Ramblings of a SC

Authors:

Introduction

The interplay between the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Arbitration and Conciliation Act, 1996 (“A & C Act”) has been evolving, with issues ranging from the impact of moratorium^[1] on pending arbitration proceedings to the effect of a Resolution Plan on an Award.

It appears to have come full circle, with the net effect that pro-IBC approach is prioritized with revival of stressed companies being the primordial consideration weighing on the minds of Courts. Stakeholders, however, held different opinions that a fully pro-IBC approach did not always enure to the benefit of other stakeholders, for example, in a situation involving an MSE unit, where such unit could invoke the dispute resolution mechanism^[2] prescribed under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) coupled with the applicable provisions of the A&C Act, for agitating claims against a company undergoing Corporate Insolvency Resolution Process (“CIRP”). In such a situation, the stakeholders involved would not be just that of a company undergoing CIRP but would also involve an MSE Unit (claimant). It is in this context that the interests of both, the company undergoing CIRP as well as an MSE unit for which a special statute and a special ADR mechanism has been formulated, will have to be balanced.

The recent judgment of the Hon’ble Supreme Court in Ujaas Energy Ltd vs. West Bengal Power Development Corporation Ltd.^[3] is an apt demonstration of this balancing act. The decision was rendered in a situation wherein the CoC^[4] approved a resolution plan for Ujaas Energy Ltd. (“Ujaas”), but without factoring the counterclaim(s) of WB Power Development Corporation Ltd. (“WBPDCL”) filed before the Arbitral Tribunal (“A.T.”). The interesting issue that arose was whether the counterclaim filed by the WBPDCL in the arbitral proceedings could survive against Ujaas [the Corporate Debtor (“CD”)], given the fact that WBPDCL had not filed a claim in terms of the IBC^[5] before the Resolution Professional (“RP”) within the prescribed time. The question is not just strictly legal, but in a certain sense, is moral.

Ujaas v. WBPDCL:  a briefer

In 2017, Ujaas (an enterprise under the MSMED Act) successfully secured a contract from the WBPDCL (a Public Sector Undertaking). Though the original work in the contract was concluded by 2019, payments remained pending from WBPDCL. Ujaas was admitted to CIRP in September 2020^[6] , and the CIRP of Ujaas came to a close with the approval of a resolution plan^[7] in September 2023.

Even as CIRP was underway, Ujaas invoked arbitration against WBPDCL and filed claims for payments due from WBPDCL. WBPDCL also filed counterclaims before the A.T. in May 2023.

On the approval of the resolution plan in September 2023, Ujaas filed an application before the A.T. praying that the counterclaim of WBPDCL should be dismissed as having been extinguished in light of the approved resolution plan^[8]. The A.T. allowed the application in an Interim Award under Section 31(6) of the A&C Act, and the Award was thereafter confirmed by a Ld. Single judge of the Hon’ble High Court under Section 34. WBPDCL assailed this order before a Division Bench of the Hon’ble High Court under Section 37 of the A&C Act, and the Division Bench interfered in the Interim Award, stating that the maintainability of the counterclaim could have only been decided post-trial. It is at this juncture that Ujaas appealed against the said Order, before the Hon’ble Supreme Court.

This chronology lends necessary context to the delicate but deliberate act of harmonizing that unfolded in the Order of the Hon’ble Supreme Court.

Even-handed justice

The Hon’ble Supreme Court, in a sense, did not agree with both the single judge and the division bench of the High Court, but entertained a rather novel argument by WBPDCL. The argument was – could the Courts be a mute spectator to the fact that,

1. the counterclaim was duly filed within time before the A.T.
2. the RP was aware of the said counterclaim before the A.T.;
3. having approached the A.T. without any default/lapse, could the claim of a Public Sector Undertaking which is considered a “State” under Article 12 of the Constitution of India, be deprived of its legitimate right to agitate its counterclaim before the A.T.

Most often than not, the Judgments that we read may not be a true reflection of what transpired in court and the points which finally weighed in the courts mind to come to a particular conclusion. It is for this reason that many from the bar, who, having appeared before the subordinate courts and who then also appear in the appeal proceedings, often remark that they are aware of the reasons why the subordinate court came to a particular conclusion and that ought to be attributed to what transpired in Court. The reason is obvious-while the judgments we read reflect the facts and the corresponding law to be applied to the said effect, it rarely reflects the mood of the Court.

