Modern Asset v. KNK Constructions Private Limited
Background
Modern Asset had contracted KNK Constructions for a building project; when KNK went into insolvency resolution (CIRP), Modern Asset filed a claim for about Rs. 12.26 crore with the Resolution Professional but, after a major "haircut," recovered only about 0.72% of it under the approved resolution plan. KNK's insolvency ended with its original promoters returning to management as the Successful Resolution Applicant (SRA) (permitted because KNK qualified as an MSME). Afterward, KNK invoked arbitration against Modern Asset over dues from the very same construction contract, and the Karnataka High Court referred the dispute to arbitration. Modern Asset appealed, arguing that since its own claim on the contract had already been extinguished through the insolvency process, there could be no live contract or arbitration clause left for KNK to invoke.
Decision Breakdown
The Supreme Court held that an arbitration clause survives termination of the underlying contract (the "doctrine of separability") and that, at the Section 11 reference stage, courts only check for the prima facie existence of an arbitration agreement: deeper questions about the effect of the resolution plan are for the arbitrator. It confirmed that while the IBC's "clean slate" principle extinguishes creditors' claims against the insolvent company once a resolution plan is approved, it does not extinguish the claims the company itself (through its SRA) may have against its own debtors, since the Resolution Professional had not raised a counter-claim on KNK's behalf during the insolvency process. However, noting the inequity of letting KNK recover fresh dues on the same contract while Modern Asset's own claim had been wiped out to 0.72 %, and following its own recent precedent in Ujaas Energy, the Court modified the High Court's order: Modern Asset may raise its extinguished claim in the arbitration solely as a set-off against any amount it is found to owe KNK, but cannot use it to claim any fresh recovery.
Lesson Learnt
Under the IBC's "clean slate" principle, a creditor's claims against a company that went through insolvency resolution are wiped out for recovery purposes, but equity can still let that creditor raise the same claim defensively, as a set-off, if the revived company later sues it on the very same transaction.