Approval Of Insolvency Resolution Plan Not An Automatic Bar To Arbitration: Karnataka High Court

The Karnataka High Court on 26 February held that approval of a Corporate Insolvency Resolution Plan does not automatically bar disputes from being referred to arbitration. Where a valid arbitration agreement exists, any objections concerning the impact of the Resolution Plan on the claims must be adjudicated by the arbitral tribunal under Section 16, and cannot be considered at the appointment stage under Section 11 of the Arbitration and Conciliation Act, 1996.

The Single Bench comprising Justice Suraj Govindraj observed:

“The statutory consequences of approval of the Resolution Plan under Section 31 of the IBC do not constitute a threshold jurisdictional bar which this Court is required to examine at the stage of Section 11. The Arbitral Tribunal is fully competent under Section 16 to determine whether the claims have been extinguished by operation of law, and this question should be left to the Tribunal.”

The Court directed that disputes between KNK Construction Pvt. Ltd. and Modern Asset, arising from a construction contract worth approximately Rs. 1,33,68,00,000, be referred first to mediation. If unresolved, Justice Ajit J. Gunjal (Retd.), former judge of the Karnataka High Court, will act as sole arbitrator.

The dispute stems from a contract dated 9 July 2018, under which Modern Asset, a partnership firm, awarded KNK Construction the tender to build an office in Bengaluru. KNK Construction claimed to have completed nearly 95% of the work, but disagreements later arose over delays, variations in scope, and payments.

Modern Asset issued a notice alleging breach in January 2020. Around the same time, KNK Construction entered the Corporate Insolvency Resolution Process (CIRP) in December 2019. During the moratorium, Modern Asset terminated the contract and encashed bank guarantees, claiming that over Rs. 12 crore was payable by KNK Construction.

After the company was revived under a resolution plan approved in 2022, KNK Construction invoked arbitration under clause 19.13 of the Conditions of Contract, seeking recovery of its alleged dues. Modern Asset opposed the petition, arguing that approval of the resolution plan invoked the “clean slate” doctrine, extinguishing all pre-insolvency claims and leaving no enforceable dispute for arbitration.

KNK Construction contended that the Court's jurisdiction under Section 11 is limited to examining the existence of an arbitration agreement. As the contract contained a valid arbitration clause, it argued, the dispute must be referred to arbitration.

Justice Govindaraj accepted this submission. The Court reiterated that at the Section 11 stage, its role is limited to examining the prima facie existence of an arbitration agreement, which it found present in this case. It emphasised that questions regarding the survival of claims after insolvency are substantive and must be decided by the arbitral tribunal.

The Court observed:

“The question of whether the Petitioner's specific claims survive the CIRP process is not a threshold jurisdictional question but a substantive defence that goes to the merits of the dispute.”

It clarified the scope of the Clean Slate doctrine, holding that while it primarily extinguishes claims against the corporate debtor, it does not automatically nullify the arbitration agreement:

“Section 31 does not expressly provide for the extinguishment of arbitration agreements. The extinguishment, if any, is of claims and not of the arbitration agreement per se.”

Relying on the competence-competence principle under Section 16 of the Arbitration Act, the Court held that the arbitral tribunal is competent to determine whether the claims stand extinguished due to the insolvency proceedings. On finding a valid arbitration agreement, it held that KNK's claims prima facie survive the Resolution Plan, and all substantive objections must be examined by the tribunal.

Accordingly, the Court directed the dispute first to mediation at the Karnataka Mediation Centre. If mediation fails, arbitration will proceed before Justice Ajit J. Gunjal (Retd.) under the aegis of the Arbitration and Conciliation Centre (Domestic & International), Bengaluru.

Appearances for Petitioner (KNK Construction Pvt Ltd): Advocates Pradeep Naik, Anupama G. Hebbar

Appearances for Respondent (Modern Asset): Senior Advocate Dhyan Chinnappa, Advocate Sundararaman