Case at a glance: The Supreme Court has upheld a Karnataka High Court order referring a post-CIRP contract dispute to mediation and arbitration, holding that the effect of a resolution plan is a question for the arbitral tribunal, not the Section 11 court. Applying equity, it allowed the appellant—whose operational claim was settled at about 0.72% under the plan—to raise its claim before the tribunal as a set-off, though not for recovery.
The parties signed a construction contract in 2018 containing an arbitration clause. The respondent (the corporate debtor) entered CIRP in December 2019 and the appellant terminated the contract in February 2020. The appellant's operational claim of about Rs 12.26 crore was admitted only to about 0.72% under a resolution plan submitted by the corporate debtor's former promoters, which the NCLT approved in April 2022.
The respondent, now under the successful resolution applicant, then sought arbitration of amounts it said were due from the appellant under the same contract. The Karnataka High Court allowed its Section 11 application, sending the parties first to the Karnataka Mediation Centre and, failing settlement, to the Bengaluru International Arbitration and Conciliation Centre.
The Key Question Before the Court
Can a corporate debtor, after a resolution plan has extinguished a creditor's claim, invoke arbitration against that creditor, and what happens to the creditor's own claim?
Section 11 Scope, the Clean Slate and Equity
Following SBI General Insurance v. Krish Spinning and the seven-judge Stamp Act reference, the Court held that the Section 11 inquiry is confined to the prima facie existence of an arbitration agreement; whether the resolution plan bars the claim is for the tribunal. It said the clean slate principle under Section 31(1) IBC, affirmed in Ghanshyam Mishra, is too well established to disturb, and that the successful resolution applicant may pursue the corporate debtor's receivables even though it comprises the former promoters. The claim was within limitation once the moratorium period was excluded.
On equity, relying on Ujaas Energy v. WBPDCL, the Court noted that the resolution professional and the resolution applicant knew of the appellant's claim and the plan effectively settled it at 0.72%. It therefore permitted the appellant to raise its claim as a set-off before the tribunal to the extent of the entire claim, but not to obtain a payment award, because the claim itself stands extinguished.
What the Court Actually Held
- The High Court's reference order was sustained with modification.
- The appellant may raise its claim only as a set-off, which the tribunal shall allow to the extent of the entire claim raised.
- No award for payment can be made in the appellant's favour, as the claim is extinguished.
- The tribunal will also decide whether the encashment of the bank guarantee was proper.
Why This Judgment Matters
- It confirms the narrow Section 11 inquiry even where IBC defences are raised.
- It reaffirms the clean slate principle while carving out an equitable set-off.
- It guides creditors facing arbitration by revived corporate debtors.
What Should Advocates Take Away From the Judgment?
For Creditors
- Plead set-off before the tribunal where your claim was extinguished in CIRP.
- Raise IBC bar arguments before the tribunal, not at the Section 11 stage.
For Resolution Applicants
- Expect equitable set-off where the plan knowingly settled a counterparty's claim at a token value.
Key Takeaways
- Section 11 asks only whether an arbitration agreement prima facie exists.
- The clean slate under Section 31(1) IBC stands.
- The extinguished claim survives only as a set-off.
- The bank guarantee issue goes to the tribunal.
Frequently Asked Questions
No. It sustained the reference to mediation and arbitration.
No payment award is possible, but the claim may be used as a set-off against the respondent's claim.
The arbitral tribunal, not the Section 11 court.
Conclusion
The judgment balances the finality of resolution plans with fairness to counterparties whose claims were written down to a token amount.
Practical takeaway: A creditor whose claim was wiped out in CIRP cannot recover it, but can still use it defensively as a set-off when the revived company sues.