2005,
decided on 25th April, 2007, Gopal L. Raheja v. Vijay B Raheja.
(8) Queens Bench Division. Sovereign Life Assurance Co. v. DODD [In the
Court of Appeal CA 1892 July 6]
(9) [House of Lords] STEIN (Respondent) BLAKE (Appellant) 1995 April 3, 4;
May 18
(10) MANU/UKHL/0052/2004 : [2004] 2 WLR Secretary of State for Trade
and Industry v. Frid [2004] UKHL 24
(11) England and Wales High Court (Chancery Division) No. 8th May, of
2008 decided on : 2nd October, 2009 Kaupthing Singer, Fiedlander Ltd. and
in the Matter of Insolvency Act, 1986.
[2009] EWHC 2308 (Ch)
(12) Brilliant Alloys (P.) Ltd. v. Mr. S. Rajagopal [Petition(s) for Special

Leave to Appeal(C) No(s). 31557/2018] order dated 14th December, 2018.
(C) Submissions by the respondent/corporate debtor
1 9 . From the side of the respondent (Aircel Entities) learned senior advocate Mr.
Janak Dwarkadas appeared and vehemently objected the proposed set off. In his
opening remark he has narrated the various types of set off/adjustment in vogue, as
follows:
(i) Legal set off
This set off is confined to debts which at the time when the defence of set off
is filed were due and payable and either liquidated or in sums capable of
ascertainment without valuation or estimation. Bankruptcy set off has a much
wider scope. It applies to any claim arising out of mutual credits or other
mutual dealing before the bankruptcy for which a creditor would be entitled
to prove as a "bankruptcy debt".
(ii) Equitable set off:
It is pleaded as under:
"Section 323 is the latest in a line of bankruptcy set off provisions
which go back to the time of Queen Anne. As it happens, legal set
off between solvent parties is also based upon statutes of Queen
Anne. But the two forms of set off are very different in their purpose
and effect. Legal set off does not effect the substantive rights of the
parties against each other, at any rate until both causes of action
have been merged in a judgment of the court. It addresses the
questions of procedure and cash flow. As a matter of procedure, it
enables a defendant to require his cross-claim (even if based upon a
wholly different subject-matter) be tried together with the Plaintiff's
claim instead of having to be the subject of a separate action. In this
way it ensures that judgment will be given simultaneously on claim
and cross-claim and thereby relieves the defendant from having to
find the cash to satisfy a judgment in favour of the plaintiff (or, in
the 18th century, go to a debtor's prison) before his cross-claim has
been determined."
(iii) Bankruptcy/Insolvency Set Qff
'Bankruptcy set off, on the other hand, affects the substantive rights
of the parties by enabling the bankrupt's creditor to use his
indebtedness to the bankrupt as a form of security. Instead of having
to prove with other creditors for the whole of his debt in the
bankruptcy, he can set off pound for pound what he owes the
bankrupt and prove for or pay only the balance. In Foster v. Wilson
(1843 12 M&W 191, 204, Parke B, said that the purpose of
insolvency set off was "to do substantial justice between the
parties". Although it is also often said that the justice of the rules is
obvious, it is worth noticing that it is by no means universal. Wood
on English and International Set Off (1989), pp. 1165, 21169, paras
24-49 to 224-56). It has, however, been part of the English law
bankruptcy since at least the time off the first queen Elizabeth :'
19.1. In the light of the types of set off explained by learned Mr. Janak Dwarkadas

he has narrated the facts revolving claim of set off. Bharti Airtel Ltd. and Bharti
Hexacom Ltd. ("Airtel Entities") had entered into a Spectrum Trading Agreement in
April 2016 for buying right to use spectrum in 8 circles in the 2300 Mhz band from
Aircel Ltd. and Dishnet Wireless Ltd. ("Aircel Entities"). The total consideration
payable to the Aircel Entities was Rs. 4022.75 crore. At the time of seeking
permission from Department of Telecommunication ("DoT") for the spectrum trading,
DoT raised various demands which were challenged by Aircel Entities before the
TDSAT. Vide order dated 3rd June, 2016, TDSAT directed Aircel Entities to deposit
Rs. 298 Crore as cash and provide bank guarantees worth Rs. 453 crore to DoT as an
interim arrangement. Since Aircel Entities did not have the financial capability, the
amount of Rs. 298 crore and BGs worth Rs. 453 crore were furnished by Airtel
Entities on behalf of Aircel and this amount was withheld from the total consideration
of Rs. 4,022 crore payable to Aircel Entities, (these facts are essential to understand
the controversy).
Further, letters of understanding ('LoUs') were executed between the Aircel and Airtel
Entities, wherein agreed that the money withheld by Airtel Entities would be released
when the BGs are returned/released by DoT, he has referred p. 32 of Airtel's
Application. Thereafter, by a final order dated 9th January, 2018, the TDSAT held the
DoT's demand to be unjustified and directed DoT to return the BGs within 4 weeks,
referred p. 21 of Aircel's Reply. Thus, since the BGs were directed to be returned,
they held no value and the money to be released/payable to Aircel Entities, which
ought to have been returned in terms of the LoU, it is explained by learned AR. The
Aircel Entities filed applications for initiation of corporate insolvency process ('CIRP'),
which was allowed and admitted in March 2018. In March/April 2018, the Airtel
Entities filed their claims before the RP, in this regard referred Claim Forms at p. 47
of Airtel's Application.
19.2. The claims of set off, thus, arise out of the following dealings/transactions
between the Airtel Entities and Aircel Entities:
(a) Operational Service agreements'
(b) SMS service agreements'
(c) Interconnect usage agreements.
It is pleaded that the claims filed by Airtel Entities have been verified by the RP, but
according to RP the stage of admission of claims had not reached, as the stage ought
to be 'liquidation' proceedings and not corporate insolvency resolution process. It is
pleaded that it is significant to note that at the time of filing the claim form, Airtel
Entities did not seek any set off (legal or equitable) from the amount withheld for
provision of the BGs.
19.3. Even assuming if the RP were to admit the claims, it would not entitle Airtel
Entities to any priority over the other creditors as Airtel will remain as an operational
creditor for the aggregate amount of the admitted claims. As particularly set out
hereinafter, Airtel Entities are not entitled to claim legal or equitable set off as
attempted to the extent of Rs. 112 crore, therefore, by doing so, the Airtel Entities
put themselves in an advantageous position, over and above rest of the financial and
operational creditors, by recovering its debt, argued by the learned advocate.
19.4. Vide orders dated 28th November, 2018 the Supreme Court has given the
direction as under:
"ORDER

