The Clean Slate Doctrine: Does Ujaas Energy add an Asterisk?

The clean slate doctrine has become one of the defining features of India's insolvency regime. It reflects a simple commercial premise, i.e., a successful resolution applicant must be able to acquire the corporate debtor without the risk of undisclosed or unresolved liabilities resurfacing after the resolution plan has been approved. Over time, courts have applied the doctrine to extinguish a wide range of claims omitted from a resolution plan, including claims by government authorities, specifically with respect to tax, personal guarantees, arbitration claims and counterclaims etc.

The Supreme Court’s decision in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd. (“Ujaas Energy”) raises a more nuanced question. Can a claim that stands extinguished under the Insolvency and Bankruptcy Code, 2016 ("IBC") nevertheless survive in a purely defensive form as a plea of set-off in an arbitration? The question assumes significance because claims and counterclaims in commercial disputes often arise out of the same underlying transaction. The IBC bars claims omitted from an approved resolution plan, but it is uncertain if the same facts can still be used to oppose or reduce a claim advanced by the corporate debtor.

It was against this backdrop that the Supreme Court decided Ujaas Energy. Although the Court held that the respondent's counterclaim stood extinguished upon approval of the resolution plan under Section 31 of the IBC, it nevertheless permitted the respondent to rely on the same underlying claim as a plea of equitable set-off against the corporate debtor's claim. The Court emphasised that such a plea would operate, if at all, only as a defence. In doing so, the judgment engages with a question that had not previously received detailed judicial consideration, i.e., whether the extinguishment of a claim necessarily precludes every legal consequence flowing from the facts underlying that claim. Under these circumstances, this piece examines whether the Supreme Court’s position in Ujaas Energy has diluted the clean slate doctrine or clarified its contours.

The clean slate doctrine was first articulated by the Supreme Court in Committee of Creditors of Essar Steel India Ltd v. Satish Kumar Gupta. While considering the consequences of allowing claims to surface after the approval of a resolution plan, the Court invoked the metaphor of a "hydra-head popping up" to describe the uncertainty that would ensue if creditors were permitted to assert undecided claims after the conclusion of the corporate insolvency resolution process ("CIRP"). The Court highlighted that in such a scenario, each newly asserted liability would undermine the commercial assumptions on which the resolution applicant had acquired the corporate debtor. The value ascribed to the business during the CIRP would become uncertain, frustrating the objective of achieving a timely and effective resolution. The Court therefore held that all claims against the corporate debtor must be submitted to and decided by the resolution professional during CIRP, failing which they would not survive the approval of the resolution plan.

In the following year, the clean slate doctrine, now statutorily recognized, was again upheld by the Supreme Court in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. In this case, the principal issue before the Court was whether government authorities could continue to pursue tax demands that had not been incorporated into an approved resolution plan. Tracing the legislative history of Section 31 of the IBC, the Court noted that Parliament had amended the provision precisely to address the mischief of statutory authorities initiating or continuing recovery proceedings after a resolution plan had attained finality. It was unambiguously clarified that “on the date of approval of resolution plan by the adjudicating authority, all such claims, which are not part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect of a claim, which is not part of the resolution plan”. It follows that the consequence is not merely procedural, such claims cannot thereafter be initiated or continued in any forum.

Subsequent decisions have consistently reinforced this understanding. This principal was extended even to GST demands by the Government, vide the judgement of the Patna High Court. The Court emphasised that the binding effect of an approved resolution plan is universal. Once the insolvency process concludes, creditors, including sovereign authorities, cannot revive claims that they chose not to pursue before the resolution professional.

It is well settled that, once the CIRP commences, Section 14(1)(a) bars the institution or continuation of proceedings against the corporate debtor. Consistent with this principle, the Supreme Court has held that arbitral proceedings initiated in breach of the moratorium are non est in law. The moratorium is intended to preserve the corporate debtor's assets and ensure that the insolvency process is not undermined by parallel recovery proceedings.

In this context, a distinction must be drawn between two related questions. The first is whether a claim stands extinguished upon approval of a resolution plan. The second is whether such a claim can even be pursued while the corporate debtor remains in the CIRP, given the moratorium imposed under Section 14(1)(a) of the IBC. At first blush, Section 14 appears to admit of a straightforward answer, i.e., once the moratorium comes into effect, proceedings against the corporate debtor cannot be instituted or continued.

The courts have, however, recognised that not every proceeding involving the corporate debtor is inconsistent with the objective of moratorium. In Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. the Delhi High Court observed that proceedings which are beneficial to the corporate debtor, or which do not threaten to diminish its assets, may continue notwithstanding the moratorium. Thus, where the corporate debtor sought to challenge an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the continuation of those proceedings was permitted despite the existence of a rejected counterclaim. Since any decree arising from the counterclaim would have remained unenforceable during the moratorium, permitting the challenge to proceed did not compromise the objectives underlying Section 14.

The distinction was taken a step further by the Delhi High Court in SSMP Industries Ltd v. Perkan Food Processors (P) Ltd., where a corporate debtor in CIRP was the plaintiff seeking recovery, against whom the defendant had filed a counterclaim. The Delhi High Court declined to stay the counterclaim merely because of the moratorium, reasoning that the claims of both parties arose from the same transaction and were factually intertwined. Additionally, given that the counter claim was noticeably smaller than the corporate debtor’s claim, the Court ruled that adjudicating them together neither exposed the corporate debtor's assets to immediate recovery nor defeated the purpose of the CIRP.

