IBC | Successful Resolution Applicant Can Exercise Set-Off Against Pre-CIRP Dues Of Operational Creditor: Supreme Court

"The benefit granted of the set-off, is only to ensure equity and further the process of preservation of assets of CD in the hands of the SRA, within the contours of the IBC." Supreme Court of India, in a judgment dated October 8, 2026, held that a Successful Resolution Applicant (SRA) is not precluded from seeking a set-off against an Operational Creditor (OC) in pending arbitration, even if the OC's claim was settled during the Corporate Insolvency Resolution Process (CIRP).

 A bench of Justice J. B. Pardiwala and Justice K. Vinod Chandran observed that while the 'clean slate' principle under Section 31 of the Insolvency and Bankruptcy Code (IBC) extinguishes claims against the Corporate Debtor (CD), it does not disable an SRA from realizing dues owed to the CD, especially when the same contract forms the basis of conflicting claims.

Clarifying The Scope Of Set-Off Rights

The court reasoned that the SRA, particularly when it consists of the erstwhile promoters allowed under the MSME provisions, is entitled to proceed against the debtors of the erstwhile CD if the Resolution Professional (RP) failed to initiate such proceedings during the CIRP. The bench emphasized that the RP's failure to raise a counterclaim during the insolvency process does not create a permanent bar against the SRA from asserting its rights.

"The resolution plan bars all future payments or settlements, in respect of claims which were not raised before it."

The dispute involved an agreement for civil and structural works where the appellant, an Operational Creditor, had already received a fraction of its claim under the approved resolution plan. When the respondent—the CD now under the SRA—subsequently sought arbitration for amounts allegedly payable under the same contract, the appellant argued that its claim was extinguished by the 'clean slate' principle and that the SRA could not seek further recoveries.

Arbitration Clause Survives Resolution Approval

The primary issue before the court was whether the arbitration agreement survives the approval of a resolution plan and whether an SRA can pursue claims against an OC who has already participated in the CIRP. The court also examined whether the doctrine of 'clean slate' prevents the SRA from raising a counterclaim for set-off in ongoing arbitral proceedings.

"The inquiry under Section 11(6-A) of the Arbitration and Conciliation Act contemplates only a prima facie examination of the existence of an arbitration agreement."

The bench ruled that an arbitration clause remains a separate and independent contract that survives the CIRP and the termination of the underlying agreement. Relying on the doctrine of competence-competence under Section 16 of the Arbitration and Conciliation Act 1996, the court affirmed that the Arbitral Tribunal is the appropriate forum to determine the substantive effects of the resolution plan on specific claims.

Ensuring Equitable Adjudication

The court drew a parallel to its decision in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., noting that even if claims not included in a resolution plan are not recoverable, the law does not bar a plea of set-off being raised as a defense in pending arbitral proceedings. The bench found this equitable approach necessary to prevent a "one-way street" where the OC might benefit from the resolution plan while the SRA is unfairly restricted.

"If any amounts are found due by the Arbitration Tribunal to be paid by the appellant to the respondent then there shall be a set-off to the extent of the entire counterclaim as put forth by the appellant."

Ultimately, the court modified the High Court's order to explicitly permit the appellant to raise a counterclaim, restricted solely to the purpose of set-off. The ruling establishes that while an SRA cannot claim affirmative relief for recovery if the claim was extinguished, the set-off mechanism ensures that the preservation of the CD's assets remains aligned with the objectives of the IBC.

Date of Decision: 08 October 2026

Case Title: Modern Asset Versus KNK Construction Private Limited | Civil Appeal No………...of 2026 [@ Special Leave Petition (C) No.25068 of 2026]

Bench: J. B. Pardiwala and K. Vinod Chandran, JJ.