SC: IBC haircut extinguishes creditor's claim; only set-off allowed in arbitration

Modern Asset and KNK Construction Pvt. Ltd. had a Rs. 133.68-crore construction contract with an arbitration clause. After KNK was admitted into Corporate Insolvency Resolution Process (CIRP), Modern Asset filed a claim of Rs. 12.26 crore with the Resolution Professional as an operational creditor. The resolution plan, approved by the Committee of Creditors and the NCLT, admitted only 0.72% of that claim -- about Rs. 8.82 lakh -- after a major haircut, and the erstwhile promoters took back management as the Successful Resolution Applicant (SRA) under the Insolvency and Bankruptcy Code's MSME provision, Section 240A.

The SRA then invoked arbitration against Modern Asset on the same contract, seeking payment allegedly due from it. The Supreme Court held that once a claim is settled in an approved resolution plan, it stands extinguished under the IBC's 'clean slate' principle, so Modern Asset cannot recover any further amount from the corporate debtor or the SRA. But since the SRA itself is the very promoter whose resolution plan accepted Modern Asset's claim, equity required that Modern Asset be allowed to raise a counterclaim in the arbitration solely for set-off -- not for any additional recovery -- against whatever the arbitral tribunal finds payable by it to the SRA.