Supreme Court - 'Clean Slate' Principle v. Plea Of Set-Off

The Supreme Court (“SC”/ “Court”), in its judgment in Ujaas Energy Limited v. West Bengal Power Development Corporation Limited, Civil Appeal No. 3619/2026 (arising out of SLP (Civil) No. 29651 of 2024) addressed an important question at the intersection of insolvency and arbitration law, i.e., whether a party, whose claim stands extinguished for not being submitted during the corporate insolvency resolution process (“CIRP”), can nonetheless raise a plea of set-off in arbitral proceedings. The case arose in the context of an approved resolution plan for Ujaas Energy Limited (“Appellant”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”), wherein the counterclaim of West Bengal Power Development Corporation Limited (“Respondent”) had not been included and was consequently held to be extinguished. In resolving this issue, the Court reaffirmed the binding and final nature of resolution plans under Section 31 of the IBC, while also examining whether a limited right of set-off as a defence could survive such extinguishment. The judgment is significant as it clarifies the scope and limits of the ‘clean slate’ principle, particularly in ongoing arbitral proceedings.

Factual Background

The Respondent floated an e-tender in February, 2017 for certain solar projects, pursuant to which the Appellant was awarded the contract. The Appellant was subsequently admitted into CIRP on September 17, 2020. At the same time, certain disputes arising under the contract led to invocation of arbitration by the Appellant, wherein the Respondent filed a counterclaim that had not been submitted to the resolution professional during the CIRP of the Appellant. Upon approval of the resolution plan on October 13, 2023, the Appellant contended that such counterclaim stood extinguished and was not maintainable. The arbitral tribunal (“Arbitral Tribunal”), by way of an interim award dated April 30, 2024, accepted the said contention of the Appellant and rejected the counterclaim, which determination was subsequently upheld by the single judge. However, in an intra-court appeal, the division bench of the High Court of Calcutta set aside the said findings on the ground that the issue warranted a full adjudication, and accordingly directed continuation of the arbitral proceedings (“Impugned Judgement”), giving rise to the present appeal.

Appellant’s Contentions

The Appellant contended that the Respondent’s counterclaim was ex facie not maintainable, having never been submitted before the resolution professional during the CIRP and, therefore, stood irrevocably extinguished upon approval of the resolution plan. By placing emphasis on the ‘clean slate’ principle, it was argued that once a resolution plan is approved by the committee of creditors and the adjudicating authority, it conclusively binds all stakeholders and extinguishes all prior claims not forming part of the plan. It was thus submitted that permitting the respondent to pursue its counterclaim in arbitration would defeat the finality of the CIRP process and undermine the statutory scheme of the IBC.

Respondent’s Contentions

The Respondent supported the Impugned Judgment and contended that the ‘clean slate’ principle ought not to be applied in an overly rigid manner so as to defeat bona fide claims. The Respondent further stated that in arguendo, even if the counterclaim was held to be barred and unenforceable for want of submission during the CIRP, the Respondent should nonetheless be permitted to raise a plea of set-off. It was contended that such a limited adjustment ought to be permitted against the Appellant’s claim in arbitration, should the Appellant’s claim ultimately succeed before the Arbitral Tribunal.

SC’s Decision

The SC identified the core issue as, whether despite the extinguishment of the Respondent’s counterclaim for failure to submit the same during the CIRP of the Appellant, the Respondent could still raise a plea of set-off before the Arbitral Tribunal. Reaffirming the statutory scheme of the IBC, the Court held that upon approval of a resolution plan under Section 31(1), all claims not forming part of the plan stand extinguished, in line with the ‘clean slate’ principle as reiterated in Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, (2021) 9 SCC 657. Accordingly, the Respondent would be disentitled from pursuing any affirmative relief by way of the counterclaim.

However, the Court took note of certain equitable considerations, including the fact that the counterclaim had been raised prior to approval of the resolution plan and was within the knowledge of the resolution professional. Interpreting the terms of the resolution plan, particularly the clause barring “payments/settlements”, the Court held that while such provisions clearly extinguish claims for recovery, they do not expressly or impliedly bar a plea of set-off when raised purely as a defence. Drawing a distinction between enforcement of a claim and an adjustment, the Court concluded that a limited right of set-off may be permitted to avoid inequitable outcomes.

Accordingly, the Court held that while the Respondent cannot pursue its counterclaim or seek any positive relief, it may raise the plea of set-off strictly as a defence to the Appellant’s claim in the arbitration proceedings. Such set-off would operate only to the extent of reducing or negating the Appellant’s claim, without entitling the Respondent to recover any surplus from the Appellant. The ruling was expressly confined to the specific terms of the resolution plan and facts of the case.

Conclusion

The SC, while modifying the Impugned Judgment, adopted a balanced and practical approach. It firmly reiterated that once a resolution plan is approved under Section 31 of the IBC, the “clean slate” principle would apply. At the same time, the Court recognised that a rigid application of this principle may, in certain situations, lead to unfair outcomes, such as in the present case where the Respondent was only seeking a plea of set-off.

Please find attached a copy of the Judgment, here.

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