IA 113342/2018 & IA 98556/2018:
Having heard learned counsel for all parties, we are of the view that, at this
interim stage, the order of the Appellate Tribunal dated 9th January, 2018, as
far as the Bank Guarantees are concerned, will operate.
Insofar as the refund of the principal amount of licence fees is concerned, we
are of the view that a sum of Rs. 298,00,00,000 which is claimed as refund
of the principal of the licence fees that has been paid by Dishnet Wireless
Ltd. and Aircel Ltd. must be refunded to Dishnet Wireless Ltd. and Aircel as
the deposit itself was made pursuant to an interim order of the Appellate
Tribunal which comes to an end as and when the final order is passed. This
refund shall be made within a period of eight weeks from today.
IAs stand disposed of accordingly."
19.5. Thereafter, one more order was passed by the hon'ble Supreme Court dated
8th January, 2019, wherein upheld the direction to return the BGs and further
directed all parties to act on the basis that the BGs stood cancelled, reproduced
below:
'ORDER
Bharti Airtel Ltd. and Bharti Hexacom Ltd. be added as party respondent(s).
Permission to file contempt petition is granted.
Heard the learned counsel for the parties.
By the order of TDSAT dated 16th July, 2018, the Union of India was
directed as follows:
"As the facts stand, there is no dispute that respondent has not
obeyed the order and direction of this Tribunal dated 9th January,
2018.
The bank guarantees in question whose details are already on
record, have not been returned till date. Some incidental directions
arising from order of 9th January, 2018 have been carried out by the
respondent but the main relief granted to the petitioner has not been
made available in spite of time frame indicated in the judgment and
order dated 9th January, 2018 itself. That order required return of
the bank guarantees forthwith or in any case within four weeks.
In these facts and circumstances, the main concern of the Tribunal is
to see that the fruit of the judgment and order of this Tribunal is not
denied to the petitioner. In order end disobedience and to achieve
that end the respondent is directed to return the three bank
guarantees which were supplied by the petitioner pursuant to interim
order dated 3rd June, 2016 passed in TP No. 38 of 2016, within one
week from today. If that is not done by the respondent then the
three bank guarantees shall stand cancelled and shall no longer be
used by the respondent for any purpose whatsoever."
This court, on 23rd July, 2018, ordered that the said order dated 16th July,
2018 shall be subject to the outcome of the appeal.

By another order dated 28th November, 2018, this court reiterated that the
said order will operate in the meanwhile and stated that a sum of Rs.
298,00,00,000 would be refunded by the DoT.
Given the aforesaid, the present application is allowed in the following
terms:
All parties including Axis Bank and Bharti Airtel Ltd. to proceed on
the basis that the three bank guarantees referred to in the opening
paragraph of this Court's order dated 28th November, 2018 and in
the TDSAT order dated 16th July, 2018 (particulars at page 18 of IA
No. 180450 of 2018) stands cancelled and shall no longer be used
for any purpose whatsoever.
Needless to add, this order will be subject to what happens
ultimately in the appeal.'
19.6. So, it is informed that on 10th January, 2019, Airtel Entities released an
amount of Rs. 341.80 crore from the total of Rs. 453 crore and withheld Rs. 112
crore claiming set off towards the undisputed amount owed to it, an admitted
position of fact. Thereafter, on 14th January, 2019, it filed an application before the
NCLT, which is now under consideration.
19.7. On the other hand, the Aircel Entities had also filed an application before the
Supreme Court seeking release of the balance amount of Rs. 112 crore, wherein
owing to the pendency of the present application, the Supreme Court vide order
dated 12th February, 2019 directed the NCLT to decide the application within 3
weeks, reproduced below:
"UPON hearing the counsel the court made the following order
IA No. 13908 of 2019
Dismissed.
IA No. 103711 of 2019
We have been informed by the learned counsel for the parties that the matter
relating to set off of Rs. 112 crore is pending before the National Company
Law Tribunal, Mumbai. We direct the NCLT, Mumbai, to decide the aforesaid
matter within a period of three weeks from today."
19.8. Reverting back to the legal argument, learned counsel has stated that there is
no right of legal set off in the present case. Right to legal set off exists only if such
right is provided under a statute (for example : order 8, rule 6 of CPC) or is
contractually provided for. Since the Insolvency and Bankruptcy Code, 2016 (TBC) is
a complete code, as held in Innoventive Industries v. ICICI Bank
MANU/SC/1063/2017 : [2017] 140 CLA 39 (SC)/[2018] 1 SCC 407, the provisions of
CPC are not applicable in the present case. Further, none of the contracts between the
Airtel Entities and Aircel Entities provide for a right to claim such set off. There is
also no provision under the IBC which allows parties to claim set off during the CIRP
process. Thus, once the Airtel Entities filed their claim before the RP and did not take
into account any set off towards the money withheld by it, no advantage of set off
can be claimed.
19.9. In the arguments it is reiterated that even there is no right for equitable set off
in the present case. The question as to under what circumstances an equitable set off

can be claimed is no longer res integra. The Supreme Court in a catena of cases and
even the Division Bench of the Bombay High Court have laid down the following
principles for governing equitable set off:
(a) the right of set off exists not only in cases of mutual debits and credits,
but also where cross-demands arise out of the same transaction;
(b) a plea in the nature of equitable set off is not available when the cross
demands do not arise out of the same transaction and not connected in its
nature and circumstances.
(c) a wrongdoer who has wrongfully withheld moneys belonging to another
cannot invoke any principles of equity in his favour and seek to deduct
therefrom the amounts that have fallen due to him;
(d) all cross-demands are to arise out of the same transaction or the
demands are so connected in the nature and circumstances that they can be
looked upon as a part of one transaction;
(e) both the parties must fill the same character in respect of the two claims
sought to be set off or adjusted.
19.10. On this issue reliance was placed on the following decisions:
(i) Jitendra Kumar Khan v. Peerless General Finance & Investment Co. Ltd.
MANU/SC/0867/2013 paras 11-13
(ii) Union of India v. Karam Chand Thapar & Bros. (Coal Sales) Ltd.
MANU/SC/0209/2004 : [2004] 3 SCC 504, paras 15, 18
(iii) Lakshmichand & Balchand v. State of Andhra Pradesh
MANU/SC/0150/1986 : AIR 1987 SC 20, para 8
(iv) Maharashtra State Farming Corpn. v. Belapur Sugar & Allied Industries
Ltd. MANU/MH/0126/2004 : [2004] 62 CLA (Snr.) 1 (Bom.)/2004 (3) Bom
CR 480 para 13.
19.11. Learned counsel has emphasised in respect of "mutual dealings" that the
courts have held that there must be transactions creating independent obligations on
each side, and not merely transactions which create obligations on one side, those on
the other being merely complete or partial discharges of such obligations. This has
been recognised in the context of Article I of the Schedule to Limitation Act, 1963 for
ascertaining time period to seek recovery of balance dues from mutual transactions.
Referred : Kesharichand jaisukhalal v. Shillong Banking Corporation Ltd., Shillong (in
liquidation) MANU/SC/0351/1965 : AIR 1965 SC 1711 para 11. A mutual
accountability between the parties is a test based on the existence of reciprocity of
demands, referred : Kalipada Banerjee v. Sree Bank Ltd. (In Liquidation)
MANU/WB/0072/1960 : AIR 1960 Cal. 285.
19.12. Therefore, the argument is that the transaction in question is in respect of a
money held in 'trust' by the Airtel Entities on behalf of the Aircel Entities, hence, it
must be returned in full upon cancellation of BGs furnished to the DoT in terms of an
interim order passed by TDSAT. As against that the Airtel Entities are trying to set off
the amount against various unconnected transactions, i.e., operational services, etc.
The set off is claimed in respect of two different and distinct transactions which is not
permissible even under the accounting principles. To buttress this argument, learned
counsel has also placed reliance on Swiss Ribbon (P.) Ltd. (supra), wherein while

