The "clean slate" principle of the Insolvency and Bankruptcy Code wipes out claims against a company once a resolution plan is approved. But what happens to the contract's other direction — the claims the company itself holds against a counterparty? In Modern Asset v. KNK Construction Private Limited (2026 INSC 1103, decided 8 October 2026), the Supreme Court answered both halves. The successful resolution applicant stands in the corporate debtor's shoes and may invoke arbitration to pursue the company's dues; the operational creditor, whose own claim was pared down to under one per cent in the plan, cannot recover anything further — but it may raise its entire claim as a set-off against whatever the company wins.
The commercial history
The parties signed a construction contract worth about Rs. 133.68 crore in 2018, with an arbitration clause. The contractor, KNK, entered corporate insolvency resolution in December 2019; it was an MSME, and its erstwhile promoters returned as the successful resolution applicant. Modern Asset, an operational creditor, had claimed about Rs. 12.26 crore; the approved plan admitted a little under Rs. 9 lakh — roughly 0.72 per cent. The NCLT approved the plan in April 2022.
The revived company then turned plaintiff: it invoked the arbitration clause in 2023 and obtained appointment of an arbitrator from the Karnataka High Court under Section 11. Modern Asset resisted, arguing that a one-way arbitration — where the company could claim but the creditor’s own claims stood extinguished — was an abuse of the clean slate it had itself suffered under.
The Court’s resolution of the asymmetry
Claims against the company
Extinguished on plan approval under Section 31(1) IBC. No positive recovery is possible on them — in arbitration or anywhere else.
Claims of the company
Preserved. The resolution applicant stands in the corporate debtor’s shoes and may pursue them fully, including through arbitration.
The bridge between the two halves is the set-off. Relying on Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., the Court held that Modern Asset may plead its claim as a shield: if KNK proves dues, the tribunal must set off Modern Asset’s claim against them. And because the resolution plan had admitted the creditor’s claim (even at a fraction of its value), the Court held the resolution applicant “is deemed to have accepted the entire claim” — so the set-off runs up to the whole of it. What the creditor cannot do is cross from shield to sword: “the appellant would not derive any positive or affirmative relief of recovery on the basis of the counterclaim.” If the company’s claim fails altogether, the creditor simply takes nothing.
The Court added one more direction with real money attached: the tribunal must examine whether the company’s encashment of the creditor’s bank guarantee of about Rs. 1.56 crore was proper. Guarantee encashments made around the insolvency period are a recurring flashpoint, and the judgment ensures the arbitration will not treat the question as closed.
Why this matters for commercial parties
Counterparties of companies that pass through CIRP often assume the relationship is fully dead: their claim was extinguished, the plan paid pennies, the file closed. This judgment is a warning that the contract’s other direction survives. A revived company — not infrequently back in the hands of its old promoters, as here — can arbitrate its receivables years later. The counterparty’s protections are procedural and defensive: insist on the full set-off, put the plan’s treatment of the claim on record, and scrutinise events like guarantee encashments that occurred in the twilight before admission.
File claims in the CIRP, always. The set-off recognised here was anchored to the claim admitted in the plan. A counterparty that never filed may find even its shield contested.
In Section 11 proceedings, frame settled law as settled. The Supreme Court corrected the High Court for referring an established legal position to the tribunal as an open question. Where the clean-slate consequences are clear, the appointing court can and should fix the framework.
Audit pre-admission encashments. Bank guarantees invoked on the eve of, or during, insolvency remain examinable in later proceedings between the parties.
Provisions involved
| Provision | Role in the case |
|---|---|
| Section 31(1) IBC | Binding effect of an approved resolution plan; source of the clean-slate principle |
| Section 11, Arbitration & Conciliation Act, 1996 | Court appointment of the arbitral tribunal invoked by the revived company |
| Section 16, Arbitration & Conciliation Act, 1996 | Tribunal’s competence over objections left open to the parties |
Frequently Asked Questions
What is the "clean slate" principle under the IBC?
Once a resolution plan is approved under Section 31(1) IBC, it binds all stakeholders, and claims not forming part of the plan stand extinguished — the successful resolution applicant takes the company free of undecided liabilities, so it is not hit by surprise claims later. The Supreme Court described the principle as too well entrenched in its decisions to be upset.
Can a company revived through CIRP still sue on its old contracts?
Yes. The clean slate extinguishes claims against the corporate debtor; it preserves claims belonging to the corporate debtor. The resolution applicant steps into the company's shoes and may pursue those receivables — here by invoking the construction contract's arbitration clause and obtaining appointment under Section 11 of the Arbitration and Conciliation Act, 1996.
What exactly can the counterparty do with its extinguished claim?
Following its recent decision in Ujaas Energy, the Court held the counterparty may plead its claim as a set-off in the arbitration — purely defensively. It cannot obtain any positive award of recovery, since its claim stands extinguished by the plan; but the tribunal must allow set-off, here up to the creditor's entire claim, which the Court treated as accepted in toto because the plan had admitted it (at a fraction).
Why did the Supreme Court modify the High Court's order?
The Karnataka High Court had left it to the arbitral tribunal to decide whether the clean-slate principle applied to the resolution applicant. The Supreme Court held that question was settled law, not an arbitrable doubt — so it confirmed the appointment but fixed the legal framework: company may claim, creditor may only set off, and the tribunal must also examine the propriety of the company's encashment of the creditor's bank guarantee.