Set-Off of Mutual Dues Allowed During CIRP Moratorium Under IBC – NCLAT Clarifies Operational Creditor Rights
- REEDLAW
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REEDLAW Legal News Network reports: In a pivotal ruling, the Appellate Tribunal clarified that an Operational Creditor was permitted to claim a set-off of admitted mutual dues or transactional liabilities owed to the Corporate Debtor while filing Form-B during the CIRP. The Tribunal concluded that such a set-off remained legally sustainable even during the moratorium period, so long as the mutual dues were undisputed, quantifiable and arose from clearly identifiable transactions, thereby drawing a clear distinction between permissible transactional set-off and the general insolvency set-off barred under the IBC.
The National Company Law Appellate Tribunal (NCLAT), comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating a Company Appeal and a connected Interlocutory Application, examined whether an Operational Creditor could adjust admitted mutual dues payable to the Corporate Debtor during the CIRP. It was observed that the claim filed in Form-B legitimately included the set-off, as the corresponding dues were undisputed, quantifiable and directly linked to identifiable transactions between the parties. The Tribunal further clarified that such transactional set-off, distinct from general insolvency set-off, did not amount to recovery during the moratorium and was therefore permissible in law.
The Appellant, an Operational Creditor, filed an appeal against the order dated 11.08.2023 passed by the National Company Law Tribunal, Kolkata Bench, approving the Resolution Plan of the Corporate Debtor (“CD”) in C.P. (IB) No. 294/KB/2021 and deciding various applications, including I.A. (IB) No. 428/KB/2023. The Appellant challenged the order only to the extent that set-off of mutual dues, which the Appellant was required to pay to the CD, was not allowed while determining its claim, which was initially submitted for Rs. 3,40,46,082/- after deducting Rs. 5,56,59,526/- payable to the CD. The Appellant did not dispute the approval of the Resolution Plan or the Nil payout under the Plan.
The Corporate Insolvency Resolution Process (“CIRP”) had been initiated against the CD on 10.10.2021. The Appellant had submitted its claim in Form-B under the CIRP Regulations, 2016, including the amount payable to the CD under a separate Memorandum of Understanding as a set-off. The Resolution Professional (“RP”) initially rejected the claim with set-off, citing Section 14 moratorium under the Insolvency and Bankruptcy Code, 2016 (“IBC”), and asked the Appellant to submit a fresh claim without deduction. The Appellant complied and filed a revised claim for Rs. 8,97,05,608/-, which was admitted to the extent of Rs. 8,66,89,866/- by the RP, with a demand raised for the balance amount payable to the CD.
The Appellant contended that the claim was correctly filed after accounting for mutual dues and that the RP erred in refusing the set-off, relying on the principle of transactional or contractual set-off recognised by the Supreme Court in Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others, REEDLAW 2024 SC 01515. It was submitted that the mutual dues were undisputed, quantifiable, and legally enforceable, thereby falling within the exception for contractual or equitable set-off, despite the moratorium imposed under Section 14.
The Respondent and the Successful Resolution Applicant opposed the Appeal, submitting that set-off is not permissible under CIRP, and the admission of the claim by the RP had become final. It was emphasised that the Appellant could not challenge the Resolution Plan after acceptance of its claim by the RP. The Tribunal noted that Column 8 of Form-B explicitly contemplates mutual credits or debts which may be set-off, provided they are admitted and not in dispute. In the present case, the mutual dues were undisputed, and the admitted claim exceeded the amount payable by the Appellant to the CD.
The Tribunal concluded that the Appellant was entitled to set-off the undisputed mutual dues while filing the claim under the CIRP. The facts of the case fell squarely within the exceptions recognised in Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others, REEDLAW 2024 SC 01515 for contractual or transactional set-off. The RP’s refusal to admit the claim with set-off was contrary to the CIRP Regulations, 2016, and the principles established by the Supreme Court.
Mr. Sumant Batra, Mr. Sarthak Bhandari and Ms. Riya Kaur Arora and Ms. Nidhi Yadav, Advocates, represented the Appellant.
Mr. Sourav Roy, Mr. Navneet R., Mr. Anshu Deshpande, Ms. Alankrita Sinha and Mr. Pranav Bafna, Advocates, appeared for the Respondent No. 1.
Mr. Abhinav Vashisth, Sr. Advocate with Mr. Raunak Dhillon, Mr. Nihaal Dewan, Ms. Niharika Shukla and Ms. Abhilasha Sharma, Advocates, appeared for the Respondent No. 2.
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