SC Clarifies Contractual Claims as Operational Debt Under Section 9 IBC

Summary: The Supreme Court in Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd. clarified the treatment of contractual claims under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Court held that consideration payable for completed contractual milestones may qualify as operational debt because it arises from the provision of goods or services. However, suspension, idling and demobilisation charges claimed as compensation for an alleged contractual breach cannot constitute operational debt until the entitlement and amount are adjudicated and crystallised by a competent forum. The Court further held that the continued subsistence of an EPC contract does not convert an earlier non-payment into a continuing default or extend limitation indefinitely. Although no genuine pre-existing dispute was established on the facts, the qualifying milestone-payment claims were barred by limitation. The ruling emphasises that creditors invoking Section 9 must separately classify each component of a composite contractual claim, establish its legal foundation and date of default, and independently satisfy limitation requirements.

SC clarifies When Contractual Claims Qualify As Operational Debt Under Section 9 of IBC

Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”) is a corporate-resolution mechanism, not a substitute for adjudicating contractual claims or recovering time-barred dues. In Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd., the Supreme Court clarified how this principle applies when a Section 9 application combines unpaid contractual consideration with claims for damages. A Bench comprising Justice J.B. Pardiwala and Justice Manoj Misra held that payments due for completed contractual milestones may constitute operational debt. Suspension, idling and demobilisation charges arising from an alleged breach, however, cannot be treated as operational debt until assessed and crystallised by a competent adjudicatory forum. The Court also held that the continued subsistence of a contract does not create a continuing cause of action for an earlier payment default.

Background and Facts

The corporate debtor invited bids on 13 December 2010 for setting up a 225 MW gas-based combined-cycle power station at Bikkavolu in Andhra Pradesh. Sravanthi Infratech Pvt. Ltd. was awarded the ₹827 crore Engineering, Procurement and Construction (EPC) contract. The parties executed the EPC agreement on 9 February 2011. It contemplated completion within 14 months, prescribed milestone-linked payments and provided for arbitration of disputes.

The contractor alleged that the corporate debtor failed to make the payments due upon achievement of the initial milestones. It issued a suspension notice on 30 July 2011, stopped EPC activities and subsequently demobilised. The amounts later claimed fell under two broad heads: (a) payments allegedly due under the contractual milestone schedule, and (b) suspension, idling and demobilisation charges, together with interest, attributed to the alleged breach.

The contractor issued legal notices on 25 July 2014, 16 September 2014 and 15 July 2015. The corporate debtor did not respond. On 2 July 2018, the contractor issued a demand notice under Section 8, IBC, claiming approximately ₹1,292 crore. Its Section 9 application, filed on 12 October 2018, was admitted by the NCLT, Amaravati Bench, on 13 December 2019. The NCLAT affirmed that order on 1 February 2021, principally accepting that the unterminated EPC contract continued to subsist and consequently the claim remained alive. The Supreme Court set aside both orders (of NCLT and NCLAT).

Legal Analysis

1. Subsistence of the EPC contract

The Supreme Court first rejected the contention that the EPC agreement had become frustrated or had ended merely by efflux of time. Section 56, Indian Contract Act, 1872 (doctrine of frustration) applies where a supervening event makes performance of contract impossible or unlawful. Relying on Boothalinga Agencies v. V.T.C. Poriaswami Nadar, 1969 AIR 110, the Court reiterated that the doctrine of frustration cannot apply to self-induced frustration.

Here, work had stopped because of the parties’ own acts or omissions, particularly the alleged non-payment and the consequential suspension. Neither party invoked the contractual termination mechanism. The agreement also did not establish that time was of the essence in a manner that automatically discharged the contract. The Court therefore held that the EPC agreement continued to subsist. That finding, however, did not preserve limitation indefinitely. The subsistence of the contract and the limitation applicable to individual payment defaults were separate questions.

2. Operational debt required a claim-by-claim analysis

Section 5(21), IBC defines “operational debt” as a claim concerning the provision of goods or services, including employment, or specified statutory dues. The Court accordingly divided the contractor’s composite demand according to its legal character.

Amounts payable upon completion of EPC milestones represented consideration for goods and services supplied under the contract. Once the relevant milestones and payment conditions were satisfied, those amounts could constitute ‘operational debt’ under IBC. Prior adjudication was not required merely because the corporate debtor had failed to pay contractual consideration.

