Case Note & Summary
The dispute arose between a corporate debtor, Appellant, and a public sector undertaking, Respondent following a contract for solar power plant installation. The appellant was admitted into Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016, in 2020. Arbitration was invoked in 2021 over contract performance disputes, with the respondent filing a counterclaim in 2023. The National Company Law Tribunal approved a resolution plan in October 2023, concluding the CIRP. The appellant sought dismissal of the counterclaim under Section 31(6) of the Arbitration and Conciliation Act, 1996, arguing extinguishment of claims not part of the resolution plan. The Arbitral Tribunal allowed this, rejecting the counterclaim via an interim award in April 2024. The respondent challenged this under Section 34 of the A&C Act, but a Single Judge dismissed it. The Division Bench of the High Court set aside the Single Judge's order, directing the Tribunal to continue proceedings and decide on the counterclaim's status. The appellant appealed to the Supreme Court. The core legal issue was whether the respondent could raise a set-off plea in arbitration despite the extinguishment of its counterclaim due to non-submission during CIRP. The appellant contended that the resolution plan's approval extinguished all non-included claims, barring any counterclaim. The respondent argued for flexibility in the 'clean slate' principle and, alternatively, sought permission to raise a set-off plea to adjust against the appellant's claim. The Court analyzed Section 31(1) of the IBC, emphasizing that approval of a resolution plan binds all stakeholders and extinguishes claims not part of it, as established in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. It agreed that the respondent's counterclaim was extinguished and could not be pursued for affirmative relief. However, the Court distinguished between seeking affirmative relief and raising a set-off plea. It noted that the respondent had raised the counterclaim before the Tribunal prior to plan approval, and the Resolution Professional was aware of it but excluded it from the plan. Considering equity and the definition of 'claim' under Section 3(6) of IBC, the Court held that while the counterclaim itself was barred, the respondent could raise a set-off plea in the arbitration as a defensive measure to adjust amounts, not to enforce payment. The decision allowed the set-off plea to be considered by the Tribunal, ensuring the respondent does not suffer unfairly while upholding the extinguishment principle.
Headnote
A) Insolvency Law - Corporate Insolvency Resolution Process - Extinguishment of Claims - Insolvency and Bankruptcy Code, 2016, Section 31(1) - Upon approval of a resolution plan by the adjudicating authority, all claims not part of the plan stand extinguished, and no person is entitled to initiate or continue proceedings in respect of such claims, as per the binding nature of the plan and the 'clean slate' principle. The Court affirmed this principle, citing Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., and held that the respondent's counterclaim, not included in the resolution plan, was extinguished and could not be pursued for affirmative relief. (Paras 10-13) B) Arbitration Law - Set-Off in Arbitration Proceedings - Distinction from Affirmative Relief - Arbitration and Conciliation Act, 1996, Section 31(6) - While claims not part of a resolution plan are extinguished and cannot be pursued for affirmative relief, a plea of set-off may be permitted in arbitration proceedings as a defensive mechanism to adjust amounts, not as a separate claim for payment. The Court allowed the respondent to raise the set-off plea before the Arbitral Tribunal, noting that it does not seek enforcement of dues but aims to prevent the respondent from paying the appellant without accounting for owed amounts, thus balancing equity. (Paras 14-20)
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Issue of Consideration: Whether the respondent ought to be allowed to raise the plea of set-off before the Arbitral Tribunal, having regard to extinguishment of the respondent's counterclaim for its failure to raise such claim before the Resolution Professional during the Corporate Insolvency Resolution Process and prior to approval of the resolution plan
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Final Decision
The Supreme Court allowed the appeal in part, holding that the respondent's counterclaim is extinguished and cannot be pursued for affirmative relief, but permitted the respondent to raise the plea of set-off before the Arbitral Tribunal as a defensive mechanism to adjust amounts against the appellant's claim