One of the striking aspects of this judgment is that the mood of the Court has also been captured and equally the quick thinking of the counsels on their feet. The Judgment maybe short, but one cannot gloss over the fact that the argument of set-off was one that was nuanced and had not been advanced before, either in the Section 34 or in the Section 37 rounds. The Hon’ble Supreme Court was also mindful of this fact, and after having recorded this scenario, proceeded to deal with the issue on hand – clearly portraying why the issue was resolved in the way it was.

Clean slate vs. Clean Hands

On the one hand, the “clean slate” doctrine was given full credence. The judgments of the Hon’ble Supreme Court in Essar Steel (India) Ltd. Committee of Creditors v. Satish Kumar Gupta^[9] and in Tata Power Western Odisha Distribution Ltd. v. Jagannath Sponge (P) Ltd.^[10],  have held that the “clean slate” doctrine will have to be adopted such that the new management stepping in, is not taken by surprise.

This position obtains even in respect of the primacy of crown debts due and payable by a company in CIRP. Despite the “alteration in the order of priority of payment of Government dues” categorically featuring in the Preamble to the IBC, and despite Government dues expressly forming part of the definition of “operational debt”^[11],  the order of priority of Government dues was subjected to severe litigation. The Hon’ble Supreme Court had originally held in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.^[12] that Crown Debts cannot be treated on a different pedestal from that of any other claim. Later, the Hon’ble Supreme Court in State Tax Officers vs Rainbow Papers Limited^[13] went on to hold the government or governmental authority shall be considered as a secured creditor. This decision in Rainbow Papers (supra) was later confined to its specific facts in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd.^[14].

To formalise this position, the Insolvency and Bankruptcy Code (Amendment) Bill, 2025 introduced in the Lok Sabha on 12.08.2025 proposes to clarify the definition of “security interest”^[15].

While balancing the doctrine of “clean slate” where no exception is accorded to even crown debts, the argument of set-off of dues seems to have been accepted by the Hon’ble Supreme Court for reasons which are not just legal, but also moral. This is ostensibly because, a “clean slate” is intended to immunise the successful resolution applicant from new claims that did not form part of the process leading up to the approval of the resolution plan. The “clean slate” doctrine cannot operate as an eyewash to protect a CD where the RP was privy to the fact of an existing claim/counterclaim. This stems from the statutory duty reposed in the RP to ensure information utilities are updated with all claims^[16],[17]. If a claim could not be accounted for with accuracy, the RP could estimate the claim in exercise of best judgment^[18].

Put simply, in this situation, the RP was aware of the counterclaim of WBPDCL in the arbitral proceedings.  This, in essence, amounts to the RP having constructive notice of a legitimate claim even in CIRP. Merely because WBPDCL had not filed these “claims” before the IRP/RP, could the RP be absolved from the duty to log such claim in the information utility? From every standpoint, the RP was duty-bound to have accounted for the counterclaim, even if on a contingent estimate as was done in Fourth Dimension Solutions Ltd. v. Ricoh India Ltd.^[19].

The notion of a Counterclaim and set-off – A&C vis-à-vis IBC

The concept of counterclaim and set-off are also not alien to civil law, and the provisions of Order VIII and specifically Rule 6 of the Code of Civil Procedure, 1908 deal with counterclaim and set-off in a civil suit. The A&C act deals with set-off and counterclaim in one breath, and to that effect, Section 23(2A) was brought in force on 23.10.2015 to state that a respondent may also submit a counterclaim or plead a set-off.

The universal rule while giving primacy to IBC is that, IBC being a later legislation or that the timelines specified in IBC being mandatory, the moratorium prescribed under IBC imposing a blanket halt on proceedings against the company in CIRP has only augured in favour of the company under CIRP. In Power Grid Corporation of India vs. Jyoti Structures Ltd.^[20], the Hon’ble Delhi High Court had adopted a purposive interpretation to decline stay sought by Power Grid Corporation, by observing that the objective of Moratorium was to enable a Corporate Debtor to protect its assets from further dissipation.