dealing the constitutional validity of IBC this point has also been touched upon and
commented that set off can be considered at the stage of filing of proof of claim
during the resolution process by the resolution professional, however, his decision is
subject to challenge before the Adjudicating Authority under section 60 of the
Insolvency Code. Learned counsel has also argued that if set off is allowed at this
stage, the same would violate the basic purpose of introduction of Insolvency Code.
The primary objective is to restructure the financially stressed companies. The
existing law at that point of time was related to "winding up of companies" under
Companies Act, which now stood replaced by this Code to ensure that the financial
creditors have primary role to play for expeditious recovery of money from the
debtors. In this case the Airtel Entities have already filed claims on Form-B before the
RP in the month of March 2018 as an operational creditor and now claiming set off
which is contrary to the object of IBC. For its claim an operational creditor is required
to be in the queue with other operational creditors so that no creditor shall have
preference over other creditors. By this set off the operational creditor is recovering
its debt which is nothing but upsetting the queue and suo motu enjoying preference
treatment, it is pleaded. If claim is allowed to Airtel Entities to retain Rs. 112 crore,
naturally the Airtel Entities would get preference over other creditors of Aircel
Entities. With these remarks learned counsel has concluded his arguments.
(D) Submissions by the resolution professional
20. Representing resolution professional learned senior advocate Mr. Ravi Kadam, at
the outset, submitted that this application has been filed by the Airtel Entities with a
mala fide intention to breach the orders of the hon'ble Supreme Court and the hon'ble
TDSAT. It is submitted that this application is pursuant to the Supreme Court's order
dated 8th January, 2019 (as supra para 19.5) wherein it was clearly directed that the
money towards all three BGs ought to be paid to the Aircel Entities. Therefore, this
application is nothing but an afterthought, filed in order to unlawfully withhold the
money duly payable to the Aircel Entities.
20.1. The learned counsel of RP states that the Airtel Entities do not have a right of
set off at this stage of the CIRP proceedings and if the same is allowed, it would
violate the core objective of the IBC. Before The Supreme Court in Innoventive
Industries (supra) one of the argument was that the primary objective of the IBC was
to overhaul the existing provisions related to winding up in the Companies Act and
replace it with a Code to ensure so that the financial creditors have a primary role to
play in expeditious recovery of monies from the debtors (not from the judgment, but
part of the pleadings).
20.2. The hon'ble NCLAT in the case of Indian Overseas Bank v. Mr. Dinkar T.
Venkatsubramaniam [Company Appeal (AT) (Insolvency) No. 267 of 2017] order
dated 15th November, 2017 clarifies that such acts of set off are against the
provisions of the Code and, hence, cannot be allowed once the moratorium is
declared against the corporate debtor. It goes on to say:
"....[O]nce moratorium has been declares (sic) it is not open to any person
including financial creditors and the appellant-bank to recover any amount
from the account of the corporate debtor, nor it can be appropriate any
amount towards its own dues."
20.3. It can be said the hon'ble Legislatures while drafting the code were quite aware
of such circumstances wherein the creditors might break the queue and priorities
themselves for recovering their own dues therefore the report of the Insolvency Law
Committee notes that

'5.2. ... the purposes of the moratorium include keeping the corporate
debtor's assets together during the insolvency resolution process and
facilitating orderly completion of the processes envisaged during the
insolvency resolution process and ensuring that the company may continue
as a going concern while the creditors take a view on resolution of default"
and "the moratorium on initiation and continuation in legal proceedings
including debt enforcement action ensures a stand still period during which
creditors cannot resort to individual enforcement action which may frustrate
the object of the corporate insolvency resolution process.'
20.4. The above report was drafted in March 2018. The intent of the Legislature was
always the same. In the report of the Bankruptcy Law Reforms Committee drafted in
November 2015, the discussion on the aspect of moratorium was that, "the
motivation behind the moratorium is that it is value maximising for the entity to
continue operations even as viability is being assessed during the IRP. There should
be no additional stress on the business after the public announcement of the IRP. The
order of the moratorium during the IRP imposes a stay not just a debt recovery
actions, but also any claims or expected claims from old law suits or a new law suits
for any manner of recovery from the entity".
20.5. In support of the arguments reliance was placed on following judgments:
(a) Mr. Dinkar T. Venkatsubramaniam (supra) order dated 15th November,
2017 passed by NCLAT.
(b) Karam Chand Thapar & Bros, (supra), order dated 10th March, 2004
(c) Corporation Bank v. Amtek Auto Ltd. CA No. 142/2017 IN CP (IB) No.
42/Chd/Hry/2017, order dated 13th October, 2017 passed by NCLT,
Chandigarh Bench
(d) K. Sashidhar v. Indian Overseas Bank Civil Appeal No. 10673 of 2018,
order dated 5th February, 2019 passed by hon'ble Supreme Court of India
(e) Kalipada Banerjee v. Sree Bank Ltd. (In Liquidation)
MANU/WB/0072/1960 : (1959-60) 64 CWN 207 : AIR 1960 Cal. 285, order
dated 27th November, 1959
(f) Lakshmichand and Balchand (supra) order dated 5th November, 1986
(g) Kesharichand Jaisukhal (supra) order dated 16th February, 1965.
(E) Findings
21. Learned representatives of both the sides have been heard at some length. Both
the sides have submitted respectively few case laws, those were carefully perused in
the light of the facts of the case. Since the time this Code was introduced with effect
from December 2016, number of issues are daily cropping-up revolving around
accountancy principles, banking laws, laws of CPC, Real Estate laws, Companies Act,
Contract Act, Law of Evidence, Law of Limitation, etc., etc., along with number of
allied laws. Those complex issues have not only been discussed but also resolved,
although supposedly it was not envisaged at that point of time when this IBC Code
was introduced. In this short period a good number of valuable decisions of the
hon'ble courts are available, thus, creating a rich jurisprudence. Keeping those
precedents in mind hereinafter addressing the controversy in hand. In this case the
controversy erupted had revolved around the application of "principle accountancy"

