Supreme Court on When Contractual Dues Qualify as Operational Debt Under Section 9 IBC

Overview

In Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd., the Supreme Court has given detailed guidance on how claims arising from commercial contracts should be treated when an assessee invokes Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Bench of Justice J.B. Pardiwala and Justice Manoj Misra clarified:

  • Contractual consideration payable for goods or services supplied (such as milestone-based payments under an EPC contract), once earned, can constitute operational debt.
  • Claims for suspension, idling, demobilisation and similar charges—which are essentially compensation for alleged breach—do not amount to operational debt unless a competent forum first adjudicates and crystallises such claims.
  • The mere fact that a contract is still in force does not make an earlier payment default a “continuing default” or extend limitation indefinitely.
  • Every component of a composite contractual demand must be examined separately for:
    • its legal character (consideration vs. damages vs. interest),
    • whether it qualifies as operational debt, and
    • whether it is within limitation.

This decision narrows the use of the IBC as a debt recovery tool for disputed or time-barred contractual dues and reiterates its role as a resolution mechanism.

Factual Matrix

EPC Contract and Project Structure

  • The corporate debtor floated a tender on 13 December 2010 to set up a 225 MW gas-based combined-cycle power plant at Bikkavolu, Andhra Pradesh.
  • Sravanthi Infratech Pvt. Ltd. was awarded the Engineering, Procurement and Construction (EPC) contract for approximately ₹827 crore.
  • The EPC agreement was executed on 9 February 2011. Key features included:
    • completion period of 14 months,
    • detailed milestone-based payment schedule, and
    • an arbitration clause for dispute resolution.

Alleged Defaults and Suspension of Work

The contractor alleged that the corporate debtor did not release payments when early milestones were achieved. As a result:

  • A suspension notice was issued on 30 July 2011.
  • EPC activities were halted.
  • The contractor subsequently demobilised its resources from the site.

The contractor’s eventual monetary claim comprised two broad components:

  1. Milestone-based contractual dues: amounts allegedly payable on achievement of specific EPC milestones.
  2. Compensatory claims:
    • suspension charges,
    • idling charges,
    • demobilisation charges, and
    • interest claimed on these heads,
      all alleged to arise from the corporate debtor’s breach.

Pre-IBC Correspondence and Section 9 Proceedings

  • Legal notices demanding payment were issued on 25 July 2014, 16 September 2014 and 15 July 2015.
  • The corporate debtor did not reply to any of these notices.
  • On 2 July 2018, the contractor served a demand notice under Section 8, IBC, claiming approximately ₹1,292 crore.
  • A Section 9 application was filed on 12 October 2018 before NCLT, Amaravati.
  • The NCLT admitted the application on 13 December 2019.
  • The NCLAT upheld the admission on 1 February 2021, largely on the basis that the EPC contract had not been terminated and hence the claim was still “alive”.

The corporate debtor approached the Supreme Court, which ultimately set aside both the NCLT and NCLAT orders.

The Supreme Court examined the following questions:

  1. Does the EPC agreement continue to subsist, or has it come to an end by frustration or efflux of time?
  2. Which component(s) of the contractor’s composite claim can qualify as “operational debt” within the meaning of Section 5(21) IBC?
  3. How should interest be treated when it arises from different legal bases (contract, statute, unadjudicated damages)?
  4. Was there a pre-existing dispute within the meaning of Section 8 and Section 9, as interpreted in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.?
  5. Were the admissible components of the claim barred by limitation, particularly in light of Section 238A IBC and the Limitation Act, 1963?

1. Contract Still Subsisting, But That Does Not Save Limitation

Doctrine of Frustration Not Attracted

The argument that the EPC contract had automatically ended by frustration or by mere lapse of the time schedule was rejected.

  • The Court referred to Section 56 of the Indian Contract Act, 1872 and relied on Boothalinga Agencies v. V.T.C. Poriaswami Nadar, 1969 AIR 110.
  • Frustration requires a supervening event that renders performance impossible or unlawful.
  • Where stoppage of work flows from the actions or inactions of the parties themselves—such as alleged non-payment and subsequent suspension—this amounts to self-induced frustration, which does not attract Section 56.

No Automatic Termination by Efflux of Time

The Court also noted:

  • The EPC contract did not provide that mere expiry of the 14-month period would automatically terminate the agreement.
  • Neither party had invoked contractual termination provisions.
  • There was no clear stipulation that time was of the essence in a manner that would automatically discharge both sides upon delay.