In the case of Shiv Charan and Ors.

The Bombay High Court recently quashed a provision of a central government office memorandum that enabled public sector banks to request issuance of look out circulars (LoCs) against wilful defaulters. In Viraj Chetan Shah v Union of India, the court held that this provision violated the fundamental right to life (Article 21) as well as the fundamental right to equality (Article 14). The government is reportedly contemplating a statutory basis for PSBs to initiate LoCs.

The original version of this article was first published in the Trilegal Quarterly Roundup

This article analyses the utility of set-off provisions in commercial contracts, especially in the context of insolvency, in light of a recent Supreme Court decision. It also provides key takeaways for ensuring the feasibility of set-off provisions and making them capable of withstanding judicial scrutiny.

The treatment and position of statutory creditors having a statutory charge in insolvency proceedings gained criticality at the first instance upon passing of the judgment by the Hon’ble Supreme Court in the matter of STATE TAX OFFICER (I) VERSUS RAINBOW PAPERS LTD. 2022 SCC ONLINE SC 1162 (Rainbow Papers Case). The issue before the Hon’ble Supreme Court was whether in terms of Section 48 of the Gujarat Value Added Tax Act, 2003, the State Government shall be treated as a “Secured creditor” of the company undergoing insolvency proceedings.

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The filing of voluntary insolvency proceedings by the promoters of Go Air in May 2023, being a first of its kind, gained a lot of limelight and the National Company Law Tribunal acted swiftly to admit the insolvency proceedings within a span of 10 days from the date of filing of the insolvency plea. At the time of initiation of proceedings against Go Air, the promptness on the part of the Promoters was being considered significant to assist an ailing airline company which stood grounded as on the date of initiation of insolvency proceedings.

The Hon’ble Supreme Court of India (“Supreme Court”) in Global Credit Capital Limited & Anr Vs SACH Marketing Pvt. Ltd & Anr, has established the following principles on classification of a debt under the Insolvency and Bankruptcy Code, 2016 (“Code”):

In the case of Shiv Charan and Ors. v Adjudicating Authority and Anr.¹, the Division Bench of the Hon’ble High Court of Bombay (“Bombay HC”) inter alia upheld the powers of the National Company Law Tribunal, Mumbai (“NCLT”) to direct the Enforcement Directorate (“ED”) to release attached properties of a corporate debtor, after the approval of a resolution plan by the NCLT, in light of Section 32A of the Insolvency & Bankruptcy Code, 2016² (“IBC”).

In the recent decision of the Anjani Kumar Prashar (Suspended Director of Grandstar Realty Pvt. Limited) v. Manab Dutta1, the National Company Law Appellate Tribunal (“NCLAT”) has held that the auction purchaser would also be a financial creditor vis‐à‐vis the creditors of the entity whose assets were purchased by the auction purchaser.

In the recent decision of Ashok Dattatray Atre & Ors. v. State Bank of India & Ors.1 National Company Law Appellate Tribunal (“NCLAT”) has reiterated that the extension of payment timelines under a resolution plan does not constitute a modification thereof, and the National Company Law Tribunal has the power to grant such extension even without the express concurrence of the committee of creditors (“CoC”).

Brief Facts