vis-Ã -vis the provisions of Insolvency Code. Keeping brevity in mind let us take up
the legal issue immediately hereinbelow, because as far as the basic facts, to settle
this controversy are concerned, not in dispute.
21.1. The issue in plain words is that if a corporate debtor is to recover a due from
its creditor, whether the said creditor is entitled to first deduct its money in turn
recoverable from corporate debtor out of the payment or it is prohibited under IBC of
such adjustment due to commencement of moratorium? Under the judicial
compliance of a court order an operational creditor is to make a payment to a
corporate debtor, which is under insolvency, whether an adjustment or set off of its
due is to be granted so that only the net amount can be disbursed?
21.2. Let us apply the controversy as formulated in above paragraph on the facts of
this case, in simple language, although the transaction apparently was little complex.
Admittedly Airtel Entities is an operational creditor of Aircel Entity undisputedly under
Insolvency. Somewhat situation is reverse in this case; to the extent that before this
operational creditor (Airtel Entity) could ask for its claim of operational debt due to
be recovered from the debtor company (Aircel Entity), vide an order of the hon'ble
Court, this creditor was ordered to make a payment to the debtor company. Why
Airtel Entity' was an operational creditor is because it has to recover an operational
debt of Rs. 112 crore (mentioned the figure to simplify the understanding of
transaction) from Aircel Entity (corporate debtor). On the other hand there was
another transaction (Spectrum Trading Agreement) owing to which Airtel Entity was
to make a payment of retention money to Aircel Entity. That amount was kept in the
shape of Bank Guarantees of Rs. 453.73 crore, being DoT was involved. So the
situation was that Aircel Entity (corporate debtor) was to recover this amount from
Airtel Entity (Applicant/operational creditor). The hon'ble Courts (TDSAT and
Supreme Court) have ordered accordingly and in compliance Airtel made the payment
of Rs. 341.73 crore on 10th January, 2019, but only after deducting its operational
debt of Rs. 112 crore.
21.3. For my understanding I have put the position of account in the following
manner:
21.4. After the aforesaid adjustment/set off the Airtel Entities have moved this
Miscellaneous Application (MA No. 230/2019 & MA No. 219/2019) to get an order of
this Tribunal (NCLT) affirming their action of set off.

21.5. The first question which is to be answered is that what is scope of Moratorium
under these facts and circumstances? In my mind a question is that whether a
corporate debtor is to be allowed to claim all its dues without adjustment of their
dues admittedly payable by the said corporate debtor. Rather it is like this that first
make my (i.e., corporate debtor's) payment due upon you and I will consider your
(operational creditor's) payment at the time of my liquidation if some amount shall
remain available. On the face of it this approach appears to be unjustifiable. In
normal course of business transaction if an amount is payable by one party to
another party, the net amount is paid after factoring of payment due minus payment
recoverable. Had it been a case where there was no insolvency proceedings were
involved, then this simple principle of netting-off as per normal accounting principle
would have been applied.
21.6. In the back drop of the above narrated factual matrix, is it just, fair, equitable
and reasonable to ask Airtel to make the payment to Aircel the sum of Rs. 453 crore
without netting the amount recoverable from Aircel of Rs. 112 crore. Netting entails
off-setting the value of multiple payments due to be exchanged between two or more
parties. It can be used to determine which party owed money in a mutual agreement.
It is a netting between account receivable and account payable. It applies in a
situation when there is an existence of two-way flow of money in a composite
dealing between those two parties, such as, an example of customer and supplier.
Also for example in this case, the two 'Entities' were having two type of dealing
between themselves. In one dealing the Airtel Entity was a Purchaser of Spectrum,
hence, to make payment to seller Aircel Entities. Juxtapose, Airtel is a service
provider, hence, to receive payment for the services provided from Aircel Entity.
There can be numerous such instances of mutual dealing where it is demanded by the
parties to set off the accounts by squaring up the debits with the credits.
21.7. The term 'set off is also a very well recognised as also acceptable mode for
settling of accounts. Rather without providing this facility or option of 'set off' no
account can get finalised if there is a cross dealing. As discussed above 'set off' as
well is a technique applied between parties having mutual rights and liabilities,
replacing gross position with net position. It permits the rights to be used to
discharge the liabilities where cross-claims exist between a debtor and a creditor.
There is nothing new about this age old principle of accountancy. In number of
precedents there were in depth decision on this subject.
21.8. On this subject English law is available, as referred from the side of the
applicant, but keeping succinctness mainly concentrating on certain direct decisions,
needless to mention after due diligence on all the case laws referred by either side.
In the case of MANU/KA/0048/1958 : AIR 1958 Mys 126 Mysore High Court Paschal
Nazereth v. Denis Lobo Civil Revn. Petition. No. (M) 13 of 1956 (supra), hon'ble
Mysore High Court has an occasion to consider section 46 of Provincial Insolvency
Act wherein it is prescribed that where there have been mutual dealings between an
insolvent and a creditor claiming a debt, an account shall be taken of what is due
from one party to the other, in respect of such mutual dealings, and the sum due
from the one party shall be set off against any sum due from the other party,
therefore, only the balance, no more, shall be paid on either side respectively. At this
juncture an argument of the respondent (Aircel) is that similar provision is in IBC but
that regulation 29 of IBBI (Liquidation Process) Regulations, 2016 is applicable at the
stage of liquidation and not at the stage of CIRP, therefore, per respondent wrongly
cited. The relevance of this judgment shall be discussed herein below at appropriate
place, however, at this juncture it is worth to remark that the doctrine of mutual
dealing is an accepted norm in settling the account between a creditor and debtor.

