Supreme Court rules on ‘clean slate’ principle: Ujaas Energy allowed limited defence against counterclaims

In a significant judgment concerning the intersection of insolvency law and arbitration, the Supreme Court of India has clarified the extent to which a creditor can assert claims against a corporate debtor after a resolution plan has been approved.

The case, Ujaas Energy Ltd. vs. West Bengal Power Development Corporation Ltd., centred on whether a public sector undertaking could pursue a counterclaim in arbitration proceedings despite failing to lodge that claim during the Corporate Insolvency Resolution Process (CIRP).

Background of the dispute

The legal battle began after Ujaas Energy, an MSME solar provider, was admitted into CIRP in September 2020. During the process, the company invoked arbitration against the West Bengal Power Development Corporation (WBPDCL) over a 2017 contract. WBPDCL filed a counterclaim in the arbitration but notably failed to submit this claim to the Resolution Professional during the insolvency proceedings.

Once the National Company Law Tribunal (NCLT) approved Ujaas Energy’s resolution plan in October 2023, the company sought to dismiss WBPDCL’s counterclaim, arguing that all undisclosed claims were extinguished under the “clean slate” principle of the Insolvency and Bankruptcy Code (IBC).

The Supreme Court’s decision

Presiding over the matter, Justice Dipankar Datta upheld the core tenet that claims not included in an approved resolution plan are generally extinguished. The Court agreed that WBPDCL could no longer seek “affirmative relief” or recover any payments through its counterclaim because it had bypassed the statutory CIRP mechanism.

However, the Court introduced a nuanced exception based on the specific language of Ujaas Energy’s resolution plan. The bench observed that while the plan barred payments or settlements for unlisted claims, it did not expressly prohibit using such claims as a set-off for defensive purposes.

Key Rulings on Set-Off

The Court granted limited indulgence to WBPDCL, allowing them to raise the plea of set-off only as a shield, not a sword:

• Defensive Use Only: WBPDCL may use its claim to reduce or eliminate any amount it might be ordered to pay Ujaas Energy in the arbitration.
• No Recovery of Surplus: If WBPDCL’s claim is found to be larger than Ujaas Energy’s, the surplus amount is not recoverable.
• Dependency on Main Claim: If Ujaas Energy withdraws its original arbitration claim, WBPDCL’s defensive set-off plea will automatically fail.

The ruling serves as a vital reminder to creditors to remain vigilant during insolvency proceedings while providing a specialized equitable remedy for parties facing claims from debtors who have emerged from the resolution process.

Also See: Section 29A in practice: SC, NCLAT & NCLT’s approach to ineligibility in CIRP