Extinguished claims not in a resolution plan may be raised as a defensive set-off in arbitration.

The Respondent issued an e-tender in 2017 for solar power plants, which the Appellant (an MSME) successfully bid for

On September 17, 2020, the Appellant was admitted into the Corporate Insolvency Resolution Process (CIRP) under the IBC

During the CIRP, the Appellant (through its Resolution Professional) invoked arbitration against the Respondent

The Respondent filed a counterclaim in the arbitral proceedings but notably failed to lodge this claim before the Resolution Professional during the CIRP

On October 13, 2023, the NCLT approved a resolution plan for the Appellant

The Appellant subsequently sought dismissal of the Respondent's counterclaim under Section 31(6) of the Arbitration and Conciliation Act, arguing that the approval of the resolution plan extinguished all claims not included therein

The Arbitral Tribunal allowed the application and rejected the counterclaim via an interim award

A Single Judge of the High Court dismissed the Respondent’s challenge to this award

a Division Bench set aside that order, directing the Tribunal to proceed with both the claim and counterclaim

1. Whether the respondent ought to be allowed to raise the plea of set-off before the Arbitral Tribunal, notwithstanding the extinguishment of its counterclaim due to failure to raise such a claim before the Resolution Professional during the CIRP

Section 31(1) of the Insolvency and Bankruptcy Code (IBC), which mandates that a resolution plan approved by the Adjudicating Authority is binding on all stakeholders and extinguishes all claims not included in the plan

the "clean slate" principle established in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021), which holds that once a resolution plan is approved, all claims not part of the plan stand frozen and extinguished

definition of "claim" under Section 3(6) of the IBC

the legal maxim expressio unius est exclusio alterius (the express mention of one thing excludes others) to interpret the specific exclusion clauses of a resolution plan

The Court observed that under Section 31 of the IBC and the Ghanashyam Mishra precedent, the Respondent's failure to lodge its claim with the Resolution Professional resulted in the legal extinguishment of that claim as an independent right to payment

Consequently, the Respondent could not seek any "affirmative relief" via a counterclaim

However, the Court scrutinized Paragraph 12.4.1 of the specific Resolution Plan, which barred "payments or settlements" regarding non-included claims but did not explicitly prohibit the use of such claims as a defensive "set-off"

The Court reasoned that while the "clean slate" principle prevents new liabilities from being enforced against the successful resolution applicant, it does not necessarily strip a party of a defensive plea of set-off to reduce their own liability to the corporate debtor

The Court distinguished this from Bharti Airtel Ltd. v. Aircel Ltd. (2024), noting that the present case turned on the interpretation of an already approved resolution plan rather than the statutory right of set-off during the CIRP stage

It held that while the Respondent's counterclaim is extinguished and cannot be pursued for affirmative recovery, the Respondent is permitted to raise the plea of set-off strictly as a defence to the Appellant’s claims

if the Respondent’s set-off amount exceeds the Appellant's award, the surplus is not recoverable; (b) only the balance remaining after such adjustment is recoverable by the Appellant; and (c) if the Appellant withdraws its claim, the Respondent's defensive plea shall also fail