21.9. Likewise in the case of Anand Brothers (supra) an important observation was
that, quote "On principle and in the interests of fairness and justice, we think that a
party against whom the company has instituted a suit, should not be prevented from
establishing that on a proper taking of the account between the company and the
party, i.e., after adjusting mutual credits and debit no amount is due the company or
that the extent of its liability is more or less reduced. When the company has made a
claim, any plea which has the effect of reducing the claim if successful; would be a
plea in defence. It may be for certain purposes as for example, for court fees a
written statement containing a plea of set off or counter-claim is treated as a cross-
suit, but that is not conclusive of the matter. There can be no doubt that the pleading
by the defendant is defensive in character. If it is so, section 171 cannot apply."
unquote. In this case there was a discussion of section 47 of Presidency Town
Insolvency Act as well as section 46 of Provincial Act for the ruling that it would be
unjust if the official liquidator demand or recover full money due from a debtor, but
that very debtor, if happens to be a creditor of the company must rest the counter-
claims by fraction of the debt amount.
21.10. The legitimacy of doctrine of set off has as well been discussed in a latest
decision of hon'ble Supreme Court pronounced in the case of Swiss Ribbon (P.) Ltd.
(supra) order dated 25th January, 2019 [WP (Civil) No. 99 of 2018], wherein vide
para 35 made an observation that,
"35. Insofar as set off and counter-claim is concerned, a set off of amounts
due from financial creditors is a rarity. Usually, financial debts point only in
one way - amounts lent had to be repaid. However, it is not as if a legitimate
set off is not to be considered at all. Such set off may be considered at the
stage of filing of proof of claims during the resolution process by the
resolution professional, his decision being subject to challenge before the
Adjudicating Authority under section 60."
21.11. In one of the decisions in the case of Smt. V Lakshmikutty (supra) decided on
12th December, 1980 the entire controversy of set off, although in liquidation
process, has been dealt that mutual credit and mutual debt in a mutual dealing a sum
is to be set off and only the balance of the amount ought to claimed and that set off
is not merely permissive but a direct statutory enactment so that only balance to be
claimed in bankruptcy, in the following manner:
This rule enacted in section 46 of the Provincial Insolvency Act with regard to
the debts provable by a creditor against the insolvent must, therefore,
likewise apply in regard to debts provable against a company in winding up.
Consequently, when the respondent in the present case claimed to prove her
debt against the company in liquidation, she was entitled to the benefit of
the rule enacted in section 46 of the Provincial Insolvency Act and she could
legitimately claim that since there were admittedly mutual dealings between
her and the company in liquidation, an account should be taken in respect of
such mutual dealings and only that amount should be payable or receivable
by her which is due at the foot of such account.
2 . It is true that section 530 provides for preferential payments, but that
provisions cannot in any way detract from full effect being given to section
529 and in fact the only way in which these two sections can be reconciled is
by reading them together so as to provide that whenever any creditor seeks
to prove his debt against the company in liquidation, the rule enacted in
section 46 of the Provincial Insolvency Act should apply and only that
amount which is ultimately found due from him at the foot of the account in

respect of mutual dealings should be recoverable from him and not that the
amount due from, him should be recovered fully while the amount due to
him from the company in liquidation should rank in payment after the
preferential claims provided under section 530. We find that the same view
has been taken by the English courts on the interpretation of the
corresponding provisions of the English Companies Act, 1948 and since our
Companies Act is modelled largely on the English Companies Act, 1948, we
do not see any reason why we should take a different view, particularly when
that view appears to be fair and just. We may point out that Gore Browne in
his book on Company Law, 43rd Ed., at pp. 34-14 also confirms this view:
"Indeed, all claims provable in the winding up may be the subject of
set off, provided that there is mutuality."
Moreover, we find that the observations of the House of Lords in National
Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd. are also to
the same effect. We may also usefully refer to the observations of Sir Ernest
Pollock, MR in R City Life Assurance Company Ltd. where the learned Master
of the Rolls after referring to section 207 of the Companies Act, 1908
(section 317 of the Companies Act, 1948) which corresponds to section 529
of Companies Act, 1956 and section 31 of the Bankruptcy Act, 1914 which
corresponds to section 46 of the Provincial Insolvency Act, says:
It is to be observed that section 31 of Bankruptcy Act, 1914, is definite in its
terms that where there is mutual credit, mutual debt or other mutual
dealings, the sums are to be set off and the balance of the account and no
more shall be claimed or paid on either side respectively. It is not merely
permissive, it is a direct statutory enactment that the balance only is to be
claimed in bankruptcy.
We are in agreement with these observations and affirm the view taken by
the Karnataka High Court in the Judgment sought to be appealed against. We
accordingly dismiss the special leave petition on merits after condoning the
delay in filing it."
21.12. Queens Bench Division Sovereign Life Assurance Co. (supra) [In the Court of
Appeal CA 1892 July 6]
"The first point which we have to consider is, what will destroy the right of
set off; when an action of debt is brought, will the fact of the plaintiff being
in liquidation or bankrupt (the action being brought by the liquidator or
trustee) of itself destroy the right, and drive the' defendant into bankruptcy
to prove his claim? Let us try what the rights of the parties would have been
under the old law in such a case. A trustee brings an action to recover a debt
due; a set off is pleaded, and it is suggested that it would have been a good
replication that the bankrupt could only pay in the pound, thus, wiping out
the set off or reducing it to is in the pound. It is enough to say that such a
thing was never heard of a set off can only be set up where an action is
brought; what is the right of the defendant after an action is commenced
against him? Clearly it is to set off a debt due to him from the plaintiff; if the
debt due to him is of the same kind as that in respect of which he is being
sued, he can set it off. The right of set off depends on the existence of a debt
due to the defendant, and the fact of his debtor being a bankrupt does not
prevent the set off arising, through it prevents his obtaining in the
bankruptcy more than his share of the assets;"

21.13. The applicant has also placed reliance on a decision of 'House of Lords' (Lord
Keith, Lord Ackner, Lord Lloyd, Lord Nicholls) in the matter of Stein v. Blake
MANU/UKHL/0026/1995 : [1996] 1 AC 243 wherein facts were stated in the opinion
Lord Hoffmann in an Appeal from the Court of Appeal wherein the issue was set-out
as under:-
"1. The issues
If A and B have mutual claims against each other and A becomes bankrupt,
does A's claim against B continue to exist so that A's trustee can assign it to
a third party? Or is the effect of section 323 of the Insolvency Act, 1986 to
extinguish the claims of A and B and to substitute a claim for the net balance
owing after setting off the one against the other? And if the latter is the case,
can the trustee assign the net balance (if any) before it has been ascertained
by the taking of an account between himself and B? If yes, is that what the
trustee in this case has done? These are the issues in this appeal."
The law related to bankruptcy set off was discussed and also compared with statutory
legal set off. Only those portions which appealed me (with permission) are
reproduced so that the present conundrum can get resolved. About 'Bankruptcy set
off' the observation was as below:
'Bankruptcy set off, on the other hand, affects the substantive rights of the
parties by enabling the bankrupt's creditor to use his indebtedness to the
bankrupt as a form of security. Instead of having to prove with other
creditors for the whole of his debt in the bankruptcy, he can set off pound for
pound what he owes the bankrupt and prove for or pay only the balance. So
in Forster v. Wilson (1843) 12 M&W 191, 204, Parke B. said that the purpose
of insolvency set off was "to do substantial justice between the parties."
Although it is often said that the justice of the rule is obvious, it is worth
noticing that it is by no means universal. [Wood on English and International
Set-Off (1989), pp. 1165-1169, paras 24-49 to 24-56.] It has, however,
been part of the English law of bankruptcy since at least the time of the first
Queen Elizabeth.'
The law related to "Legal-set off' was narrated as below:
'Legal set off is confined to debts which at the time when the defence of set
off is filed were due and payable and either liquidated or in sums capable of
ascertainment without valuation or estimation. Bankruptcy set off has a much
wider scope. It applies to any claim arising out of mutual credits or other
mutual dealings before the bankruptcy for which a creditor would be entitled
to prove as a "bankruptcy debt".'
In this judgment it further considered cross-claims in the following manner:-
'5. Taking the account under section 323
Bankruptcy set off, therefore, requires an account to be taken of liabilities
which, at the time of bankruptcy, may be due but not yet payable or may be
ascertained in amount or subject to contingency. Nevertheless, the law says
that the account shall be deemed to have been taken and the sums due from
one party set off against the other as of the date of the bankruptcy. This is in
accordance with the general principle of bankruptcy law, which governs
payment of interest, conversion of foreign currencies, etc., that the debts of
the bankrupt are treated as having been ascertained and his assets

