The Supreme Court on October 8, 2026 held that Modern Asset, a creditor that received only 0.72% of its claim under an insolvency resolution plan, can raise a counterclaim in arbitration against KNK Construction Private Limited. The case arose under the Insolvency and Bankruptcy Code, 2016 (IBC), the law that governs the rescue or liquidation of companies unable to repay their debts.
The counterclaim is allowed only for set-off, meaning adjustment against any amount found payable, and not for recovering money. A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran decided the matter.
Background of the Case
The parties signed a contract on July 9, 2018 for civil and structural work on an office building. The contract was worth Rs. 133.68 crore and contained an arbitration clause. KNK Construction was admitted into the Corporate Insolvency Resolution Process (CIRP) on December 11, 2019. Modern Asset terminated the contract in February 2020.
Modern Asset then claimed Rs. 12,26,30,840 before the Resolution Professional. Under the resolution plan, only 0.72% of this was admitted, which came to Rs. 8,82,942 with interest. The plan was backed by the creditors' committee and approved by the NCLT on April 5, 2022. KNK's former promoters returned to run the company as the successful resolution applicant. Payment under the plan began on June 15, 2023 and is now fully paid.
KNK had meanwhile sent an arbitration notice on March 13, 2023 and approached the Karnataka High Court on June 20, 2023. The High Court appointed an arbitrator, but first directed the parties to try mediation. Modern Asset challenged this in the Supreme Court.
Senior Advocate Shyam Divan, for Modern Asset, argued that it would be unfair to let KNK pursue its claim while Modern Asset's own claim on the same contract had been wiped out. He called the arbitration a "one-way street". Senior Advocate Nikhil Nayyar, for KNK, argued that a resolution applicant may pursue the company's claims against its debtors, whoever the applicant is.
The Court said the "clean slate" principle, under which pre-approval claims against the company stand extinguished, is well settled. It therefore held that the High Court was wrong to leave that question open for the arbitrator.
It also accepted that a resolution applicant can pursue claims owed to the company. The return of the old promoters does not change this, and the Court found the arbitration was filed within the limitation period.
The Court noted, however, that the promoters had taken part in the insolvency process and knew of Modern Asset's claim. By offering 0.72%, the plan was treated as accepting the whole claim. The bench relied on Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., where set-off was allowed on similar equitable grounds.
The Court held:
"In the above circumstances, we are of the opinion that just as in the decision in Ujaas Energy Ltd., the appellant should be permitted to raise a counterclaim for the sole purpose of claiming set-off and the appellant would not derive any positive or affirmative relief of recovery on the basis of the counterclaim. However, in the more compelling circumstance of the SRA, being the very erstwhile promoters of the CD, who accepted the claim of the OC, in the CIRP with a major haircut by a Resolution Plan, the SRA is deemed to have accepted the entire claim of the appellant/OC. In the arbitration constituted, after considering the monetary claim raised by the respondent/SRA, the Arbitration Tribunal shall allow set-off to the extent of the entire claim raised by the appellant, before the RP in the CIRP, accepted in toto by the SRA in its resolution plan, favoured with a majority of the CoC and approved by the NCLT."
The High Court's order was upheld with this modification, and the appeal was disposed of. Even if KNK's claim fails entirely, Modern Asset cannot seek payment under the award.
The arbitral tribunal will also consider the dispute over encashment of the bank guarantee.
