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Setting off dues during Corporate Insolvency Resolution Process

National Company Law Appellate Tribunal, New Delhi
Vijay Kumar V Iyer, RP for Aircel Ltd. And Dishnet Wireless Ltd.
Vs.
Bharti Airtel Ltd. & others
CA (AT) (Ins) No.530 & 700 of 2019 | Date: 13.07.2020
FACTS
In the present case, Corporate Debtor i.e. Dishnet Wireless Ltd and Aircel Limited had undergone Corporate Insolvency Resolution Process (CIRP) under Section 10 of the I&B Code on 19.3.2018 and 12.03.2018 respectively.
Both Aircel Ltd and Dishnet Wireless Ltd, being Aircel entities had entered into Spectrum Trade Agreement with the Respondents. A total consideration of Rs. 453 crores was paid by Aircel to the Respondents. The Hon’ble Supreme Court, vide Order dated 08.01.2019 in IA No. 180450/2018 with Contempt Petition No. 271/2018, had ordered the Respondents to return the sum of money paid as consideration to Aircel.
However, on 01.05.2019, the Mumbai Bench of National Company Law Tribunal passed an order permitting the setting off of dues by Respondents while making payment of the total consideration amount of Rs. 453 Crores.
Thereafter, the Respondents breached the orders of the Hon’ble Supreme Court and paid a sum of Rs. 341 Crores only, to the Appellants, while deducting a sum of Rs. 112 Crores for set off against dues owed by Aircel to the Respondents.

ISSUE BEFORE THE APPELLATE TRIBUNAL

The following issue was considered by the Appellate Tribunal:

Whether the Respondents can claim set off for dues owed to it during the period of Corporate Insolvency Resolution Process and when Moratorium is in force?
CONCLUDING VIEW
The Tribunal held that the Respondents cannot set off their dues against the Appellants during the period of Corporate Insolvency Resolution Process (CIRP).
The Bench relied on the judgment of NCLAT in Indian Overseas Bank Vs. Mr. Dinkar T.Venkatsubramaniam Resolution Professional for Amtek Auto Ltd Company Appeal (AT) (Ins) No. 267 of 2017. The Hon’ble Bench held that a Financial Creditor cannot appropriate any amount towards its own dues once moratorium has initiated pursuant to an application made under Section 7 of the I&B Code.
“5. …Having heard learned counsel for the Appellant, we do not accept the submissions made on behalf of the Appellant in view of the fact that after admission of an application under Section 7 of the I&B Code, once moratorium has been declared it is not open to any person including ‘Financial Creditor’ and the Appellant bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues”.
Further, the Bench also relied on the judgment of NCLAT in MSTC Ltd. Vs. Adhunik Metaliks Ltd & Ors Company Appeal (AT)(Ins) No.519 of 2018 and Liberty House Group Pvt. Ltd Vs. State Bank of India & Anr. Company Appeal (AT) (Ins) No.53 & 54 of 2019, wherein it was held that Section 14 of I&B Code pertaining to Moratorium period shall prevail over other provisions contrary to the same.
Hence, the Operational Creditor cannot appropriate any amount due to him prior to CIRP during the moratorium period.
“24. …Having heard learned counsel for the parties, we find that the Adjudicating Authority rightly held that Section 14 of the ‘I&B Code’ will override any other provisions contrary to the same. Any amount due to the ‘Operational Creditor’ prior to the date of ‘Corporate Insolvency Resolution Process’ (Admission) cannot be appropriated during the moratorium period.”
The Appellate Tribunal concluded that the provisions of I&B Code, 2016 in particular Section 238 which enables to provisions of the I&B Code, 2016 to override other laws which are inconsistent with it.
The Appellate Tribunal also observed that the provision of Moratorium under Section 14, which states that the order of moratorium shall remain in effect from the date of such order till the Corporate Insolvency Resolution Process is completed and the Resolution Plan is approved or an order of Liquidation is passed.
Furthermore, the Accounting Conventions cannot supersede the express provisions of the specific law, i.e. the I&B Code. The I&B Code includes provision for mechanism of Moratorium to remain in effect till Resolution Plan is approved or Liquidation order is passed.
It further enables the provisions of I&B Code to override other inconsistent laws. Hence, the Appellate Tribunal held that the provisions of I&B Code will prevail over other provisions of law for setting off.
The Appellate Tribunal allowed the Appeal and set aside the Order of the Adjudicating Authority allowing the setting off of dues. The Respondents were directed to pay the amount being set off by them to the Appellant.
AMLEGALS REMARKS
The Appellate Tribunal decided upon the validity of setting off dues by a Creditor during the moratorium period and Corporate Insolvency Resolution Process. While deciding the matter, it was observed that the provisions of I&B Code have an overriding effect over any other inconsistent law.
The Account Provisions provide for the right of a party to apply set off and that such rights have been recognized in the context of insolvency and liquidation under Companies Act, 2013 and Presidency Insolvency and Provincial Insolvency Act, 1920.
However, the I&B Code or the CIRP Regulations do not contain any provision permitting the setting off of dues during CIRP. Hence, the provisions of CIRP under the I&B Code shall prevail over Accounting Provisions.
Further, the set off claimed by the Respondents was in respect of two separate and unrelated transactions. Such a preferential appropriation of dues would be prejudicial to the interest of secured creditors, who have a prior claim to the dues.
The Appellate Tribunal after referring to various judgments of the NCLAT, held that the right to claim set off cannot be applied after the initiation of CIRP during the moratorium period. Further, it observed that the provision of setting off dues under Accounting Standards is inconsistent to the I&B Code 2016 and hence, the Respondents cannot follow the same.
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