New Delhi: The Supreme Court has clarified the application of the ‘clean slate’ principle under the Insolvency and Bankruptcy Code, 2016 (IBC), holding that an extinguished claim cannot be used to seek independent recovery after approval of a resolution plan. However, a counterclaim may be permitted for the limited purpose of set-off in arbitration proceedings, subject to the applicable resolution plan and the facts of the case.
In Modern Asset v. KNK Construction Private Limited, decided on October 8, 2026, a Bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran examined the rights of parties to pursue contractual claims after the completion of the corporate insolvency resolution process (CIRP).
The dispute arose from a civil construction contract worth approximately ₹133.68 crore. Modern Asset had submitted a claim of ₹12.26 crore during the insolvency proceedings of KNK Construction. Under the approved resolution plan, the claim was admitted only to the extent of approximately ₹8.82 lakh, along with interest, representing a substantial reduction.
After the resolution plan was approved by the National Company Law Tribunal (NCLT), the erstwhile promoters returned to the company’s management as the successful resolution applicant. Subsequently, KNK Construction initiated arbitration proceedings seeking amounts allegedly due under the same construction contract.
The Supreme Court considered whether the resolution applicant could pursue the company’s contractual claims in arbitration and whether the operational creditor could rely on a counterclaim after its claim had been substantially reduced under the resolution plan.
The Court explained that Section 31(1) of the IBC gives binding effect to an approved resolution plan and extinguishes claims against the corporate debtor that are not preserved under the plan. The principle provides certainty to successful resolution applicants by preventing them from facing unexpected liabilities after the insolvency process has concluded.
At the same time, the Court recognised that the successful resolution applicant may pursue legitimate dues owed to the corporate debtor by third parties. The completion of CIRP does not, by itself, extinguish an independent arbitration agreement or prevent the recovery of such dues through arbitration.
The Court also distinguished between an independent counterclaim seeking payment and a plea of set-off used defensively. A counterclaim cannot be used to obtain affirmative recovery of an extinguished liability. However, where legally permissible, a party may raise set-off to reduce or defeat the amount claimed against it in arbitration.
The ruling highlights the importance of distinguishing between recovering an extinguished debt and using a claim solely as a defence against another party’s demand. It also reinforces the principle that the insolvency resolution process must provide a clear financial position to the successful resolution applicant while preserving legitimate contractual rights that survive the process.
The judgment is significant for insolvency practitioners, resolution professionals, operational creditors and parties involved in arbitration arising from contracts with companies undergoing CIRP. It underscores the need to submit claims and counterclaims during the insolvency process and to examine the precise terms of the approved resolution plan before pursuing further proceedings.
Source: The Bar Bulletin. Modern Asset v. KNK Construction Private Limited, decided on October 8, 2026.