simultaneously distributed among his creditors of the bankruptcy date : see
Dynamics Corporation of America, In re. [1976] 1 WLR 757, 762. It is clear,
therefore, that when section 323(2) speaks of taking an account of what is
"due" from each party, it does not mean that the sums in question must have
been due and payable, whether at the bankruptcy date or even the date when
the calculation falls to be made. The claims may have been contingent at the
bankruptcy date and the creditor's claim against the bankrupt may remain
contingent at the time of the calculation, but they are nevertheless included
in the account. I consider next how this is done.
6. Quantifying the cross-claims
How does the law deal with the conundrum of having to set off, as of the
bankruptcy date, "sums due" which may not yet be due or which may
become owing upon contingencies which have not yet occurred? It employs
two techniques. The first is to take into account everything which has
actually happened between the bankruptcy date and the moment when it
becomes necessary to ascertain what, on that date, was the state of account
between the creditor and the bankrupt. If by that time the contingency has
occurred and the claim has been quantified, then that is the amount which is
treated as having been due at the bankruptcy date. An example is Sovereign
Life Assurance Co. p. Dodd £ 1,170 on the security of his policies. The
company was wound up before the policies had matured but Mr. Dodd went
on paying the premiums until they became payable. The Court of Appeal held
that the account required by bankruptcy set off should set off the full
matured value of the policies against the loan.'
Therefore, at this juncture prima facie in my opinion although in Legal set off the
substantive rights of the parties, both have respective cause of action, are to be
merged in a judgment of the court, but the procedure of adjustment in any case shall
remain identical that the cross-claims to be tried together instead of having to be
subject to separate action or suit and thereafter a cash flow statement to be prepared
so as to relieve the debtor from the burden of payment of entire debt due to
Insolvent, but to make arrangement of cash of the balance payment after due
adjustment of cross-claims.
21.14. It is worth to take help of one more decision of House of Lords pronounced
by Lord Nicholls, Lord Hoffman, Lord Hope of Craighead, Lord Philips of Worth
Matravers and Lord Brown of Eaton-under-Heywood in the case of Frid (supra)
wherein a company was going into liquidation and having claim against Customs and
Excise for overpaid VAT and on the other hand there was a contingent liability on the
said company of Secretary of State pertaining to Employees payment, so the question
was that whether VAT credit to be set off against Secretary of State's claim and that
whether Crown could act as 'debtor' and 'creditor' in the same capacity on the
occasion of settlement of cross-claims. Allowing the appeal, allowed set off by
holding that the term 'mutual debts' require no more than commensurable cross-
obligation between the same people in the same capacity. An observation is worth
reproduction:-
'7. The rule requires that there should have been "mutual credits, mutual
debts or other mutual dealings" between the company and the Secretary of
State before the company went into liquidation, that is to say, before the
date of the resolution to wind it up. I shall call this "the insolvency date". In
considering whether this requirement was satisfied, I shall put aside two
matters for later consideration. One is the question of whether the Customs

and Excise is the same party as the Secretary of State and the second is that
the effect of the words "or other mutual dealings". I shall consider first
whether "mutual debts" existed at the relevant time between the company
and the Crown, treating HM Customs and Excise and the Secretary of State as
both being manifestations of the Crown.'
21.15. There is one more important decision pronounced by England and Wales High
Court (Chancery Division) in the case of Kaupthing Singer, Fiedlander Limited and in
the Matter of Insolvency Act, 1986 [2009] EWHC 2308 (Ch). Hon'ble Justice Norris
has made an observation vide para 9 of the said order as follows:
'9. The general and long established rule in liquidations was that where,
before a company went into liquidation, there had been mutual credits,
mutual debts or mutual dealings between the company and any providing
creditor then an account was to be taken of what was due to each party from
the other in respect of those dealings, the sums due from one party being
provable in the liquidation or being recoverable by the liquidator as part of
the assets (depending on how the balance was struck). In M.S. Fashions, In
re. [1993] Ch. 425 Hoffman L J (at 432Fff) noted three established features of
the rule, (a) Its application was mandatory ("the mandatory principle"). In
the Court of Appeal Dillon L J, noted (at 446B) that this principle meant that
secured and unsecured debts were set off. (b) The account was taken at the
date of the winding up order (being an application of the wider principle that
the realisation and distribution of assets are treated as notionally taking
place simultaneously with the date of the order) ("the retroactivity
principle"). Dillon L J, noted that this rule supplanted an earlier rule that the
set off took place at the date of presentation of the petition (ibid at p. 446G).
(c) In taking the account the court has regard to events which have occurred
since the date of the winding up ("the hindsight principle"). In Stein v. Blake
MANU/UKHL/0026/1995 : [1996] 1 AC 243 at 252E Lord Hoffman explained
that this required the Court to take into account everything that had actually
happened between the insolvency date and the moment when it becomes
necessary to ascertain what, on that date, was the state of account between
the creditor and the insolvent. In that same case at 251E Lord Hoffman drew
attention to three further features of insolvency set off. (d) Unlike legal set
off insolvency set off affects the substantive rights of the parties, enabling
the creditor to set off pound-for-pound what he owes the insolvent and to
prove for or pay only the balance. A creditor with relevant mutual dealings
is, thus, treated much more favourably than an unsecured creditor with none.
As Professor Roy Goode commented in "Principles of Corporate Insolvency
Law" at para 7-22
Set-off on insolvency represents a major incursion into the pari passu
principle, for its effect is that a creditor who owes money to the company on
a separate account may resort to self-help by setting off the debt due to him
against his own indebtedness to the company, thus [ensuring] payment of
his claim pro tanto ahead of other creditors.
(e) Unlike legal set off, insolvency set off operates in relation to sums which
are not necessarily due and payable at the date of the bankruptcy or winding
up order, but which may be future or contingent. It addresses the problems
arising from the adoption of this broad approach by using the hindsight
principle and by estimating the value of claims of the creditor. As to claims
against the creditor on the other side of the account Lord Hoffman observed
(on the state of the law as it then was) (at 253B)

