Experts hail SC ruling on creditor’s claim in insolvency-linked dispute between two Bengaluru firms

Corporate law and insolvency experts have welcomed a recent Supreme Court ruling that clarified a key issue under the Insolvency and Bankruptcy Code (IBC), holding that a creditor whose claim was largely extinguished during the insolvency process can still raise it as a counterclaim for the limited purpose of set-off in subsequent arbitration proceedings.

The case arose from a dispute between infrastructure developer Modern Asset and construction firm KNK Construction, both Bengaluru-based. Modern Asset received only 0.72% of its admitted claim under KNK Construction's insolvency resolution plan after the latter entered the corporate insolvency resolution process (CIRP) before the National Company Law Tribunal (NCLT).

The two companies had signed a Rs 133 crore contract in July 2018 for civil and structural work on Modern Asset's office building, with an arbitration clause forming part of the agreement. After KNK entered insolvency proceedings in 2019, Modern Asset terminated the contract in early 2020 and claimed that KNK owed it Rs 12.26 crore. It submitted the claim before the resolution professional.


The resolution plan approved by the committee of creditors and the NCLT, however, admitted only 0.72% of the claim, translating to about Rs 8.82 lakh with interest. KNK's erstwhile promoters subsequently regained control of the company as successful resolution applicants.

The dispute resurfaced in March 2023 when KNK's new management sought to initiate arbitration proceedings against Modern Asset and approached the Karnataka High Court. Modern Asset challenged the High Court's ruling before the Supreme Court.

A bench comprising Justices JB Pardiwala and K Vinod Chandran, in its October 8 judgment, modified the High Court order and held that Modern Asset could raise its counterclaim in arbitration, but only as a set-off against KNK's claim.

"The appellant (Modern Asset) would be entitled to raise the counterclaim only for the purpose of set-off," the court said, adding that the relief was intended to ensure equity while preserving the corporate debtor's assets within the framework of the IBC.

Senior advocate M. Dhyan Chinnappa said the judgment is significant as it balances the interests of a company undergoing the CIRP and those of its creditors. He said the Supreme Court has ensured a fair outcome in a case where a creditor's claims were effectively extinguished under the resolution plan, even as the corporate debtor sought to pursue claims against the creditor. By permitting a set-off, the court has protected creditors' interests while preserving the IBC's "clean slate" principle.

Meena Venugopal, partner at Kochhar & Co, said the ruling appropriately balances the interests of both parties. While the clean slate principle under the IBC safeguards corporate debtors and successful resolution applicants, creditors can sometimes be disadvantaged by its strict application. By allowing the operational creditor to raise a counterclaim solely for the purpose of set-off, the court has ensured that the insolvency framework is not misused and that equitable principles are upheld, she said.

Mumbai-based insolvency counsel Prachi Wazalwar, in a LinkedIn post, said the judgment offers three key takeaways. First, a haircut under a resolution plan does not necessarily extinguish every defensive remedy, and an otherwise extinguished claim may still be used as a set-off in appropriate cases. Second, the clean slate principle remains intact, with successful resolution applicants retaining the right to pursue surviving claims of the corporate debtor, while creditors cannot independently revive extinguished debts. Third, the ruling reinforces that arbitration must operate as a two-way process, allowing both parties an effective opportunity to present their claims and defences.

Delhi-based corporate lawyer Niharika Sharma, in a LinkedIn post, said the judgment draws an important distinction between recovering a claim and using it as a defence. While extinguishment may bar a creditor from pursuing recovery, it does not necessarily mean the claim becomes irrelevant for all purposes, particularly when the opposing claim arises out of the same contractual relationship, she said.