Set-Off Can Be Raised As Defence Against Corporate Debtor Though Resolution Plan Bars Future Settlements : Supreme Court

The Supreme Court has held that while claims not included in an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 stand extinguished, a limited plea of set-off can still be raised as a defence in arbitral proceedings, provided it does not result in any affirmative recovery.

A bench of Justice Dipankar Datta and Justice Augustine George Masih partly allowed an appeal filed by Ujaas Energy Ltd. against West Bengal Power Development Corporation Ltd., modifying the Calcutta High Court Division Bench's order which had directed continuation of arbitral proceedings without excluding the counterclaim.

The dispute arose from a 2017 contract for installation of grid-connected rooftop solar power plants in West Bengal. Ujaas Energy, an MSME, was later admitted to the Corporate Insolvency Resolution Process (CIRP) in September 2020. During arbitration proceedings initiated by the company, the respondent PSU raised a counterclaim. However, this counterclaim had not been submitted before the Resolution Professional during CIRP.

After the resolution plan was approved by the National Company Law Tribunal in October 2023, Ujaas Energy argued that all claims not forming part of the plan stood extinguished. The arbitral tribunal accepted this contention and rejected the counterclaim through an interim award, which was upheld by a Single Judge of the High Court. However, the Division Bench reversed this, observing that the issue required full adjudication along with the main claim.

The appellant argued that once the Adjudicating Authority approved the resolution plan under Section 31(1) of the Insolvency and Bankruptcy Code, 2016, it is impermissible to raise any counterclaim either under the IBC or before the arbitral tribunal.

However, the Respondent contended that even if its counterclaim could not survive as an independent claim pursuant to approval of the resolution plan, it should still be allowed to raise the plea of set-off to resist the appellant's claims against it.

The Court agreed with the appellant that any claim not included in the resolution plan stands extinguished upon its approval under Section 31 of the IBC. Relying on its earlier ruling in Ghanashyam Mishra & Sons v Edelweiss Asset Reconstruction Co Ltd, the bench reiterated that no proceedings can be continued in respect of such extinguished claims.

However, the Court drew a distinction between pursuing a claim and using it defensively. It noted that the resolution plan barred recovery or settlement of claims not included in it, including counterclaims, but did not expressly prohibit the use of such claims as a defence by way of set-off.

Taking note of the fact that the respondent had raised its counterclaim prior to approval of the resolution plan and that the Resolution Professional was aware of it, the Court held that limited equitable consideration was warranted.

Accepting the respondent's contention, the judgment authored by Justice Datta held that although the respondent's counterclaim was not maintainable, it could still invoke set-off as a defence to resist the appellant's claim, since the resolution plan did not prohibit such a plea.

“we hold that the respondent, although not entitled to independently pursue its claim by way of counterclaim post approval of the resolution plan, ought to be permitted to raise the plea of set-off at least by way of defence. It is ordered accordingly.”, the court held, saying that “…the resolution plan does not expressly, or even impliedly, exclude the plea of set-off as a defence; the same merely bars any claim for the purpose of payment or settlement.”

Accordingly, the Court permitted the respondent to raise the plea of set-off purely as a defence in arbitration. It clarified that no affirmative relief or recovery can be granted on the basis of such a plea. If the respondent's claim exceeds the amount awarded to the appellant, the surplus cannot be recovered. Conversely, if any amount remains payable to the appellant after adjustment, it can be awarded.

The Court further held that if the arbitration proceedings are withdrawn, the counterclaim would also fail, as its survival is only for defensive purposes.

Clarifying that its ruling is confined to the specific terms of the resolution plan in the present case, the Court distinguished its earlier decision in Bharti Airtel Ltd. v Aircel Ltd., noting that the issue there pertained to set-off during CIRP, whereas the present case concerns a claim raised before the approval of the resolution plan.

Cause Title: UJAAS ENERGY LTD. VS. WEST BENGAL POWER DEVELOPMENT CORPORATION LTD.

Citation : 2026 LiveLaw (SC) 272

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Appearance:

For Petitioner(s) : Mr. Abhijeet Sinha, Sr. Adv. Mr. Himanshu Satija, Adv. Ms. Neha Mehta Satija, AOR Mr. Harshit Khanduja, Adv. Mr. Harsh Saxena, Adv. Mr. Anshul Rao, Adv.

For Respondent(s) : Mr. Jishnu Chowdhury, Sr. Adv. Mr. Kartikey Bhatt, Adv. Mr. Aviroop Mitra, Adv. Mr. Abhinav Rana, Adv. Mr. Kunal Mimani, AOR Mr. Chavan Gupta, Adv. Mr. Mandeep Singh, Adv.