Operational Creditor Who Suffered 99.28% Haircut In CIRP Can Claim Set-Off In Post-CIRP Arbitration Initiated By SRA: Supreme Court
The Supreme Court held that an operational creditor whose claim stood extinguished under an approved resolution plan can raise a counterclaim solely for set-off against amounts found payable to the successful resolution applicant under the same contract, but cannot seek independent monetary recovery.
The Court has held that an operational creditor who suffered a 99.28% haircut under an approved resolution plan can raise a counterclaim for set-off in arbitration initiated by the successful resolution applicant (SRA), where both parties' claims arise from the same contract.
A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran clarified that although the 'clean slate' principle under the Insolvency and Bankruptcy Code, 2016 (IBC) extinguishes the operational creditor's claim against the corporate debtor and the SRA, the creditor may rely on that claim for the limited purpose of set-off. Such a counterclaim cannot result in any independent monetary recovery.
The Court delivered the judgment in Modern Asset v. KNK Construction Private Limited on October 8, 2026, while upholding the appointment of an arbitral tribunal by the Karnataka High Court, subject to the modification permitting set-off.
Background
Modern Asset and KNK Construction Private Limited entered into a contract dated July 9, 2018, for civil and structural work on an office building valued at ₹133.68 crore. Clause 19.13 of the agreement provided for arbitration of disputes arising out of the contract.
KNK Construction was admitted into the Corporate Insolvency Resolution Process (CIRP) on December 11, 2019. Modern Asset subsequently terminated the contract and submitted a claim of ₹12,26,30,840 before the Resolution Professional (RP).
The resolution plan submitted by KNK Construction's erstwhile promoters, who were permitted to return to management as the SRA in view of the corporate debtor's MSME status under Section 240A(1) of the IBC, provided for payment of only ₹8,82,942, representing approximately 0.72% of Modern Asset's claim. The National Company Law Tribunal (NCLT) approved the resolution plan on April 5, 2022, and the payment under the plan was subsequently completed.
KNK Construction invoked arbitration by a notice dated March 13, 2023, seeking amounts allegedly due under the same contract. It subsequently approached the Karnataka High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator.
The High Court appointed an arbitrator and left the questions concerning the effect of the resolution plan and the extinguishment of claims to the arbitral tribunal. Modern Asset challenged the order before the Supreme Court.
Submissions Before The Supreme Court
Senior Advocate Shyam Divan, appearing for Modern Asset, argued that allowing the SRA to pursue its monetary claims while preventing Modern Asset from raising a corresponding counterclaim would create an inequitable, one-sided arbitration.
He submitted that Modern Asset's claim had already been settled under the resolution plan and that the SRA, whose promoters were aware of the claim during the CIRP, could not pursue a claim arising from the same contract without allowing a corresponding set-off.
Senior Advocate Nikhil Nayyar, appearing for KNK Construction, argued that the SRA retained the right to pursue debts owed to the corporate debtor. He submitted that the inquiry under Section 11 was confined to the prima facie existence of an arbitration agreement and that the substantive consequences of the resolution plan could be considered by the arbitral tribunal.
Supreme Court's Observations
The Court reiterated that the 'clean slate' principle under Section 31 of the IBC extinguishes claims against the corporate debtor that are not preserved under the approved resolution plan. However, the SRA remains entitled to pursue claims available to the corporate debtor against its debtors.
The Bench observed that the present dispute involved three significant circumstances: the substantial haircut suffered by Modern Asset, the return of the corporate debtor's erstwhile promoters as the SRA, and the fact that both parties' claims arose from the same contract.
The Court noted that the Resolution Professional had not included the counterclaim available to the corporate debtor in the Information Memorandum before resolution plans were invited. The erstwhile promoters, who submitted the resolution plan, were aware of Modern Asset's claim but did not account for the counterclaim when submitting the plan.
Relying on its decision in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., 2026 SCC OnLine SC 453, the Court held that an extinguished claim could be considered for set-off without permitting an independent recovery.
The Bench clarified that the clean-slate principle could not be left open for reconsideration by the arbitrator. While the SRA could pursue claims available to the corporate debtor, claims against the corporate debtor stood extinguished in accordance with the approved resolution plan.
The Supreme Court sustained the appointment of the arbitral tribunal but modified the High Court's order to permit Modern Asset to raise a counterclaim solely for set-off.
The Court directed that if the arbitral tribunal finds any amount payable by Modern Asset to KNK Construction, the amount shall be set off against the entire claim that Modern Asset had raised before the RP during the CIRP.
The Court made it clear that even if KNK Construction's claim is found entirely untenable, Modern Asset cannot obtain any payment on the basis of its counterclaim, since its claim stands extinguished against the corporate debtor and the SRA.
The arbitral tribunal will also consider whether the encashment of the bank guarantee furnished by KNK Construction was proper or improper.
The appeal was accordingly disposed of with the above modification.
Case Title: Modern Asset v. KNK Construction Private Limited
Case Number: Civil Appeal arising out of SLP (C) No. 25068 of 2026 (the judgment does not specify a numbered Civil Appeal No. in the cause title)