2026 (3) TMI 1254 - SC - IBC

Set-off in arbitration survives resolution plan extinction only as a defence, not as a basis for affirmative recovery.

Approval of a resolution plan under the Insolvency and Bankruptcy Code extinguishes claims not included in the plan, and no affirmative recovery can be ... Effect of approval of a resolution plan under Section 31(1) - definition of 'claim' under Section 3(6) - clean slate principle - Extinguishment of claims on approval of a resolution plan - principles of strict construction - moratorium under insolvency proceedings - binding effect of resolution plan. Whether the respondent ought to be allowed to raise the plea of set-off before the Tribunal, having regard to extinguishment of the respondent’s counterclaim for its failure to raise such claim before the Resolution Professional during the CIRP and prior to approval of the resolution plan? - HELD THAT:- The Court held that approval of a resolution plan under Section 31(1) of the IBC renders the plan binding and causes all claims not included in the plan to stand extinguished; this principle, endorsed in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. [2021 (4) TMI 613 - SUPREME COURT], means the respondent cannot pursue affirmative relief by way of a counterclaim that was not part of the approved plan. Examining paragraph 12.4.1 of the resolution plan, the Court observed that while the plan expressly bars payments, settlements and counterclaims for recovery, it does not expressly or impliedly preclude raising a plea of set-off as a defensive measure; applying the maxim expressio unius est exclusio alterius, the Court inferred no clear intention to exclude defensive set-off. Accordingly, the respondent is permitted to rely on the plea of set-off solely as a defence to reduce or defeat the appellant's claim, but not to obtain any positive or affirmative relief or recover any surplus amount; any recoverable balance in favour of the appellant after adjustment remains payable to the appellant, and if the arbitration is withdrawn the counterclaim shall fail. The Court limited this conclusion to the terms of the cited paragraph of the resolution plan and the facts of the case. [Paras 23, 25, 26, 27, 28] Respondent may plead set-off only defensively in the arbitration; its counterclaim remains extinguished for purposes of affirmative relief, and any adjustment is limited as specified by the Court. Final Conclusion: The Division Bench's order is modified: while the respondent's counterclaim is extinguished on approval of the resolution plan and cannot yield affirmative relief, the respondent is permitted to raise a plea of set-off only as a defence subject to the limitations and conditions stated by the Court; the appeal is partly allowed. Issues: Whether, where a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 extinguishes claims not included in the plan, the party whose claim was not admitted may nevertheless raise a plea of set-off in pending arbitral proceedings.Analysis: The Court examined the effect of approval of a resolution plan under Section 31(1) of the Insolvency and Bankruptcy Code, 2016 and the definition of 'claim' under Section 3(6) of the Insolvency and Bankruptcy Code, 2016, noting that claims not included in an approved resolution plan stand extinguished. The language of the resolution plan paragraph barring 'payments/settlements' for claims not part of the plan was considered alongside the procedural history showing that the counterclaim had been filed in arbitration prior to approval of the resolution plan but was not included in the plan. The Court analysed whether the plan's bar on payments and settlements should be read as also barring the defensive plea of set-off. Applying principles of strict construction of resolution plan terms and the maxim expressio unius est exclusio alterius, the Court found that the clause expressly bars affirmative claims for payment or settlement but does not expressly or impliedly exclude raising set-off as a defensive plea in pending proceedings. The Court balanced the extinguishment principle and the binding effect of the approved plan against equitable considerations arising from the facts that the counterclaim was on record before approval and that the Resolution Professional was aware of it, and concluded that limited equitable relief in the form of permitting set-off as a defence is appropriate while preserving the extinguishment principle for affirmative relief.Conclusion: Counterclaims or claims not included in an approved resolution plan stand extinguished and no affirmative relief may be pursued; however, a plea of set-off may be raised only as a defensive plea in pending arbitral proceedings and may not result in any positive or recoverable amount in favour of the claimant beyond adjustment against the claimant's claim.Ratio Decidendi: On approval of a resolution plan under Section 31(1) of the Insolvency and Bankruptcy Code, 2016, claims not included in the plan are extinguished; nevertheless, where the plan's language bars payments or settlements but does not expressly exclude defensive set-off, a limited right to raise set-off as a defence in pending proceedings may be permitted, subject to the condition that no affirmative monetary recovery shall be allowed on that basis.