IBC haircut does not bar creditor from using its extinguished claim as a set-off in arbitration, Supreme Court rules

Modern Asset and KNK Construction entered into a construction contract containing an arbitration clause.

After KNK was admitted to the corporate insolvency resolution process (CIRP), Modern Asset submitted a claim of approximately ₹12.26 crore against it.

The resolution plan, submitted by KNK’s erstwhile promoters as the successful resolution applicant (SRA), provided for payment of approximately 0.72% of that claim; the plan was approved by the NCLT and the payment was subsequently satisfied.

KNK, acting through the SRA, later sought arbitration for amounts allegedly due under the same contract.

The High Court appointed an arbitral tribunal, leaving the effect of the resolution plan and the “clean slate” principle to the tribunal.

Modern Asset appealed, seeking to prevent a one-sided arbitration and to raise its extinguished claim as a set-off.

Whether the arbitration agreement survived approval of the resolution plan, permitting the SRA to pursue KNK’s claim against Modern Asset in arbitration.

Whether Modern Asset could raise its claim, extinguished as a claim against the corporate debtor under the resolution plan, as a counterclaim solely for set-off against any amount awarded to the SRA.

Under Sections 31(1) and 30(2) of the Insolvency and Bankruptcy Code, 2016 (IBC), an approved resolution plan binds the relevant stakeholders and claims against the corporate debtor that are not preserved under the plan stand extinguished; the “clean slate” principle does not, however, prevent an SRA from pursuing claims belonging to the corporate debtor.

Under Section 11(6-A) of the Arbitration and Conciliation Act, 1996, the referral court’s inquiry is limited to the prima facie existence of an arbitration agreement, while the arbitration clause is separable from the underlying contract.

In Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., 2026 SCC OnLine SC 453, the Court allowed an otherwise extinguished counterclaim to be considered for set-off only, without permitting affirmative recovery.

The Court also relied on Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, on the binding and extinguishing effect of an approved resolution plan.

The Court upheld the reference to arbitration because the contract contained a valid arbitration clause and the SRA could pursue claims belonging to the corporate debtor; the plan’s approval did not extinguish those claims.

But both parties’ claims arose from the same contract, and Modern Asset’s claim had been disclosed in the CIRP and provided for—at a substantial haircut—in the resolution plan submitted by the erstwhile promoters, who became the SRA.

Applying the equitable approach in Ujaas Energy, the Court held that allowing the SRA to pursue its claim while preventing Modern Asset from relying on its related claim even defensively would be inequitable.

It therefore permitted Modern Asset to use its claim only as a set-off, consistently with the clean-slate principle, and not to obtain an independent recovery.

The tribunal may determine the SRA’s claim and must allow set-off up to the full amount of Modern Asset’s claim submitted in the CIRP if any amount is found payable by Modern Asset.

Modern Asset cannot recover any amount through that counterclaim, even if the SRA’s claim fails entirely.

The tribunal may also consider the dispute concerning encashment of the bank guarantee.