Authority: Supreme Court of India

Order Date: 08 October 2026

Case Overview

  • Parties: Modern Asset (Appellant) and KNK Construction Private Limited (Respondent).
  • Contract: Civil and structural work for an office building dated 09‑07‑2018, total value Rs 133.68 Crores; mobilisation advance paid by appellant; bank guarantee of Rs 1,56,13,250 furnished by respondent.
  • Work commenced 01‑06‑2018, timeline extended to 31‑12‑2019; 95% of work completed before appellant issued termination notice on 25‑02‑2020.
  • Respondent entered Corporate Insolvency Resolution Process (CIRP) on 11‑12‑2019; subsequently applied for MSME registration with Ministry of MSME.
  • Claim before Resolution Professional (RP): Rs 12,26,30,840; only 0.72% (Rs 8,82,942 with interest) admitted in the resolution plan submitted by the erstwhile promoters (now Successful Resolution Applicant – SRA).
  • NCLT approved the resolution plan on 05‑04‑2022; promoters became management of the corporate debtor (CD) as SRA.
  • Post‑CIRP events: FIR Crime No.20 of 2023 filed by appellant against respondent’s directors under IPC §§420, 468, 471 for alleged forged work‑completion certificate; respondent’s counter‑complaint Crime No.77 of 2023 (misappropriation) later quashed by High Court on 25‑07‑2025.
  • Payment under the resolution plan commenced 15‑06‑2023 and was fully satisfied.
  • On 20‑06‑2023 respondent filed an application under Section 11 of the Arbitration and Conciliation Act before the High Court of Karnataka, invoking Clause 19.13 of the contract for arbitration of amounts allegedly payable to respondent under the same contract.
  • High Court appointed an arbitrator, directed parties to first approach Karnataka Mediation Centre, and ultimately upheld the arbitration route.
  • Appellant argued that the claim had been settled in CIRP (clean‑slate principle) and that no arbitration clause should survive; respondent contended that SRA, as successor, may pursue CD’s pre‑CIRP dues.
  • The Supreme Court examined the interplay of Section 11 (prima‑facie existence of arbitration agreement), Section 31 (clean‑slate principle), Section 30(2), and recent amendment Section 31(6) effective 26‑05‑2026.
  • The Court referenced several precedents: SBI General Insurance v. Krish Spinning (2024), Interplay between Arbitration Agreements (2024), Swiss Ribbons Pvt. Ltd. v. Union of India (2019), Ghanshyam Mishra & Sons v. Edelweiss (2021), New Delhi Municipal Council v. Minosha India Ltd (2022), and Ujaas Energy Ltd. v. West Bengal Power Development Corp (2026).
  • The Court answered six specific questions, confirming: (i) Clause 19.13 is a valid arbitration agreement surviving contract termination; (ii) Section 11(6‑A) only requires prima‑facie existence of arbitration agreement, substantive effects of the resolution plan to be decided by the arbitral tribunal; (iii) Section 31(1) extinguishes claims against the CD but not the SRA’s claims; (iv) Extinguishment of the respondent’s claim is a disputed legal question for the tribunal; (v) Competence‑competence doctrine applies, and the arbitration tribunal may consider the effect of the resolution plan; (vi) Live disputes exist, warranting arbitration.

Final Outcome

  • The Supreme Court sustained the High Court’s order appointing an Arbitration Tribunal.
  • Modification: The appellant (Modern Asset) may raise a counter‑claim only for the purpose of set‑off against any amount the tribunal may award to the respondent; no positive or affirmative recovery is permitted for the appellant.
  • The SRA (KNK Construction’s former promoters) may continue to pursue the CD’s claims, but the appellant’s original OC claim is extinguished under the clean‑slate principle.
  • The arbitral tribunal is also directed to consider the issue of encashment of the bank guarantee furnished by the respondent.
  • The appeal is disposed of with the above modification; any pending applications are rejected.

Topics: Arbitration, Insolvency & Bankruptcy Code, Clean‑Slate Principle