There is no similar machinery for quantifying contingent or unascertained
claims against the creditor because it would be unfair upon him to have his
liability to pay advanced merely because the trustee wants to windup the
bankrupt's estate.
(f) Not only is the insolvency set off mandatory, it is "self-executing", i.e.,
not dependent upon the taking of any procedural step such as lodgement of a
proof.'
Few important points have been decided that a creditor who owes money to a
corporate debtor company on a separate account may resort to self-help by setting
off the debt due to him against his own indebtedness to the said company thus,
ensuring payment of his claim pro tanto ahead of other creditors. The hon'ble court
was of the view that not only the insolvency set off is mandatory but it is also "self-
executing". The observation was to the extent that there is no requirement of even
lodgement of a proof. However, in the present case, the Airtel Entities have lodged
their claim and the said lodgement of claim is not in dispute.
2 2 . In the foregoing paragraphs, the basic principles of set off as per prevalent
accounting principles are discussed and noticed that the hon'ble courts have almost
unanimously taken a view that in mutual dealings among the same parties it is fair
and reasonable to allow for netting off or set off of the mutual debts and credits with
each other so as to arrive at a net figure for settlement of accounts. In the light of
this background it is now pertinent to examine the provisions of Insolvency Code to
determine whether an embargo has been imposed under the Code.
22.1. From the side of the respondent to this application/corporate debtor as well as
on behalf of the resolution professional, a legal question has been raised that once
on commencement of insolvency proceedings section 14 of IBC came into operation
by declaring 'moratorium' in respect of certain transactions, therefore, the impugned
transaction of set off is prohibited. To buttress this argument reliance was placed on
section 14(1)(d) of the Code for the legal proposition that the Adjudicating Authority
shall prohibit the recovery of any property by an owner where such property is
occupied or in the possession of the corporate debtor. In this regard, my attention
was drawn on the definition of 'Property' as defined under section 3(27) of the Code
means money, actionable claim, goods, land, etc. So it is submitted that the
impugned set off of Rs. 112 crore although a property of Airtel Entities cannot be
allowed to be recovered in the guise of set off while discharging the debt belonging
to Aircel recoverable from Airtel Entities. This Bench is not agreeable to this
argument because section 14(1)(d) has taken into consideration only one type of
situation when a creditor has to recover any property which is in possession of the
corporate debtor. In this case, the position is somewhat reverse because the major
amount, i.e., Rs. 453 crore is to be recovered from the operational creditor by the
corporate debtor, however, as against that only sum of Rs. 112 crore is the property
of the said operational creditor, that too, not in possession of the corporate debtor.
The intent of introduction of section 14(1)(d) appears to be on the ground that the
corporate debtor be not put in an inconvenient situation that as soon as he is
declared insolvent, all the creditors may come rushing, demanding their property
back under possession of the said corporate debtor.
Let us frame an example that what will happen if there is an existence of a reverse
position of accounts in which the corporate debtor is supposed to owe a huge
liability, but against that the said corporate debtor is to recover an amount from its
debtor. If set off is not granted in this reverse situation then the resolution applicant
may or may not propose a correct resolution plan after seeing the said huge liability

without analysing the benefit of set off of credit amounts. To make myself clear it is
necessary that a resolution applicant must be aware of the correct outstanding
balances appearing on the date of commencement of insolvency in the balance sheet
of a corporate debtor. It is necessary to communicate to resolution applicant a true
and correct picture of outstanding balances in the balance sheet, ought to be net
balances and not the gross balances. Only then a resolution applicant can be sure
about his money position that the proposed plan is economically viable to him.
Rather, it is required to make the law clear and unambiguous that there ought not to
be any controversy whether a gross or a net amount is to be taken into account for
submission of a resolution plan. While deciding this type of issue if the Tribunal
leave a scope of indecisiveness the same shall mar the effective and quick
implementation of the provisions of this Code.
22.2. The above view is also to be examined in the light of few other provisions of
The Code which are in operation during corporate insolvency resolution process. One
of such section is 18(1)(f) of the Insolvency Code wherein it is prescribed the duties
of IRP and one of them is to take control and custody of any asset over which the
corporate debtor has ownership rights as recorded in the balance sheet of the
corporate debtor, whether that asset may or may not be in possession of the
corporate debtor. So the general rule is that the IRP is supposed to take control over
all the assets of a corporate debtor having ownership rights. This is only one part of
the coin and naturally the other part of the coin ought not to be ignored. Both the
facets of a coin are equally important. Rather, one face coin is of no value. Likewise,
a balance sheet is incomplete if not demonstrating assets as well as liabilities.
Likewise, an account cannot be settled without accounting the credit entry as well as
the debit entry. Therefore, an exception is carved out in section 18(1)(f) that certain
assets shall not be included while taking action under section 18(1)(f) of the Code.
The Explanation below section 18 reads as follows:
"(a) assets owned by a third party in possession of the corporate debtor held
under trust or under contractual arrangements including bailment;
(b) assets of any Indian or foreign subsidiary of the corporate debtor; and
(c) such other assets as may be notified by the Central Government in
consultation with any financial sector regulator."
The purpose of insertion of this Explanation is obvious that assets of any nature must
not be forced to put under control of the resolution professional. An asset owned by
a third party in possession of a corporate debtor held under trust or under contractual
arrangement shall not be affected by sub-section (f). Therefore, the resolution
professional can take control/custody over an asset belonging to or in possession of
the corporate debtor but the exception is that if an asset, although in possession of
the corporate debtor but held under trust or under contractual arrangement shall not
be taken over by the resolution professional. This provision of the Code is squarely
applicable on the present situation that a sum of Rs. 112 crore, although said to be
under ownership of the corporate debtor, but the right is arising out of a contractual
arrangement. Unpaid invoices are nothing but in the nature of a contractual
obligation emerging from the services provided. The unpaid invoices are the asset of
the operational creditor, i.e., Airtel Entities, although not in direct control/possession
of the corporate debtor but out of the ambits of section 18(1)(f), being an asset
under contractual obligation of payment by the corporate debtor to the operational
creditor. Interestingly, the language of Explanation (a) and the language of section
14(1)(d) are very much identical. On co-joint reading of these two sections a
message is conveyed that if an asset is in possession of the corporate debtor then in

