The Supreme Court has held that an operational creditor cannot use proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) to revive a time-barred debt, even where the underlying EPC contract continues to subsist. 

Setting aside orders of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), the bench of  Justice J.B. Pardiwala and Justice Manoj Misra ruled that the limitation period for an IBC application runs from the date of default and is not extended merely because the contractual relationship between the parties remains technically alive.

The bench examined whether an EPC contract had been frustrated by efflux of time, whether amounts claimed under the contract constituted “operational debt”, whether there was a pre-existing dispute, and whether the Section 9 application was barred by limitation.

Buy Now: 50+ Supreme Court Judgments – July 2026

The dispute originated from an International Competitive Bid issued for setting up a 225 MW gas-based combined cycle power station at Bikkavolu, East Godavari District, Andhra Pradesh. The respondent was awarded the project after submitting the lowest bid, and a Letter of Award dated December 24, 2010 was issued for approximately ₹827 crore.

The parties subsequently entered into an Engineering, Procurement and Construction (EPC) agreement dated February 9, 2011. The contract contemplated completion within 14 months and contained detailed milestone-based payment provisions. The agreement also contained contractual mechanisms for suspension and termination in the event of non-payment.

Under the payment schedule, the contractor was entitled to an initial advance of 10% of the contract price, amounting to ₹82.7 crore. Although the milestone was achieved and the requisite guarantees were furnished, only ₹50.15 crore was paid.

The contractor subsequently achieved further milestones, including those relating to ordering major equipment. According to the judgment, despite the achievement of the first three milestones, the cumulative amount of ₹165.4 crore remained payable, while the contractor received only ₹50.15 crore. The contractor thereafter submitted its Billing Break-up (BBU), which was acknowledged by the appellant, but the corresponding payment was not made.

Following the alleged payment default, the contractor issued a notice of suspension dated July 30, 2011. The notice referred to an unpaid amount of ₹32.55 crore from the advance payment. The contractor stopped EPC activities and stated that work would resume upon receipt of the outstanding amount.

The contractor subsequently issued legal notices dated July 25, 2014, September 16, 2014 and July 15, 2015, demanding payment under the EPC agreement. It asserted that because of the continued non-payment it had been compelled to suspend the works and eventually demobilise from the site.

On July 2, 2018, the contractor issued a statutory demand notice under Section 8 of the IBC, claiming approximately ₹1,292.13 crore. The contractor thereafter filed an application under Section 9 of the IBC on October 12, 2018.

The NCLT admitted the insolvency application on December 13, 2019. It held that the amounts claimed constituted operational debt, that the EPC agreement continued to subsist because neither party had terminated it, and that the claim was not barred by limitation. The NCLAT subsequently affirmed the NCLT’s decision.

One of the principal issues before the Supreme Court was whether the EPC contract had automatically come to an end because of the passage of time.

The Court rejected this contention. It examined Clauses 14.1 and 14.2 of the EPC agreement and noted that the contract specifically contemplated circumstances in which either party could suspend or terminate contractual performance.

The Court found that neither party had actually exercised the contractual right to terminate the agreement. In particular, the supplier’s right to terminate following prolonged suspension due to non-payment was discretionary and not automatic. The Court therefore concluded that the contract continued to subsist.

The Supreme Court drew an important distinction between efflux of time and frustration of contract.

According to the Court, frustration arises where an unforeseen supervening event makes contractual performance impossible or unlawful. Mere passage of time, on the other hand, does not amount to frustration. Since the parties had not completed their contractual obligations and the contract itself contained mechanisms dealing with suspension and extension, the EPC agreement could not be treated as having naturally come to an end merely because substantial time had elapsed.

The Court also held that the suspension of work resulting from non-payment could not constitute a supervening impossibility under Section 56 of the Indian Contract Act, 1872. The suspension resulted from the contractual conduct of the parties and therefore could not be treated as an external event frustrating the agreement.

The Supreme Court, however, accepted an important part of the contractor’s case concerning the character of the unpaid amounts.

Section 5(21) of the IBC defines “operational debt” as a claim concerning the provision of goods or services, including employment-related dues and certain statutory dues.

The Court observed that the EPC agreement constituted a works contract involving procurement of goods as well as construction of the power facility. Consequently, amounts contractually payable upon achievement of the specified milestones constituted operational debt once they became due and payable.

Thus, the Court distinguished between amounts contractually payable for work performed and claims for damages arising from breach of contract.

The Supreme Court refused to treat suspension, idling and demobilisation charges as operational debt.

According to the Court, these amounts arose from the alleged breach of the EPC agreement and were therefore in the nature of damages. Whether liquidated or unliquidated, damages cannot constitute operational debt unless they have first been assessed and crystallised through adjudication by a competent court or other appropriate forum.