Suspension, idling and demobilisation charges stood on a different footing. They were claimed as compensation for the consequences of the corporate debtor’s alleged breach. Determining such entitlement could require adjudication of breach, causation, contractual allocation of risk, mitigation and quantum. The Court held that damages, whether liquidated or unliquidated, cannot constitute ‘operational debt’ until assessed and crystallised through adjudication by a competent forum. The NCLT and NCLAT are not intended to conduct a trial of such contractual disputes at the admission stage.

3. Interest must be classified by its legal foundation

The ruling must not be read as holding that every monetary consequence of delayed payment is necessarily damages. Paragraph 48 of the judgment records one claim-head as “suspension and demobilization charges and interest thereupon”. The Court’s operative analysis in paragraphs 52–53 and 93 classifies the underlying suspension, idling and demobilisation charges as damages; it does not formulate a general rule governing every claim for interest on unpaid operational dues.

Interest that is expressly stipulated in the contract, established through an accepted course of dealing/business or arising under an applicable statute may serve as an accessory to an established principal debt. Conversely, interest claimed unilaterally, without an agreed, statutory or adjudicated foundation, may itself require adjudication. To the extent interest depends upon uncrystallised damages, it cannot independently transform those damages into operational debt. Nor can continued calculation of interest revive a principal debt that has already become time-barred.

4. No pre-existing dispute was established

Applying Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353, the Court held that no genuine pre-existing dispute had been demonstrated. A dispute need not already be the subject of a suit or arbitration, but it must be evident from contemporaneous communications or conduct and cannot be spurious, hypothetical or illusory.

The corporate debtor had maintained complete silence in response to the contractor’s successive notices and raised its defence only after the Section 9 proceedings commenced. The Court cautioned that silence, by itself, does not invariably establish the absence of a dispute. On the particular facts, however, consistent silence over several years was strong evidence that the subsequent defence was an afterthought.

5. Limitation defeated the operational-debt component

Section 238A, IBC makes the Limitation Act, 1963 applicable to proceedings before the NCLT and NCLAT. Under Article 137, an application must ordinarily be brought within three years from the date on which the right to apply accrues.

The Court found that the qualifying contractual dues had crystallised when the liability was acknowledged on 5 January and 3 February 2012. The contractor did not commence insolvency proceedings within three years. The fact that the EPC agreement had not been terminated did not make non-payment a continuing default. A default occurs when a due and payable debt is not paid. Its financial consequences may continue, but the legal default does not recur every day.

The creditor’s later notices could not reset limitation. Section 18, Limitation Act, 1963 requires an acknowledgment in writing by the party against whom the liability is asserted, made before expiry of the prescribed period. A creditor cannot renew limitation through its own unilateral demand. Following Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1, the Court reiterated that the IBC does not give a new lease of life to time-barred debts.

Thus, the damages component was excluded because it had not been adjudicated and crystallised. The milestone-payment component was capable of constituting operational debt, but the Section 9 application concerning it was barred by limitation.

Practical Implications

Operational creditors should segregate their claims before issuing a Section 8 demand notice. The notice should distinguish:

• unpaid invoices or milestone consideration;
• contractually agreed interest on those dues;
• statutory interest, where applicable; and
• damages for suspension, idling, demobilisation, loss of profit or other consequences of breach.

For each component, the creditor should identify the contractual or statutory foundation, payment date, date of default and any acknowledgment relevant under Section 18, Limitation Act, 1963. A composite demand should not assume that quantifying damages in a notice makes them due and payable operational debt.

Corporate debtors should respond promptly to disputed demands. The response should identify the factual and contractual grounds of dispute and should be consistent with contemporaneous records. Strategic silence may weaken a later contention that a genuine pre-existing dispute existed.

NCLTs must examine the character and limitation of every material component at the admission stage. A Resolution Professional’s later scrutiny of claims cannot cure the erroneous commencement of CIRP on a debt that was never operational, was not crystallised or was already time-barred.

Conclusion

Srinivasa Reddy Velagala does not exclude all contractual claims arising in the context of a breach from the definition of operational debt. It requires careful legal classification. Consideration payable for completed goods or services may constitute operational debt; compensation requiring adjudication does not. Even a valid operational debt must independently satisfy limitation. The decision therefore reinforces three disciplines under Section 9: classify each claim, establish when it became due, and act within limitation.

Authorities and Source Links

• Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd., Civil Appeal No. 876 of 2021, 2026 INSC 835, Supreme Court, 12 August 2026
• Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353
• Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1
• Insolvency and Bankruptcy Code, 2016
• Limitation Act, 1963
• Indian Contract Act, 1872