Brief Overview:
Set-off during liquidation of a corporate debtor is permitted only where mutual dealings exist between the corporate debtor and the same counterparty. Regulation 29 of the Liquidation Regulations cannot be applied to set-off dues owed to a common creditor by other group entities of the corporate debtor.
Technical Details:
Can a creditor avoid paying dues to a corporate debtor in liquidation by setting them off against amounts allegedly recoverable from the group entities of the corporate debtor based on Regulation 29 of the Liquidation Regulations and ‘group of companies doctrine’?
The NCLAT answered in the negative, stating that:
1) Regulation 29 of the Liquidation Regulations permits set-off only where mutual dealings exist between the corporate debtor and the same counterparty.
2) Claims against group companies cannot be set-off against amounts payable to the corporate debtor.
3) Each company undergoing CIRP or liquidation retains its separate legal identity, even if the entities belong to the same group.
4) In liquidation, a creditor is entitled to recover its admitted claims only in accordance with Section 53 of the IBC and cannot bypass the waterfall mechanism by pursuing cross claims with same group entities of the corporate debtor.
JC takeaway:
As a matter of observation by NCLAT, the claim form submitted by the creditor during CIRP in relation to ‘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’ was marked as “N/A”. Perhaps the outcome may have been different if this was filled differently. Till then, a creditor cannot claim set-off in the corporate debtor’s liquidation on the basis of debts owed to it by the corporate debtor’s group entities.
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