The Supreme Court clarified the interplay between the Insolvency and Bankruptcy Code, 2016 and arbitration agreements, holding that while an operational creditor’s claim stands extinguished under a resolution plan, the creditor may raise a counterclaim solely for the purpose of set-off in any arbitration initiated by the successful resolution applicant. The Court emphasized that the ‘clean slate’ principle does not extinguish the successful resolution applicant’s right to pursue the corporate debtor’s dues, but equity demands that the extinguished creditor be allowed to set-off its claim against such pursuit.
Background & Facts
The Dispute
The dispute arises from a contract for civil and structural work of an office building executed on 09.07.2018 between Modern Asset (appellant) and KNK Construction Private Limited (respondent). The total contract value was Rs.133.68 crores. Modern Asset paid a mobilization advance and the respondent furnished a bank guarantee of Rs.1,56,13,250. Work commenced on 01.06.2018, with the timeline extended once to 31.12.2019. By the time 95% of the work was completed, Modern Asset issued a termination notice and effected termination on 25.02.2020. The respondent had already been admitted into the Corporate Insolvency Resolution Process (CIRP) on 11.12.2019. After CIRP admission, the respondent sought registration as a micro, small and medium enterprise (MSME). Modern Asset filed a claim of Rs.12,26,30,840 before the Resolution Professional (RP), of which only 0.72% (Rs.8,82,942) was admitted in the resolution plan with interest. The National Company Law Tribunal (NCLT) approved the resolution plan on 05.04.2022, whereby the erstwhile promoters of the respondent became the successful resolution applicant (SRA). Payment under the plan commenced on 15.06.2023 and was fully satisfied as of the judgment date. Modern Asset later lodged an FIR (Crime No.20 of 2023) alleging forgery, while the respondent filed a counter-complaint (Crime No.77 of 2023) quashed by the High Court on 25.07.2025. The respondent invoked arbitration by notice dated 13.03.2023 and filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 before the High Court of Karnataka on 20.06.2023. The High Court directed the parties to mediation and, failing that, to approach the Bengaluru International Arbitration and Conciliation Centre. Aggrieved, Modern Asset appealed to the Supreme Court.
Key Facts
- Agreement date: 09.07.2018
- Work commencement: 01.06.2018
- Timeline extension: till 31.12.2019
- 95% work completion prior to termination threat
- Termination notice and effect: 25.02.2020
- Respondent admitted into CIRP: 11.12.2019
- NCLT approval of resolution plan: 05.04.2022
- Commencement of payment under plan: 15.06.2023
- Respondent’s arbitration notice: 13.03.2023
- Section 11 application before Karnataka HC: 20.06.2023
- Respondent’s counter-complaint (Crime No.77/2023) quashed: 25.07.2025
- Judgment date: 08 October 2026
Procedural History
- 11.12.2019: CIRP commenced (Section 9 petition admitted)
- 05.04.2022: NCLT approved resolution plan
- 13.03.2023: Respondent issued arbitration notice under Section 11
- 20.06.2023: Respondent filed Section 11 application before High Court of Karnataka
- 25.07.2025: High Court quashed respondent’s Crime No.77/2023
- 08.10.2026: Supreme Court delivered judgment in the present appeal
Relief Sought
Modern Asset sought to set aside the impugned order of the High Court that permitted arbitration, contending that its claim had been extinguished under the IBC resolution plan and that no further claim could be raised by the SRA. The respondent sought to uphold the High Court’s direction for arbitration, asserting that the ‘clean slate’ principle did not bar it from pursuing dues of the corporate debtor.
The Legal Issue
The central question was whether, after approval of a resolution plan under Section 31(1) of the IBC, an operational creditor whose claim has been extinguished may raise a counterclaim in arbitration initiated by the successful resolution applicant, and if so, whether such counterclaim can be limited to set-off only or may also seek affirmative relief.
Arguments Presented
For the Appellant/Petitioner
Modern Asset, through Senior Counsel Shyam Divan, argued that its claim of Rs.12.26 crores stood extinguished to the extent of 99.28% under the resolution plan, which had been accepted in toto by the SRA. It contended that allowing the SRA to pursue arbitration for the same dues would create a one-way street, depriving the appellant of any right to set-off its extinguished claim. Reliance was placed on the principle that the resolution plan, once approved, binds all stakeholders and extinguishes claims not included therein, citing Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd. (2026 SCC OnLine SC 453) and Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021) 9 SCC 657. The appellant urged that the Arbitral Tribunal should be barred from entertaining any claim by the SRA arising from the same contract.