Even in Bharti Airtel Ltd. v. Aircel Ltd. & Dishnet Wireless Ltd. (Resolution Professional)^[21] , the Hon’ble Court considered that allowing mutual set-off for one creditor would upset the priority of claims and would hence go against the grain of the IBC. Distinguishing the law laid therein, the Hon’ble Court noted that the set-off sought by WBPDCL could be allowed in the specific facts, in light of the approved resolution plan. For this reason, the Hon’ble Supreme Court also records that this judgment in Ujaas ought to be limited to the present facts and circumstances.

The Balancing Act – the way forward?

Clearly, the decision in Ujaas stands on a separate footing from the plethora of precedents populating the insolvency regime in India. The Hon’ble Supreme Court has gently tilted the scales by balancing the interest of all stakeholders, while also upholding the time-honoured principle that the rigours of IBC cannot be breached by any other statute. This case marks an exception, grounded in the fact that the definition of “claim” under Section 3(6) of the IBC and the Resolution Plan finally approved, does not bar a set-off. The reasoning might seem more technical given that the Hon’ble Supreme Court did not provide any leeway to the exception to the rule that the provisions of IBC are supreme^[22]. The harmonisation is rather novel and rejuvenating, as the conduct of both the parties have been taken into account – the act of WBPDCL in filing the counterclaim within time before the A.T., and the conduct of the RP in ignoring a claim technically not made though he was aware of it, seems to have strongly weighed on the mind of the Hon’ble Supreme Court.

It is equally significant to note that the Hon’ble Supreme Court has, by way of ex abundanti cautela, prescribed the four corners under which the said set-off could work. For starters, it has been spelt out that there can be no recovery under the garb of a Set-off and that if at all the claim of the CD is allowed, the amount of set-off will have to be limited to the amount awarded to CD, despite the fact that the creditor may be entitled to a higher amount.

If the Hon’ble Supreme Court had believed that there was a case on hand for a set-off, it can be gainfully said that there was no reason to upset the counterclaim. It is in this aspect that, allowing the plea of set-off is not just technical but also moral, given what transpired in court. The same yardstick could have been applied to the plea of counterclaim as well, as the RP has constructive notice of the creditor’s claim.

The IBC completes a decade of existence since its coming into force on 28^th May 2016, and it seems to herald to a time where the interests of all stakeholders are taken into consideration. It is for this reason that there were initially different views taken before the Hon’ble Supreme Court in respect of pending proceedings, moratorium, limitation, crown debts and now set-off. The non-obstante clause and interpretation thereat will have to be such that the stakeholders are on a level playing field and more so, to ensure that one statute does not defeat the interests of other stake holders. Viewed in this lens, the novel approach by the Hon’ble Supreme Court seems to be a step forward in this direction.

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[1] § 14, IBC

[2] § 18, MSMED Act

[3] 2026 INSC 268

[4] § 21, IBC

[5] § 3(6), IBC and § 18, IBC

[6] Order dated 17.09.2020 in Deepak Chandak, Proprietor of Harshal Enterprises v. Ujaas Energy Limited [CP (IB) No.09/9/NCLT/AHM/2020]

[7] Order dated 13.10.2023 in IA/190(MP)2021 in CP(IB) 9 of 2020 [Deepak Chandak, Proprietor of Harshal Enterprises v. Ujaas Energy Limited]

[8] § 31, IBC

[9]  (2020) 8 SCC 531– paragraph 107

[10] 2023 SCC OnLine 2442 – paragraph 2

[11]  §5(21), IBC

[12] (2021) 9 SCC 657 – paragraph 98

[13] 2023 9 SCC 545

[14] (2023) 10 SCC 60

[15] Clause 2, IBC Amendment Bill, Statement of Objects and Reasons provided in The Insolvency and Bankruptcy Code (Amendment) Bill, 2025

[16] § 18(b), IBC

[17] Regulations 6-14, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016

[18] Regulation 14, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016

[19] 2022 SCC OnLine 2379

[20] 2017 SCC OnLine Del 12189

[21] (2024) 4 SCC 668

[22] § 238, IBC