Insolvency Set Offs in India: A Comparative Perspective

Abstract

The overarching objective of the Insolvency and Bankruptcy Code, 2016 (IBC) is to foster rescue culture in India and facilitate the reorganization, restoration and resolution of the corporate debtor rather than its liquidation. However, liquidation has been the most prevalent outcome so far for corporate debtors who have entered into the insolvency resolution process. The liquidation process under the IBC entails an orderly distribution of sale proceeds of the liquidation estate or the unsold assets of the corporate debtor where each creditor receives a proportionate amount of their claims based on their place in the distribution hierarchy of the liquidation process. A creditor’s ability to set off a debt by-passes this orderly scheme of distribution and allows the creditor exercising the set off to be preferred over others to the extent of the set off value. Despite this manifestation of the right to set off, it is preserved in the insolvency and bankruptcy regimes of the US and the UK, the latter making it mandatory. India recognized set offs under insolvency law prior to the enactment of the IBC. After the IBC’s enactment, an indebted creditor’s right to set off during the insolvency resolution process has become ambiguous. The IBC’s protective moratorium during the insolvency resolution process has been used to deny indebted creditors of their ability to exercise set offs against the corporate debtor. This paper analyses the evolution in the Indian position on insolvency set offs and compares it with the treatment of set offs in the UK and the US. The paper finds that set offs are not inherently antithetical to insolvency law and that they can be embraced by the IBC.