The 'clean slate' principle under the Insolvency and Bankruptcy Code — that once a resolution plan is approved under Section 31(1), all claims not expressly included in it stand extinguished, freeing the resolved company from a fresh round of legacy litigation — met an important qualification in the Supreme Court's ruling in West Bengal Power Development Corporation Ltd v Ujaas Energy Ltd. The parties were locked in an arbitration arising from a commercial dispute, and by the time the matter reached the Court, Ujaas Energy had gone through the corporate insolvency resolution process, with a resolution plan approved that did not carry forward the counterclaim WBPDCL had been pursuing against it.
The Court held that the counterclaim itself was correctly treated as extinguished — WBPDCL could not seek any independent, affirmative relief against Ujaas Energy through it, since the approved resolution plan had not preserved that claim and the clean-slate doctrine is designed precisely to prevent successful resolution applicants from being ambushed by pre-CIRP liabilities that were not priced into the plan. But the Court drew a sharp line between an affirmative counterclaim and a purely defensive plea of set-off, holding that WBPDCL remained entitled to raise set-off as a shield against Ujaas Energy's own claim in the arbitration, even though it could no longer pursue that same amount as a sword.
The distinction is doctrinally significant because it prevents the clean-slate principle from being read more broadly than the Code actually requires. Extinguishing claims not covered by a resolution plan protects the resolved entity from fresh liability exposure — but it was never intended to hand that entity an unqualified right to recover the full value of a claim against a counterparty while denying that counterparty any right to reduce its own exposure by the same underlying amount. The Court was explicit that the set-off could only operate defensively: if WBPDCL's own arbitration claim against Ujaas Energy were withdrawn, the set-off plea would fail along with it, since it has no independent life outside the proceeding it defends against.
For creditors, counterparties, and arbitration practitioners dealing with entities that have been through CIRP, the ruling offers a practical roadmap: a claim genuinely extinguished by a resolution plan cannot be revived as a counterclaim, but where the resolved entity itself initiates a claim, the counterparty should not assume it has lost every avenue to reduce that exposure — a properly pleaded defensive set-off, confined strictly to resisting the claim rather than seeking recovery, remains available and should be raised at the earliest opportunity in any ongoing or fresh proceeding.