The Court stressed that the NCLT and NCLAT are not forums for adjudicating disputed contractual damages. Their jurisdiction under the IBC is concerned with insolvency resolution and maximisation of value, rather than determining complicated contractual claims arising from alleged breaches.

Since there had been no suit or arbitration in which the suspension, idling and demobilisation claims had been assessed and crystallised, those amounts could not form part of the operational debt for the purpose of Section 9 proceedings.

The appellant also argued that the Section 9 application was barred because there was a pre-existing dispute concerning the claims.

The Supreme Court rejected this contention.

Relying on the principles laid down in Mobilox Innovations Pvt. Ltd. v. Kirusa Software (P) Ltd., the Court reiterated that a Section 9 application cannot proceed where there is a genuine pre-existing dispute concerning the debt. Such a dispute need not necessarily have already reached a civil court or an arbitral tribunal; it can be demonstrated through the conduct and communications between the parties.

However, the Court found no material establishing such a dispute in the present case. The appellant had remained silent in response to a series of legal notices issued by the respondent over several years.

The Bench clarified that silence by itself does not necessarily establish absence of a dispute. However, in the peculiar circumstances of the case, the appellant’s “consistent and total” silence for approximately seven years was regarded as strong evidence that the claims were not being disputed.

The Court therefore answered the pre-existing-dispute issue in the negative and held that this ground did not bar the Section 9 proceedings.

The most significant aspect of the judgment concerned limitation.

The respondent argued that because the EPC agreement had never been terminated, the contractual relationship continued and therefore there was a continuing cause of action. The Supreme Court emphatically rejected this argument.

The Court held that the subsistence of an EPC contract does not automatically extend the limitation period for an IBC application. The right to initiate proceedings under the IBC arises when the default occurs.

The Court relied upon Section 238A of the IBC, which makes the Limitation Act applicable to proceedings before the NCLT and NCLAT. It also referred to Article 137 of the Limitation Act, under which the applicable period for such an application is three years from the date when the right to apply accrues.

The Court explained that a default arising from non-payment occurs at a specific point in time. Although the consequences of an unpaid debt may continue, the legal default itself does not become a “continuing default” merely because the debt remains unpaid.

In the Court’s words, the mere subsistence of the EPC contract cannot provide a continuing cause of action in respect of an already crystallised default.

On the facts, the Supreme Court found that the relevant operational debt had crystallised in 2012, when the appellant acknowledged its liability in communications concerning the work performed and amounts payable.

The Court specifically identified January 5, 2012 and February 3, 2012 as the dates on which the liability to pay was acknowledged. However, the respondent did not pursue its claims within three years from those dates.

The legal notices issued in 2014 and 2015 could not restart or extend the limitation period because Section 18 of the Limitation Act requires an acknowledgment of liability by the party against whom the claim is being pursued.

Since the appellant did not respond to those notices, there was no acknowledgment capable of resetting the limitation clock.

The Supreme Court reiterated the principle that insolvency proceedings are not intended to function as a substitute for ordinary debt-recovery proceedings.

Referring to its earlier decision in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., the Court emphasised that the IBC cannot be used to provide a fresh lease of life to debts that have already become time-barred.

The Court noted that the respondent ought to have pursued its claims within the prescribed limitation period before the appropriate civil or arbitral forum. Alternatively, if legally permissible, it could have sought condonation of delay before the NCLT. The filing of an IBC application after the expiry of limitation could not itself revive the extinguished procedural right.

The Bench also distinguished the limitation principles applicable to substantive contractual claims under complex EPC arrangements from those governing insolvency applications. While an EPC contract may in appropriate circumstances generate a fresh cause of action upon reconciliation of a final bill or completion of testing, that principle cannot be used to indefinitely postpone the limitation period for an IBC application concerning an already crystallised default.

Having concluded that the operational debt forming the basis of the Section 9 application was time-barred, the Supreme Court held that the NCLAT had erred in affirming the NCLT’s admission of the insolvency proceedings.

The Court answered the four principal issues as follows: The EPC contract was not frustrated by efflux of time and continued to subsist. Contractual milestone payments payable for goods and services under the EPC agreement constituted operational debt. Suspension, idling and demobilisation charges, being damages, could not be treated as operational debt without adjudication and crystallisation. There was no pre-existing dispute sufficient to defeat the Section 9 application. Nevertheless, the Section 9 application concerning the operational debt was clearly barred by limitation.

The Supreme Court accordingly allowed the appeal and set aside both the NCLAT judgment and the NCLT order admitting the insolvency application.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: UNICEF’s IGST Refund Claims Within Time, CESTAT Rules Limitation Starts From 2019 Customs Circular