spite of the applicability of "Moratorium", if that asset came into existence out of a
contractual obligation then set off or adjustment is required to be allowed so that the
resolution professional be not entitled to take control over such an asset. In the
recent past a problem was posed to NCLT, Chandigarh Bench in the case of Weather
Makers (P.) Ltd. v. Parabolic Drugs Ltd. [CA 206/2019 in CP 102/CHD/2018], order
dated 26th April, 2019, that a perishable stock is supplied to the corporate debtor,
hence, in possession of the resolution professional, who has denied to return the said
stock back to the claimant on the ground of commencement of 'moratorium' but the
NCLT Bench, Chandigarh has taken a view that an adjustment has to be allowed
because the said stock was under "contractual arrangement" in possession of the
corporate debtor, therefore, out of the ambits of 'moratorium' so that the said stock
be returned to its actual owner. Therefore, a conclusion can be drawn that even
during CIRP a question of set off or netting off or adjustment can be raised either by
the creditor or by the debtor which is permissible and to be adjudicated upon.
2 3 . A serious argument has been raised that by allowing set off a preferential
treatment is given to an operational creditor, i.e., Airtel Entities. It is elaborated that
by way of set off, this operational creditor is in fact recovering its debt by jumping
the queue of other creditors. The operational creditor, therefore, be treated a
preferred creditor over the claims of other creditors. In this connection what is to be
seen is the correct position of law as well as the accurate position of accounts. This
argument is nothing but an innovative reasoning because otherwise neither the RP
nor the corporate debtor is acting in such manner which could be alleged to be a
preferential treatment. Rather, the true picture is that before disbursement of the
claim amount of the corporate debtor, the operational creditor has retained its money
over which on merits there was no controversy. It is pleaded from the side of the
RP/respondent that the said operational creditor (Airtel Entities) has lodged their
respective claims on Form No. B which is required to be treated at par with other
claimants. If this method is permitted, then there was no use of submission of Form
No. B as the same shall stood paid as an adjustment leaving behind no outstanding
claim to be received from Aircel Entities. At this juncture, it is worth to mention that
in the case of Swiss Ribbons (P.) Ltd. (supra) order dated 25th January, 2019
although it is noted that a corporate debtor is required to be preserved as a going
concern, however, it has also been observed that set off may be considered at the
stage of filing of proof of claims during the resolution process. Otherwise also, while
lodging Form No. B it is obvious that inter se mutual debit and credit entries are
supposed to be reflected in the Statement of Accounts to arrive at a figure of claim
amount. Therefore, it is wrong to say that a preference is given to a particular
operational creditor. This method of inter se adjustment ought to be available to all
other creditors (financial/operational), naturally if an amount is available for mutual
adjustment.
24. While reading the judgment of Swiss Ribbons (supra) we have noticed that at the
time of filing of resolution plan, the resolution applicant is to take into account the
amount of set off in terms of section 30(2)(b) of the Code, which provides that: for
the repayments of the debts of operational creditor shall not be less than the amount
to be paid to the operational creditor in the event of liquidation of the corporate
debtor under section 53 of the Code. Interestingly, it is made clear in section 30(2)
that the resolution professional shall examine resolution plan and confirm that such
resolution plan wherein made a provision for the payment of the debts of operational
creditors which shall not be less than the amount to be paid to the operational
creditors in the event of a liquidation of the corporate debtor under section 53 of the
Insolvency Code. Therefore, the argument of the respondents (Aircel) that set off is
the subject-matter at the stage of liquidation and not at this stage, is not sustainable.
This argument is required to be turned down because of the simple reason that even

at the CIRP stage a resolution plan is to be examined keeping in mind the provisions
of section 53, i.e., Distribution of assets on liquidation. At that stage of liquidation
the learned counsel of Aircel entities are in agreement that netting off is permissible.
If that be so, that the Aircel entities are in agreement that under liquidation process
only net amount is to be squared up, then a resolution applicant while submitting a
resolution plan is duly authorised to keep in mind the net values for which a
provision is to be made as prescribed under section 30(2)(b) of the Code, while
submitting a resolution plan. Therefore, my humble opinion, whatever is the stage,
either CIRP or liquidation, a true and correct position of account should emerge from
the records of both the sides. I am also of the strong view that if there is no
restriction or prohibition in the statute, then a fair and reasonable approach is always
is to be adopted. There is no specific bar or barrier in the Insolvency Code that up to
CIRP process only gross amount/claims are to be taken into account and the netting
is permissible only in case of start of liquidation. In the absence of any such
restriction this Bench obviously has a liberty to take an independent view which is
not at variance with the provisions of the Code, rather remove the ambiguity between
a gross claim or net claim, that too at what stage.
25. As far as the stand of the respondent/Aircel entities is concerned that set off is
admissible but only at the stage of liquidation being specifically provided under
regulation 29 of IBBI (Liquidation Process) Regulations, 2016, which allows mutual
credit and set out that where there are mutual dealings between the corporate debtor
and other party the adjustment is permissible. This regulation is unambiguous by
making a provision that a sum due from one party shall be set off against the sums
due from the other to arrive at net amount payable to the corporate debtor or to the
other party. An illustration has also been given under this regulation. So the
argument is that let the liquidation stage come in this case for netting of the claims
but not before that stage. It is also vehemently pleaded that all the decisions as
relied upon by the petitioner revolve around the liquidation process and the
liquidation proceedings thereafter. In fact, the case laws were of that era when there
was no system of submission of resolution plan and the only option available was the
start of liquidation. Due to this reason, when there was no system of restructuring or
revival of a debtor company under financial stress and the only statute available was
law of liquidation, therefore, naturally the case laws available on this subject is
confined to liquidation process. However, the unanimous decision is in favour of
granting of set off so that only the net claims of the respective parties be settled.
Thus, a conclusion can be drawn that the doctrine of set off or the accounting
principle of netting off is an accepted principle to be adopted by the concerned
parties.
2 6 . There was argument and counter-argument in respect of the term "mutual
dealings" used in regulation 29 of IBBI (Liquidation Process) Regulations. This
terminology has also been thoroughly examined by the hon'ble Courts and in one
such case of Gokul Chit Funds & Trades (P.) Ltd. (supra), it was made clear that
several distinct or independent transactions entered into between the same parties
are enough to permit adjustment so as to arrive at a net figure of payment, either to
the creditor or to the debtor. It is not necessary that set off is permissible in respect
of same nature of transaction. This conservative or strict condition has a limited
scope of its application, such as Income-tax laws where set off of loss is allowed
against the same nature of transaction. In my humble opinion, the terminology
"mutual dealings" is a conscious Legislation. While deciding such disputes revolving
around claim or counter-claim or set off, it is expected to give due regards to this
term "mutual dealings". The scope of this terminology is wide, which must not be
applied in restrictive manner.

27. Before I part with, it is necessary to place an important feature as appearing in
Form B which is meant for submission of claim by operational creditor wherein as per
clause 8 of the Form "the details of mutual credit, mutual debit between the
corporate debtor and creditor are required to be informed which may be arrived by
set off against the claim. The amount of claim in Form B is not the gross amount to
be furnished by operational creditor but only the amount after set off against
respective claims. As a result, a conclusion can be drawn that the submission of Form
B by Airtel Entity has given an entitlement of netting off the amount.
28. To conclude, this Bench is of the view that the applicant is legally entitled under
the Insolvency Code to set off the amount of Rs. 112 crore while making a payment
of the amount retained out of the total consideration settled as per Spectrum Trading
Agreement. Resultantly, I hereby hold that this application deserves to be allowed.
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MANU/NC/0017/2019

Equivalent Citation: [2019]150C LA419

IN THE NATIONAL COMPANY LAW TRIBUNAL

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