S. 9 IBC | UNCRYSTALLIZED DAMAGES FROM BREACH OF CONTRACT NOT OPERATIONAL DEBT: SUPREME COURT 

SUMMARY:

¹The case concerned an EPC contract for setting up a 225 MW gas based power station. The respondent, the operational creditor, claimed unpaid milestone payments along with suspension and demobilisation charges and initiated proceedings under Section 9 of the IBC. 

The Supreme Court held that the EPC contract had not come to an end merely because the work remained suspended. However, this did not mean that the respondent had a continuing cause of action for the unpaid amounts. The contractual milestone payments were operational debt, while the unadjudicated suspension and demobilisation charges were damages and could not be treated as operational debt. 

Most importantly, the Court held that the Section 9 application was filed after the expiry of the limitation period. Mere continuation of the EPC contract or sending legal notices could not extend limitation. The NCLT and NCLAT orders were therefore set aside.  

FACTS:

• The appellant invited bids for setting up a 225 MW gas based combined cycle power station at Bikkavolu, Andhra Pradesh. 
• The respondent was awarded the contract for Rs. 827 crore through a Letter of Award dated 24.12.2010. An EPC agreement was subsequently executed on 09.02.2011, with completion contemplated within 14 months. 
• Under the payment schedule, payments were linked to different milestones. Although the respondent completed the first three milestones, the appellant paid only Rs. 50.15 crore, leaving substantial amounts unpaid. 
• Due to non-payment, the respondent issued a suspension notice on 30.07.2011 and stopped the EPC work. 
• The respondent subsequently sent legal notices dated 25.07.2014, 16.09.2014 and 15.07.2015, demanding its dues. The appellant did not respond to these notices. 
• On 02.07.2018, the respondent issued a statutory demand notice under Section 8 of the IBC and later filed a Section 9 application on 12.10.2018. 
• The NCLT admitted the application on 13.12.2019. The NCLAT upheld the decision, mainly holding that the EPC contract continued to subsist and therefore the claim was not time-barred. 

ISSUES: 
The Supreme Court considered four main issues: 

• Whether the EPC contract had been frustrated by efflux of time.  
• Whether the amounts claimed constituted operational debt under Section 5(21) of the IBC.  
• Whether there was a pre-existing dispute between the parties.  
• Whether the Section 9 application was barred by limitation. 

JUDGEMENT:

On subsistence of the EPC contract: 

The Court held that the contract continued to subsist because neither party had terminated it. The suspension of work was not an unforeseen event making performance impossible. Therefore, Section 56 of the Contract Act could not be invoked. The contract was not frustrated merely because time had passed.  

On operational debt: 

The Court distinguished between the different claims. Payments due under the contractual milestones were operational debt because they were consideration for the works performed. However, suspension, idling and demobilisation charges were in the nature of damages. Since they had not been adjudicated and crystallised by a competent court or arbitral tribunal, they could not be treated as operational debt under Section 5(21).  

On pre-existing dispute: 

The Court held that there was no pre-existing dispute. Although a dispute does not necessarily have to be pending before a court or arbitral tribunal, the appellant had remained completely silent in response to several legal notices and even the Section 8 demand notice. The defence was raised for the first time in response to the Section 9 application and was therefore treated as an afterthought. 

On limitation:

This was the decisive issue. The Court held that the operational debt had become due and payable when the relevant defaults occurred, and the claim had crystallised by January and February 2012. The limitation period under Article 137 was three years. 

The Court rejected the argument that the continued existence of the EPC contract created a continuing cause of action. A default occurs when a debt becomes due and is not paid. Sending subsequent legal notices does not restart limitation unless there is a written acknowledgment of liability under Section 18 of the Limitation Act. 

ANALYSIS:

The main takeaway from the judgment is that a continuing contract does not necessarily mean a continuing cause of action for the purpose of IBC limitation. 

The Court also made an important distinction between ordinary civil/arbitration proceedings and IBC proceedings. In some EPC disputes, a fresh right to sue may arise when the final bill is reconciled or the works are finally tested. However, for a Section 9 IBC application, the relevant question is when the default under Section 3(12) occurred. Paras 86 to 88.  

The judgment also reinforces that IBC proceedings cannot be used as a method of reviving a debt that has already become time barred. 

Last Updated on 25 September, 2026