Introduction

In the recent judgment in Modern Asset v. KNK Construction Private Limited (decided on October 8, 2026 reported as 2026 SCC OnLine SC 2088) (“Judgment“), the Hon’ble Supreme Court of India (“Supreme Court“) considered whether an operational creditor, which had suffered a major haircut in the corporate insolvency resolution process (“CIRP“) of a corporate debtor, can be proceeded against by the successful resolution applicant for the pre-CIRP dues allegedly owed by the operational creditor to the corporate debtor, under the very same contract (on the basis of which the operational creditor had filed its claims in the CIRP of the corporate debtor).

Background

Factual background

The Appellant (“Appellant“/ “OC“) and the Respondent (“Respondent“/ “CD“) entered into an agreement dated July 9, 2018, for civil and structural works for the construction of an office building, for a total contract value of Rs. 133.68 crores. The dispute resolution mechanism in the said agreement was arbitration.

Vide Order dated December 11, 2019, CIRP commenced against the Respondent/ CD, pursuant to a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC“). In February 2020, the Appellant terminated the agreement with the Respondent/ CD and filed its claims to a tune of Rs. 12.26 crores with the Resolution Professional (“RP“).

Interestingly, after the commencement of CIRP an application was made to register the Respondent/ CD as a ‘small enterprise’ with the Ministry of Micro, Small and Medium Enterprises (“MSME“). Accordingly, a resolution plan in relation to the Respondent/ CD was submitted by its erstwhile promoters, being now eligible under the provisions of the IBC. The resolution plan submitted by the erstwhile promoters of the Respondent/ CD provided for a payment of only 0.72% of the Appellant/ OC’s claim, i.e., approx. Rs.8.82 lakh.

The above resolution plan of the erstwhile promoters was approved by the National Company Law Tribunal and accordingly, the erstwhile promoters took over the management of the Respondent/ CD as the Successful Resolution Applicant (“SRA“).

Pursuant to the said approval and take over by the SRA, the SRA/ Respondent by a notice dated March 13, 2023, invoked arbitration in respect of certain amounts allegedly payable to it under the very same agreement (based on which the Appellant/ OC had filed its claims). The SRA/ Respondent filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act“) for appointment of an arbitrator, before the High Court of Karnataka (“High Court“), which was allowed by the High Court. The High Court left all questions, inter-alia, including the effect of the ‘clean slate’ principle, to be adjudicated by the arbitrator. Being aggrieved by the order passed by the High Court, the Appellant/ OC approached the Supreme Court.

Issues before the Supreme Court

Submissions by the parties

It was contended on behalf of the Appellant/ OC that the agreement between the Appellant and the Respondent had worked itself out in the CIRP and that no agreement or arbitration clause subsisted. It was further argued that permitting the arbitration at the behest of the SRA/ Respondent would create a ‘one-way street’, considering the fact that the Appellant would be barred from raising any counterclaim in view of the ‘clean slate’ principle, while the very promoters who had led the CD into CIRP, having returned as the SRA, would be free to pursue claims under the same agreement. It was further argued that the RP ought to have raised any counterclaim on behalf of the CD during the CIRP itself.

On the other hand, counsel for the SRA/ Respondent firstly contended that the status of the SRA remains the same whether it is the erstwhile promoters or a new entity, and the SRA is entitled to proceed against the debtors of the erstwhile CD.

The counsel for the SRA/ Respondent further contended that the scope of Section 11 of the Arbitration Act is confined to the prima facie existence of an arbitration agreement (as held in SBI General Insurance v. Krish Spinning, (2024) 12 SCC 1) and while Section 31 of the IBC extinguishes claims against the CD, the same does not extinguish the agreement between the parties or the claims that the SRA (by virtue of it having acquired the CD) against the Appellant. It was also contended that merely because the RP did not raise the counterclaims on behalf of the CD, as against the Appellant, the same does not create any embargo on the SRA now proceeding against the Appellant.

Observations and findings

At the outset, the Supreme Court noted that the resolution plan having been approved by the National Company Law Tribunal, became final and binding on all stakeholders. The Supreme Court reaffirmed that the ‘clean slate’ principle flowing from Section 31(1) of the IBC is too well entrenched to be revisited, more so after the introduction of sub-section (6) of Section 31 (by virtue of the IBC Amendment Act, 2026). Therefore, there is no question of any claim being raised against the SRA.

