Can a Respondent Raise a Set-Off After Resolution Plan Approval? Supreme Court Clarifies

Introduction

The Supreme Court of India recently addressed a significant issue regarding the treatment of counterclaims and set-offs in the context of corporate insolvency resolution processes. In the case of UJAAS ENERGY LTD. vs. WEST BENGAL POWER DEVELOPMENT CORPORATION LTD., the Court examined whether a respondent could raise a plea of set-off after the approval of a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling clarifies the application of the clean slate principle and the binding nature of resolution plans on all stakeholders involved.

Case Background

UJAAS ENERGY LTD., a corporate debtor engaged in the solar power sector, was involved in a contractual dispute with the WEST BENGAL POWER DEVELOPMENT CORPORATION LTD. The dispute arose from a contract for the manufacture and installation of a solar power plant, which led to arbitration proceedings after UJAAS ENERGY was admitted into the Corporate Insolvency Resolution Process (CIRP) under the IBC. The National Company Law Tribunal (NCLT) approved a resolution plan, which was crucial in determining the fate of various claims against UJAAS ENERGY.

The respondent, WEST BENGAL POWER DEVELOPMENT CORPORATION, had raised a counterclaim during the arbitration proceedings, which was not submitted to the Resolution Professional during the CIRP. The NCLT allowed UJAAS ENERGY's application to dismiss the counterclaim, leading to an appeal by the respondent to the High Court. The High Court's Division Bench overturned the NCLT's decision, prompting UJAAS ENERGY to appeal to the Supreme Court.

What The Lower Authorities Held

The NCLT initially ruled in favor of UJAAS ENERGY, stating that the counterclaim was barred due to the approval of the resolution plan, which extinguished all claims not included in it. The Single Judge of the High Court upheld this decision, emphasizing the clean slate principle that underpins the IBC. However, the Division Bench of the High Court found that the interim award issued by the arbitral tribunal resembled a full judgment and directed the tribunal to continue with the proceedings, including the counterclaim.

The Supreme Court was tasked with determining whether the respondent could raise a plea of set-off in light of the extinguishment of its counterclaim due to the resolution plan's approval.

The Court's Reasoning

The Supreme Court, led by Justice Dipankar Datta, focused on the implications of the resolution plan's approval under Section 31 of the IBC. The Court reiterated that once a resolution plan is approved, it is binding on all stakeholders, including creditors and public sector undertakings. The Court emphasized that claims not included in the resolution plan are extinguished, preventing any further proceedings regarding those claims.

The Court acknowledged the arguments presented by both parties. UJAAS ENERGY's counsel argued that allowing the counterclaim would undermine the clean slate principle, while the respondent's counsel contended that the principle should not be applied rigidly to deny genuine claims.

The Supreme Court ultimately agreed with UJAAS ENERGY's position, stating that the respondent's counterclaim did not form part of the resolution plan and was therefore extinguished. However, the Court also recognized the need for equity in the proceedings, particularly given that the respondent had raised its counterclaim before the approval of the resolution plan.

Statutory Interpretation

The Court's interpretation of Section 31(1) of the IBC was pivotal in its decision. This section outlines the binding nature of the resolution plan and the extinguishment of claims not included in it. The Court highlighted that the resolution plan's terms must be strictly adhered to, reflecting the IBC's objective of resolving corporate distress efficiently.

The Court also referenced the definition of a 'claim' under Section 3(6) of the IBC, which encompasses various rights to payment and remedies for breach of contract. This definition underscored the importance of timely submission of claims during the CIRP, as failure to do so results in their extinguishment.

Constitutional or Policy Context

While the judgment primarily focused on statutory interpretation, it also touched upon the broader policy objectives of the IBC. The clean slate principle is designed to facilitate the swift resolution of corporate insolvency, ensuring that all stakeholders are aware of their rights and obligations once a resolution plan is approved. This principle aims to provide certainty and finality in the resolution process, which is essential for maintaining the integrity of the insolvency framework.

Why This Judgment Matters

This ruling is significant for legal practice as it clarifies the treatment of counterclaims and set-offs in the context of corporate insolvency. It reinforces the importance of adhering to the resolution plan's terms and highlights the consequences of failing to submit claims during the CIRP. Legal practitioners must be vigilant in advising clients on the implications of the IBC and the necessity of timely claims submission to protect their interests.

Final Outcome

The Supreme Court partly allowed UJAAS ENERGY's appeal, permitting the respondent to raise a plea of set-off as a defense in the arbitration proceedings. However, the Court clarified that the respondent would not be entitled to any affirmative relief based on this defense. The ruling underscores the delicate balance between enforcing the clean slate principle and ensuring that genuine claims are not entirely barred from consideration.

Case Details

• Case Title: UJAAS ENERGY LTD. vs. WEST BENGAL POWER DEVELOPMENT CORPORATION LTD.
• Citation: 2026 INSC 268
• Court: IN THE SUPREME COURT OF INDIA
• Bench: Justice Dipankar Datta, Justice Augustine George Masih
• Date of Judgment: 2026-03-20