Contractor Recovers Just 0.72% of ₹12 Crore Insolvency Claim; Supreme Court Permits Full Set-Off Against Company’s Later Arbitration Demand
Company Revived Through Insolvency Pursues Former Creditor for Contract Dues; Supreme Court Allows ₹12 Crore Set-Off Despite Extinguished Recovery Rights
Facts
Modern Asset and KNK Construction Private Limited entered into a ₹133.68 crore construction contract dated 9 July 2018 containing an arbitration clause. KNK entered corporate insolvency resolution proceedings (CIRP) on 11 December 2019. Modern Asset terminated the contract in February 2020 and submitted a claim of ₹12,26,30,840 to the resolution professional. Under the resolution plan approved by the NCLT on 5 April 2022, Modern Asset received only ₹8,82,942, or approximately 0.72% of its claim. KNK’s former promoters returned to management as the successful resolution applicant (SRA), permissible for an MSME. KNK subsequently invoked arbitration seeking sums allegedly payable by Modern Asset under the same construction contract. The Karnataka High Court enabled appointment of an arbitrator, prompting Modern Asset’s appeal.
Issues
Whether an approved resolution plan extinguishes the corporate debtor’s claims against its own debtors; whether arbitration survives CIRP and contract termination; and whether an operational creditor whose claim was substantially written down can assert its original claim as a defensive set-off against a post-resolution arbitration demand arising from the same contract.
Petitioner’s Arguments
Modern Asset argued that allowing KNK to pursue the same contract after its own ₹12.26 crore claim was satisfied for just 0.72% would create a one-way arbitration. It submitted that the contractual dispute had effectively been dealt with in CIRP, that no claim remained for arbitration, and that the resolution professional and returning promoters could have asserted KNK’s counterclaim during the resolution process but failed to do so.
Respondent’s Arguments
KNK argued that the arbitration clause survives independently of the underlying contract, and Section 11 review is limited to prima facie existence of an arbitration agreement. Approval of a resolution plan extinguishes claims against the corporate debtor, not assets and receivables belonging to it. The successful resolution applicant could therefore pursue pre-existing contractual claims even if the resolution professional had not done so. The return of former promoters under MSME provisions was legally permitted.
Analysis of the Law
The Court distinguished between the IBC’s binding “clean slate” for liabilities of the corporate debtor under Section 31 and the continuing ability of the revived debtor to collect its own receivables. It considered the CIRP framework, the duties of the interim resolution professional and resolution professional, the information memorandum, and the moratorium/limitation provisions. While Modern Asset could not revive an extinguished claim as an independent recovery action, the Court examined whether that claim could defensively reduce any amount established in KNK’s arbitration.
Precedent Analysis
The Court considered SBI General Insurance v. Krish Spinning, (2024) 12 SCC 1, and In Re: Interplay Between Arbitration Agreements and the Indian Stamp Act, (2024) 6 SCC 1, on limited Section 11 scrutiny and separability. It discussed Swiss Ribbons v. Union of India, (2019) 3 SCC 17, and Ghanshyam Mishra & Sons v. Edelweiss Asset Reconstruction, (2021) 9 SCC 657, on CIRP and extinguishment of claims. New Delhi Municipal Council v. Minosha India, (2022) 8 SCC 384, informed the limitation discussion. Most importantly, Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., 2026 SCC OnLine SC 453, supported permitting an otherwise unrecoverable claim to be considered solely as a set-off without affirmative recovery.
Court’s Reasoning
The Supreme Court upheld the arbitral reference because the revived company could pursue claims owed to it and the arbitration clause remained operative. Yet the facts justified equitable protection: Modern Asset had lodged its claim in CIRP, KNK’s returning promoters were aware of it, the resolution plan provided only 0.72% payment, and both sides’ claims arose from the same contract. The Court treated the entire original claim as accepted for the limited purpose of calculating a defensive set-off. It clarified that the clean-slate doctrine remained intact: Modern Asset could not obtain any positive payment or award on its extinguished claim.
Conclusion
The appeal was disposed of by modifying the High Court’s order. Arbitration may proceed, but Modern Asset may raise its entire ₹12,26,30,840 claim as a counterclaim solely for set-off against any amount found payable to KNK. No affirmative recovery is permissible even if KNK’s claim fails completely. The arbitral tribunal must also consider the dispute concerning encashment of the bank guarantee.
Case Details
Case: Modern Asset v. KNK Construction Private Limited
Court: Supreme Court of India
Case Number: Civil Appeal arising out of SLP (C) No. 25068 of 2026; 2026 INSC 1103
Judges: Justice J. B. Pardiwala and Justice K. Vinod Chandran
Date: 8 October 2026
Result: Appeal disposed of; arbitration upheld with modification permitting the entire original insolvency claim to be raised as a set-off only, without any affirmative recovery.
