IBC Clean Slate Does Not Wipe Out Right of Set-Off as Defence: Supreme Court Draws Critical Distinction Between Counterclaim and Defensive Plea

"Paragraph 12.4.1 Does Not Expressly Bar a Plea of Set-Off Raised Purely as a Defence — Applying Expressio Unius Est Exclusio Alterius, Intention to Exclude Cannot Be Inferred", Supreme Court of India has resolved a significant conflict between the "clean slate" principle under the Insolvency and Bankruptcy Code and the right of a party to raise set-off as a defence in arbitration proceedings, holding that while a counterclaim not lodged before the Resolution Professional stands extinguished upon approval of a resolution plan, the party retains the right to raise set-off as a purely defensive plea — not to recover any surplus, but to resist the corporate debtor's claim either entirely or in part.

A bench of Justice Dipankar Datta and Justice Augustine George Masih, delivering the judgment authored by Justice Datta on March 20, 2026, partly allowed the appeal filed by Ujaas Energy Ltd. against a Calcutta High Court Division Bench order, and modified the Division Bench's direction to the Arbitral Tribunal.

The sole issue before the court was whether, after the extinguishment of WBPDCL's counterclaim upon approval of the resolution plan, the respondent could nonetheless raise a plea of set-off as a defence before the Arbitral Tribunal — and if so, to what extent.

Clean Slate Principle Confirmed — Counterclaim Stands Extinguished

The court began by unequivocally affirming the clean slate principle. Section 31(1) of the IBC provides that upon approval, the resolution plan is binding on all stakeholders — the corporate debtor, its employees, creditors, government authorities, guarantors, and all others. Drawing on the Constitution Bench decision in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, the court reiterated: "On the date of approval of resolution plan by the adjudicating authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan."

WBPDCL had raised its counterclaim before the Tribunal but had never lodged any claim before the Resolution Professional during the CIRP. The resolution plan did not include any provision for WBPDCL's claim. The court had no hesitation in holding that "we cannot permit the respondent to seek any affirmative relief from the Tribunal" — the counterclaim stood extinguished by operation of law.

Three Facts That Prompted the Court to Consider Equitable Relief

Having confirmed extinguishment of the counterclaim, the court noted three facts of significance that prompted it to consider whether any limited indulgence in favour of the respondent was warranted. First, WBPDCL had raised its counterclaim before the Tribunal prior to the approval of the resolution plan — it was not a post-plan creation. Second, the Resolution Professional was aware of the counterclaim in the arbitration proceedings it had itself initiated, yet did not incorporate it in the resolution plan. Third, the resolution plan, as framed, bars all future "payments/settlements" in respect of claims not raised before the Resolution Professional — but its language did not expressly address the defensive use of set-off. These facts, the court held, "though not decisive in any manner, prompt us to slightly drift towards considering whether some equity in favour of the respondent does accrue."

Paragraph 12.4.1 Bars Payment and Settlement — Not Defensive Set-Off

The pivotal analysis turned on the precise language of Paragraph 12.4.1 of the resolution plan, which provided that all claims not forming part of the plan — "including counterclaims under any pending arbitration proceedings" — "shall stand irrevocably and unconditionally abated, discharged, settled and extinguished in perpetuity." The court read this language carefully and drew a distinction of considerable doctrinal importance.

The provision expressly bars "payments/settlements" in respect of unincluded claims. It expressly extinguishes counterclaims in pending arbitration. What it does not do — expressly or impliedly — is bar a party from raising set-off as a purely defensive plea. "Going by the very words employed in such paragraph of the plan, it does not appear to bar a plea of set-off being raised as a 'defence' in any pending arbitral proceedings, although claims for any 'payment' or 'settlement', including a counterclaim, not included therein is specifically not recoverable."

The court then applied the interpretive maxim expressio unius est exclusio alterius — the express mention of one thing excludes others. Since the resolution plan expressly barred payments and settlements and expressly extinguished counterclaims, but did not expressly exclude the defensive plea of set-off, "an intention to exclude it would ordinarily be inferred by application of the maxim expressio unius est exclusio alterius." The defensive use of set-off, falling outside the express exclusions, was held to survive.

Set-Off Permitted Only as a Shield, Never as a Sword

The court drew a careful line at what the defensive set-off could achieve. "The respondent shall not derive any positive or affirmative relief on the basis of the said defence and may only defend itself against the claim raised by the appellant." In other words, WBPDCL could deploy set-off to resist Ujaas Energy's claim — entirely or in part — but could not use it to recover any surplus amount for itself.

The court issued three clarifications of practical importance: if the amount in the counterclaim found due to WBPDCL exceeds the amount awarded to the appellant, the surplus is not recoverable by WBPDCL; conversely, if any amount remains payable to the appellant after the set-off adjustment, it remains recoverable; and crucially, if the appellant withdraws the arbitration proceedings, the counterclaim and the defensive plea of set-off both fail — since the latter exists only for the limited purpose of defence against the former.

Bharti Airtel Distinguished

The court considered Bharti Airtel Ltd. v. Aircel Ltd. & Dishnet Wireless Ltd. (Resolution Professional), (2024) 4 SCC 668, which had addressed set-off during the CIRP itself. The court distinguished it on the ground that Bharti Airtel dealt with set-off at the CIRP stage, whereas the present case concerned set-off in light of an already approved and binding resolution plan — an entirely different legal context.

The Supreme Court partly allowed the appeal, modified the Division Bench's order, and held that WBPDCL was not entitled to independently pursue its counterclaim but was permitted to raise set-off as a purely defensive plea before the Arbitral Tribunal on the terms specified.

Date of Decision: March 20, 2026