S. 9 IBC | Uncrystallized Damages From Breach Of Contract Not Operational Debt : Supreme Court

The Supreme Court on Wednesday (August 12) held that claims for damages arising from breach of contract cannot be treated as "operational debt" under the Insolvency and Bankruptcy Code, 2016, unless previously adjudicated and crystallized by a competent court.

“It is a settled position of law that damages, whether liquidated or unliquidated, cannot be treated as operational debt unless and until they are assessed and crystallized by way of adjudication by a court of competent jurisdiction. We say so because the NCLT and NCLAT are not the appropriate fora for determination of disputes. Their functions and powers are for the purpose of ensuring survival of a particular company and alternatively, to ensure maximization of repayment capabilities in the event of liquidation.”, observed a bench of Justice JB Pardiwala and Justice Manoj Misra.

The dispute arose from an Engineering, Procurement and Construction (EPC) contract, for setting up a 225 MW gas-based power station in Andhra Pradesh. The respondent was awarded the contract for Rs. 827 crore.

The respondent claimed that despite achieving milestones, the appellant paid only Rs. 50.15 crore out of the cumulative Rs. 165.4 crore due. The respondent suspended the work and later claimed damages caused to it due to the breach of contract by the Appellant.

The payments became due in 2011–2012, but the Respondent filed an application under Section 9 of the IBC only in 2018.

The NCLT admitted the Section 9 application and the NCLAT upheld the admission, prompting the appellant to move to the Supreme Court.

Setting aside the concurrent findings of the NCLAT and NCLT, the judgment authored by Justice Pardiwala observed that the adjudicating authorities committed an error in admitting the Respondent's insolvency plea, in the absence of crystallisation of the debt.

“…disputes that arise from breach of the contract cannot give rise to an operational debt till the time the debt becomes crystallized and legally enforceable. In the present matter, it was argued that the suspension, idling and demobilization charges accrued to the respondent due to the appellant's alleged breach of contract by failure to pay in terms of the EPC contract. Since, there is no record of a suit or arbitration that assessed, adjudicated and crystallized these claims, the amounts claimed under these heads cannot be treated as operational debt…Therefore, these portions of the respondent's claims cannot be treated as operational debt for the purpose of adjudication of an application under Section 9 of the IBC.”, the Court said.

Insolvency cannot be used to revive stale claims

Also, the Court found the Respondent's insolvency application to be barred by limitation, as the debt occurred between 2011-12, however, the insolvency was invoked only in 2018.

The Respondent's argument that since the contract was never terminated and technically continued to exist, therefore, its claim was still alive was rejected by the Court, stressing that a mere sending of legal notices repeatedly does not revive an expired claim unless the debtor acknowledges the debt in writing.

The right to initiate insolvency proceedings would ordinarily become time-barred after three years unless limitation is legally extended, the Court said.

“In the present matter, the appellant gave no reply to the legal notices of the respondent. Therefore, the clock of limitation continued to run its course and there was no action by the parties that reset it. We find ourselves constrained to restate the observation of this Court in Babulal Vardharji Gurjar (supra) that the intention of the IBC is not to give a new lease of life to debts which are time-barred. Therefore, the respondent ought to have pursued its claims within the period of limitation before a civil court or pleaded for condonation of delay before the NCLT.”, the Court observed.

As a result, the appeal was allowed, granting a liberty to the respondent-contractor to pursue its claims before the appropriate dispute resolution forum contemplated under the EPC agreement.

Cause Title: SRINIVASA REDDY VELAGALA. SRAVANTHI INFRATECH PVT. LTD

Citation : 2026 LiveLaw (SC) 793

Click here to download judgment

Appearance:

For Appellant(s) Mr. Shyam Divan, Sr. Adv. Mr. Shoeb Alam, Sr. Adv. Mr. Shashank Manish, AOR Ms. Nidhi Sahay, Adv. Mr. Rongon Choudhuri, Adv.

For Respondent(s) Mr. Nitin Bhardwaj, AOR Mr. Akash Mehta, Adv. Mr. Sachit Sahijpal, Adv.