The Supreme Court also noted that merely because the erstwhile promoters of the Respondent came back into the management as the SRA, the same cannot be a ground to ignore the settled position of law that permits the SRA to proceed with any claims as maybe available to the CD against its debtors.

It was further noted that since the law as stated above is well settled, even an arbitrator cannot deviate from the same. Accordingly, the Supreme Court disagreed with the High Court insofar as it had left to the arbitrator the question of whether the ‘clean slate’ principle applies to the SRA. The Supreme Court held that, in view of the clear legal position, the ‘clean slate’ principle applies as against the SRA, while the SRA can proceed for the dues of the CD, and nothing remains to be considered by the arbitrator on those aspects.

At the same time, drawing upon its earlier decision in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd (reported in 2026 SCC OnLine SC 453) (“Ujaas Energy“), the Supreme Court directed that the Appellant/ OC would be entitled to raise a counterclaim in the arbitration initiated by the SRA, solely for the purpose of set-off, to the extent of its entire claim filed before the RP.

To balance equities, the Supreme Court inter-alia took note of the following aspects:

• the major haircut suffered by the Appellant/ OC, resulting in almost the total extinguishment of its claim; and
• the claims of both parties arising from the very same contract.

The Supreme Court observed that the erstwhile promoters are not alien to the CIRP, since the IBC contemplates their cooperation with the interim resolution professional, and the information memorandum is required to disclose disputes by or against the CD. Having provided for payment of 0.72% of the Appellant’s claim in its own resolution plan, the SRA was deemed to have accepted the Appellant’s claim in toto, while restricting its payment.

Relying on Ujaas Energy, where a counterclaim not pursued before the RP was permitted to be considered for the purpose of set-off alone, the Supreme Court held that the circumstances in the present case applied with even greater force. Accordingly, the Supreme Court while upholding the appointment of the arbitrator, inter-alia passed the following directions. The Supreme court observed that the Appellant/ OC would be entitled to raise its counterclaim only for the purpose of set-off, and that the arbitrator shall allow set-off to the extent of the entire claim raised by the Appellant/ OC before the RP. The Supreme Court further clarified that even if the Respondent/ SRA’s claim is found untenable in toto, the Appellant/ OC will not be able to seek any payment based on such an award, since its claim stands extinguished as against the CD / SRA on approval of the resolution plan.

Our analysis and conclusion

In our view, the Judgment is in consonance with the settled position of law, while carefully balancing equities between the parties. The Supreme Court has reaffirmed the ‘clean slate’ principle consistent with Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd (reported in  (2021) 9 SCC 657). The Supreme Court has reiterated that all claims against a corporate debtor stand extinguished upon approval of the resolution plan, and a successful resolution applicant is entitled to take over the corporate debtor free from such claims. The Judgment further recognises that any receivable for a corporate debtor is its asset and accordingly, a successful resolution applicant is entitled to pursue the same (which is in furtherance of the IBC’s objective of revival of the corporate debtor and preservation of its assets).

We are also in agreement with the Supreme Court’s view that that the return of an erstwhile promoter as the successful resolution applicant does not, by itself, alter the legal position. Section 240A of the IBC (read with Section 29A of the IBC) consciously permits promoters of an MSME to submit a resolution plan.

Importantly, the Judgment correctly removes the question of the applicability of the ‘clean slate’ principle from the domain of the arbitral tribunal. Since the legal position is clear, leaving it open for re-agitation in arbitration would have only invited prolonged and avoidable litigation, and potentially conflicting outcomes.

At the same time, the direction permitting set-off is, in our view, a principled equitable measure rather than a departure from the IBC. The set-off operates purely as a shield and not as a sword: the Appellant/ OC derives no affirmative or positive relief of recovery, and the extinguishment of its claim remains intact. What the Judgment prevents is a situation where the SRA, having itself acknowledged the OC’s claim in its resolution plan and paid only 0.72% thereof, could recover in full under the very same contract, while the OC is left with no defence. Such an outcome would have converted the ‘clean slate’ principle, intended to facilitate revival, into an instrument of unjust enrichment. The Supreme Court has, therefore, balanced equities within the contours of the IBC.