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.

Headnote

Insolvency and Bankruptcy Code, 2016 – Sections 3(12), 9, & 238A r/w Limitation Act, 1963, Article 137 & Section 18 – Starting Point of Limitation – Continuing Cause of Action – Unilateral Legal Notices - Non-payment of Debt as a Singular Default - A default arising out of non-payment of a due and payable amount provides a cause of action on the date when the default occurs and does not constitute a "continuing cause of action" - While an unpaid debt may cause continuing damage, it does not cause continuing legal injury - The mere subsistence of an EPC contract does not extend the statutory limitation period under Article 137 of the Limitation Act - Each Invoice Generates Its Own Default - Where a claim is founded on multiple invoices or milestone payments, each invoice/milestone generates its own date of default - Limitation cannot be treated in the aggregate from the date of the first or last invoice, and only defaults occurring within the three years preceding the filing of the Section 9 application can be entertained - Unilateral Notices Do Not Reset Limitation - Mere service of statutory/legal demand notices by the creditor without any written acknowledgment of liability by the debtor under Section 18 of the Limitation Act cannot extend or reset the limitation period - The IBC is not intended to revive or give a new lease of life to time-barred claims. [Paras 69–73, 75, 76, 81–85, 97–100]

Insolvency and Bankruptcy Code, 2016 – Section 5(21) – Operational Debt vs. Damages - Scope of Operational Debt in Works Contracts - Amounts payable as consideration for completed stages/milestones in a works/EPC contract fall within the definition of "operational debt" under Section 5(21) of the IBC - Unadjudicated Damages Cannot Constitute Operational Debt - Claims for suspension charges, idling costs, or demobilization expenses arising from an alleged breach of contract are in the nature of damages (liquidated or unliquidated) - They cannot be treated as an operational debt unless and until they are formally assessed, adjudicated, and crystallized by a court or arbitral tribunal of competent jurisdiction. [Paras 48–54, 90-93]

Insolvency and Bankruptcy Code, 2016 – Sections 8 & 9 – Pre-Existing Dispute – Corporate Debtor's Silence - Standard for Dispute: To bar an application under Section 9, a dispute must truly exist, be substantive, and not be spurious, hypothetical, or illusory - It is not strictly necessary for a civil suit or arbitration to be pending prior to the Section 8 notice - Silence as Evidence of No Dispute - While silence cannot as a general rule be treated as an indicator of "no dispute", consistent and total silence on the part of the corporate debtor across multiple notices over several years, without raising any contestation until filing a reply to the Section 9 application, shows that the defence is an afterthought, establishing the absence of a pre-existing dispute. [Paras 56–64, 94–96]

Indian Contract Act, 1872 – Section 56 – Doctrine of Frustration vs. Effluxion of Time – Self-Induced Frustration – Distinction - Frustration occurs when an unforeseen supervening extraneous event makes performance impossible or unlawful, whereas effluxion of time is the natural closure/expiry of a contract - Self-Induced Frustration Inapplicable - The doctrine of frustration under Section 56 does not apply where the stalling or suspension of the contract is the result of the default, act, or election of one of the contracting parties (self-induced frustration) - Where a contract is suspended due to non-payment and neither party invokes the termination clause, the contract continues to subsist. [Relied on Boothalinga Agencies v. V.T.C. Poriaswami Nadar, 1968 SCC OnLine SC 135; Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353; Next Education India (P) Ltd. v. K12 Techno Services, 2023 SCC OnLine SC 1117; B. Prashanth Hegde v. SBI, 2026 SCC OnLine SC 197; Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1; Paras 40–46, 89–91, 98-100].

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

Citation : 2026 LiveLaw (SC) 793

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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.