For the Respondent/State
The respondent, represented by Senior Counsel Nikhil Nayyar, countered that the ‘clean slate’ principle under Section 31(1) applies only to claims against the corporate debtor, not to claims of the corporate debtor (including those asserted by the SRA). It argued that the RP’s failure to include the appellant’s counterclaim in the resolution plan did not extinguish the SRA’s right to pursue the corporate debtor’s dues. Reliance was placed on SBI General Insurance v. Krish Spinning (2024) 12 SCC 1 and In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act, 1899 (2024) 6 SCC 1, which hold that an arbitration agreement is separate and independent and survives the approval of a resolution plan. The respondent further submitted that Section 31(6), inserted w.e.f. 26.05.2026, clarifies the retrospective effect of the ‘clean slate’ principle and does not affect the SRA’s right to realize dues.
The Court's Analysis
The Court began by noting that Section 31(1) of the IBC extinguishes debts due to financial and operational creditors but keeps alive debts due to the corporate debtor. It observed that the arbitration agreement is a separate and independent contract, as held in SBI General Insurance v. Krish Spinning and In Re: Interplay between Arbitration Agreements. Consequently, the approval of a resolution plan does not automatically extinguish the arbitration clause or the SRA’s right to initiate arbitration for the corporate debtor’s dues.
Turning to the appellant’s claim, the Court found that the resolution plan had admitted only 0.72% of the claim, with the balance agreed to be paid by the SRA as a major haircut. This amounted to acceptance of the entire claim in toto, albeit with a restricted payout. The Court emphasized that equity requires that when the SRA steps into the shoes of the erstwhile promoters and seeks to realize the corporate debtor’s dues, the extinguished creditor must be allowed to set-off its claim against such pursuit.
The Court relied on Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., where it had directed that a counterclaim could be entertained solely for the purpose of set-off, without allowing any affirmative recovery. It held that the same principle applies with greater force here because the SRA is none other than the erstwhile promoters who had accepted the claim with a major haircut. The Court therefore directed that the Arbitral Tribunal may allow the appellant to raise a counterclaim, but only to the extent of set-off, and that any amount found payable by the appellant to the respondent shall be set-off to the extent of the entire counterclaim.
The Court also addressed limitation, noting that the termination of the contract (26.02.2020) occurred after the CIRP commenced, and the notice of arbitration (13.03.2023) and the Section 11 application (20.06.2023) were filed within the limitation period after excluding the moratorium under Section 14 of the IBC.
"The Arbitration Tribunal shall allow set -off to the extent of the entire claim raised by the appellant, before the RP in the CIRP, accepted in toto by the SRA in its resolution plan, favoured with a majority of the CoC and approved by the NCLT."
The Verdict
The appeal is allowed in part. The High Court’s order directing the parties to approach arbitration is upheld, but with the modification that the appellant (Modern Asset) shall be entitled to raise a counterclaim solely for the purpose of set-off, limited to the entire claim of Rs.12,26,30,840 raised before the RP during the CIRP, which was accepted in toto by the SRA in its resolution plan. No affirmative relief of recovery shall be granted to the appellant on the basis of such counterclaim. The respondent (KNK Construction Private Limited) may proceed with arbitration to realize the corporate debtor’s dues, subject to the set-off defence. The appellant shall bear its own costs.
What This Means For Similar Cases
Set-Off as the Sole Remedy for Extinguished Claims
Practitioners must now frame counterclaims in arbitration proceedings initiated by a successful resolution applicant as purely defensive set-off mechanisms when the underlying operational creditor’s claim has been extinguished under an approved resolution plan. No claim for affirmative recovery can be sustained.
The ‘Clean Slate’ Principle Does Not Bar the SRA’s Right to Pursue Corporate Debtor Dues
The successful resolution applicant, even if it comprises the erstwhile promoters, retains the right to arbitrate and realize dues owed by the corporate debtor. The principle extinguishes only claims against the corporate debtor, not claims of the corporate debtor.
Limitation Computation Excludes the Moratorium Period
For timing challenges, the limitation period for filing a Section 11 application must be computed after excluding the moratorium period under Section 14 of the IBC, ensuring that notices issued during the CIRP are not time-barred.
Arbitration Agreement Survives Resolution Plan Approval
An arbitration clause remains enforceable post-approval of a resolution plan; the doctrine of separability preserves its independence, allowing the SRA to invoke it for the corporate debtor’s dues.
