Supreme Court Allows Creditor Who Suffered 99.28% Haircut In CIRP To Claim Full Set-Off In Arbitration

The Supreme Court has held that an operational creditor who suffered a 99.28% haircut under an approved resolution plan can use its entire ₹12.26 crore claim to set off amounts found payable to a successful resolution applicant in arbitration.

The relief is limited to set-off, and the creditor cannot independently recover the extinguished claim.

“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,” a bench of Justices J.B. Pardiwala and K. Vinod Chandran held.

The Court partly modified the Karnataka High Court's order appointing an arbitral tribunal. It upheld the appointment but directed the tribunal to allow set-off of the creditor's entire claim against any amount found payable to the successful resolution applicant.

The dispute arose from a ₹133.68 crore construction contract dated July 9, 2018, between Modern Asset and KNK Construction Private Limited.. The parties had agreed to arbitrate disputes arising from the contract.

After the construction company entered insolvency proceedings in December 2019, the creditor's ₹12.26 crore claim was reduced to ₹8.82 lakh, plus interest, under a resolution plan approved in April 2022. This amounted to a 99.28% haircut.

The company invoked arbitration in March 2023 over claims under the same contract. The Karnataka High Court appointed an arbitral tribunal in February 2026, leaving the resolution plan's effect for the tribunal to decide.

The top court held that the clean-slate principle bars claims against the corporate debtor, but allows the successful resolution applicant to pursue the debtor's claims against others.

The court nevertheless found that the circumstances warranted an equitable mechanism to balance the parties' competing claims. It noted three relevant factors: the 99.28% haircut suffered by the creditor, the erstwhile promoters' return as the successful resolution applicant, and the fact that both parties' claims arose from the same contract.

“Be that as it may, the aspects of; (i) the massive haircut suffered by the appellant resulting in total extinguishment of its claim, (ii) the erstwhile promoters having come back into the saddle of the CD as a SRA and (iii) the claims of both parties arising from the very same contract, assume relevance in adjusting equities, especially, in an arbitration, which, as submitted by the learned Senior Counsel for the appellant, is a two-way street,” the court observed.

The court noted that the Resolution Professional had not included the counterclaim available to the corporate debtor in the information memorandum before resolution plans were invited. The erstwhile promoters, who submitted the resolution plan, were aware of the creditor's claim but did not account for the counterclaim while submitting the plan.

By providing for payment of 0.72% of the creditor's claim, the successful resolution applicant was deemed to have accepted the entire claim. However, payment remained restricted to the amount offered under the resolution plan.

Relying on its decision in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., the Court held that an extinguished claim could be considered for set-off in arbitration. It could not, however, form the basis of an independent recovery.

The court accordingly directed the arbitral tribunal to allow set-off of the entire ₹12.26 crore claim against any amount found payable to the successful resolution applicant. Even if the latter's claims are found entirely untenable, the creditor cannot recover any amount independently under its extinguished claim.

The appeal was disposed of with this modification. The Court also left the question of whether the encashment of the bank guarantee furnished by the construction company was proper or improper for the arbitral tribunal to decide.

For Petitioner: Dua Associates, AOR, Shyam Divan, Sr. Adv., Amit Dhingra, Adv., Tejas S.r., Anirudh Arunkumar, Thapo Shreshta, Isika Agarwal, Advocates 

For Respondent: Nikhil Nayyar, Sr. Adv., Pritha Srikumar Iyer, Mansi Binjrajka, AOR, Subham Jain, Archita Sharm, Advocates