These decisions illustrate an emerging judicial recognition that a counterclaim serving a purely defensive function occupies a different position from an independent claim for affirmative recovery. While the former may be permitted to remain a part of an adjudicatory process, the latter continues to be constrained by the objectives of the IBC. It is against this jurisprudential backdrop that the Supreme Court's decision in Ujaas Energy assumes significance.

The dispute in Ujaas Energy arose from a contract executed in 2017 for the installation of rooftop solar power plants across various locations in West Bengal. Following the commencement of CIRP against Ujaas Energy, its Resolution Professional invoked the arbitration agreement in December 2021. In the arbitration initiated by Ujaas Energy, West Bengal Power Development Corporation Ltd. (“WBPDCL”) filed its counterclaim before the arbitral tribunal in 2023. Crucially, however, WBPDCL never submitted that claim to the Resolution Professional during the CIRP. By the time the counterclaim came to be considered by the arbitral tribunal, the NCLT had already approved the resolution plan, raising the question whether the counterclaim had stood extinguished under Section 31 of the IBC.

The arbitral tribunal answered the question in the affirmative and dismissed the counterclaim. While the Calcutta High Court upheld that decision, the Division Bench reversed it, holding that both the claim and counterclaim ought to proceed to trial. The matter ultimately reached the Supreme Court.

The Supreme Court in its analysis upheld the uncontroverted proposition that the clean slate doctrine, as explained in Essar Steel and Ghanashyam Mishra, barred WBPDCL from maintaining an independent counterclaim seeking affirmative relief. Since the claim had not been submitted during CIRP, it stood extinguished upon approval of the resolution plan and could not thereafter be pursued as a basis for recovery. To that extent, the Court reaffirmed the established position under Section 31 of the IBC.

The real significance of the judgment, however, lies in what followed. Instead of treating WBPDCL's counterclaim solely as an affirmative claim for recovery, the Court examined whether it could survive as a plea of equitable set-off. It was observed that the resolution plan expressly extinguished claims for "payments" and "settlements", including pending arbitral counterclaims, but was silent on the availability of set-off as a defence. Applying the maxim expressio unius est exclusio alterius, the Court held that the omission was significant. The resolution plan had extinguished affirmative claims, it had not expressly excluded the right to rely on the same underlying facts as a purely defensive set-off against Ujaas Energy's own claim. Moreover, given that other equities were at play, including the fact that the counterclaim was filed well before the resolution plan was approved and that the resolution professional was aware of the counterclaim and yet made no provision of it in the plan, the Court found sufficient satisfaction equity in favor of the Respondent to warrant this decision.

The Court was careful to ensure that the defensive plea did not become a disguised claim for recovery. It therefore held that the counterclaim could operate only to the extent necessary to reduce or extinguish Ujaas Energy's claim. Any excess amount found due to WBPDCL could not be recovered independently. Likewise, if Ujaas Energy were to withdraw the arbitration altogether, the plea of set-off would also disappear, having no independent existence outside of Ujaas Energy’s claim. In this manner, the Court preserved the commercial rationale underlying the clean slate doctrine while recognising a narrow distinction between an extinguished claim asserted as a sword and the same claim relied upon as a shield.

At first glance, Ujaas Energy appears to carve out an exception to the clean slate doctrine. A closer reading suggests otherwise. The decision does not dilute the principle that claims omitted from an approved resolution plan stand extinguished. Nor does it permit a creditor to revive an otherwise barred claim through arbitral proceedings. The significance of the decision lies in a narrower, but more nuanced, distinction. The Court drew a careful distinction between a claim asserted as a sword, which Section 31 extinguishes, and the same claim deployed as a shield, solely to test the quantum of the corporate debtor's recovery. Viewed in this light, Ujaas Energy sits comfortably alongside Power Grid and SSMP Industries. Those decisions recognised that the IBC does not prohibit every proceeding involving the corporate debtor; rather, it restrains proceedings that threaten the objectives of the insolvency framework.

The decision also carries an important takeaway in terms of the resolution plan. The outcome turned, in no small measure, on the language of the resolution plan itself. While the plan expressly extinguished claims, payments and pending arbitral counterclaims, it was silent on the availability of equitable set-off as a defence. That omission ultimately proved decisive. Resolution professionals and resolution applicants must therefore ensure that resolution plans are drafted with greater precision, particularly where pending litigation or arbitral proceedings involve intertwined claims and counterclaims. If the objective is to achieve complete finality, the plan must address not only affirmative claims but also the possibility of defensive pleas founded on those very claims.

Ultimately, Ujaas Energy does not place an asterisk against the clean slate doctrine. Instead, it reminds us that the doctrine is directed at extinguishing claims and not necessarily every legal consequence that may flow from the facts underlying those claims. Whether future courts confine the decision to its unusual facts or develop it into a broader principle governing equitable set-off remains to be seen. For now, Ujaas Energy is best understood not as an erosion of the clean slate doctrine, but as a careful delineation of its limits.

Alipak Banerjee is a Counsel and Founder of Alipak Banerjee Law Chambers. Sreeja Sengupta is a member of the Chambers.

The authors are grateful to the assistance provided by Arya Jhawar, Member, Alipak Banerjee Law Chambers.