SRINIVASA REDDY VELAGALA VS. SRAVANTHI INFRATECH PVT. LTD.

2026 INSC 835REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 876 OF 2021

SRINIVASA REDDY VELAGALA ... APPELLANT

VERSUS

SRAVANTHI INFRATECH PVT. LTD. ... RESPONDENT

J U D G M E N T

C.A. No. 876 of 2021 Page 2 of 62

J. B. PARDIWALA, J. :

For the convenience of exposition, this judgment is divided into the following

parts: -

INDEX

A. FACTUAL MATRIX .................................................................................... 4

B. SUBMISSIONS OF THE PARTIES ......................................................... 15

i. Submissions on behalf of the appellant ................................................ 15

ii. Submissions on behalf of the respondent ............................................. 20

C. ISSUES TO BE DETERMINED ........................................................... 26

D. ANALYSIS .................................................................................................. 26

(i) Subsistence of the EPC contract ........................................................... 26

(ii) Amount claimed by the respondent is operational debt .................... 33

(iii) Pre-existing dispute between the parties ............................................. 36

(iv) Respondent’s claim is barred by limitation ......................................... 43

E. DETERMINATION OF THE ISSUES IDENTIFIED ........................... 56

I. Whether the EPC contract entered into by and between the appellant

and respondent was frustrated by the efflux of time? ............................... 56

I. Whether the monies claimed by the respondent in the application

under Section 9 of the IBC constitute ‘operational debt’ as defined under

Section 5(21) of the IBC? ............................................................................. 57

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II. Whether there existed a prior dispute in respect of the claims of

respondent? ................................................................................................... 58

III. Whether the application filed by the respondent under Section 9 of the

IBC was time-barred in respect of the dues amounting to ‘operational

debt’?.............................................................................................................. 60

F. CONCLUSION ........................................................................................... 61

C.A. No. 876 of 2021 Page 4 of 62

1. This appeal arises from the judgment and order dated 01.02.2021 passed by

the National Company Law Appellate Tribunal at New Delhi (“NCLAT”)

in the Company Appeal (AT) (Insolvency) No. 188 of 2020, preferred by the

appellant herein against the admission of the insolvency application filed by

the respondent herein under Section 9 of the Insolvency and Bankruptcy

Code, 2016 (“IBC”), by which the NCLAT affirmed the order of the

National Company Law Tribunal, Amravati Bench (“NCLT”) admitting the

Section 9 application and initiating insolvency proceedings against the

appellant herein.

A. FACTUAL MATRIX

2. The appellant herein (the corporate debtor) had invited an International

Competitive Bid by advertisement dated 13.12.2010, for setting up a 225

MW gas based combined cycle Power Station at Bikkavolu, East Godavari

District, Andhra Pradesh.

3. The respondent herein (the original petitioner before the NCLT), i.e., the

operational creditor, was awarded the contract for execution of the aforesaid

project as it submitted the lowest bid. The appellant issued the Letter of

Award dated 24.12.2010 (the “LOA”) to the respondent for an amount of

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Rs. 827 crore. The parties subsequently entered into a contract for

Engineering Procurement and Construction (“EPC agreement” / “EPC

contract”) dated 09.02.2011. It was decided amongst the parties that the

EPC contract was supposed to be completed in 14 months. It was mutually

agreed between the parties that any disputes arising out of the EPC

Agreement shall be referred to arbitration.

4. The EPC agreement enumerated several obligations and conditions for

payment. The terms of payment in the EPC agreement signed between the

parties is reproduced hereinbelow:

“Appendix – B

TERMS OF PAYMENT

SUPPLY OF EQUIPMENT

Sl.

No.

Milestone Payment

1 Initial Advance Payment 10% of Contract Price

against Corporate

Guarantee

2 Payment against ordering major

equipment;

5% of Contract Price

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a) Against ordering of GTGs

b) Against ordering of STG

c) Against ordering of HRSGs

d) Against ordering of CT / ACC

3 Payment against release of advances

a) Against release of advance of

GTGs

b) Against release of advance of STG

c) Against release of advance of

HRSGs

d) Against release of advance of CT /

ACC

5% of Contract Price

4 Payment against Billing Break-up (BBU) 70% of the contract

price shall be paid as

per agreed billing

break up.

5 Payment on Commissioning 5% payment shall be

made on

Commissioning in

Open Cycle or 45 days

of readiness of

facilities and against

submission of

performance corporate

guarantee for 5% of the

contract value.

6 Payment on Commissioning 5% payment shall be

made on

Commissioning in

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Combined Cycle or 45

days of readiness of

facilities and against

submission of

performance corporate

guarantee for 5% of the

contract value.

(…)”

5. The monetary break-up of the contract price in terms of the aforesaid

payment schedule is provided below:

Sl.

No.

Milestone Payment Amount to be

paid in

milestones

(In Rs.)

1 Initial Advance Payment 10% of Contract

Price against

Corporate

Guarantee

82.7 crore

2 Payment against ordering

major equipment;

e) Against ordering of

GTGs

f) Against ordering of

STG

g) Against ordering of

HRSGs

5% of Contract

Price

41.35 crore

C.A. No. 876 of 2021 Page 8 of 62

h) Against ordering of

CT / ACC

3 Payment against release of

advances

e) Against release of

advance of GTGs

f) Against release of

advance of STG

g) Against release of

advance of HRSGs

h) Against release of

advance of CT / ACC

5% of Contract

Price

41.35 crore

4 Payment against Billing

Break-up (BBU)

70% of the

contract price

shall be paid as

per agreed

billing break up.

578.9 crore

5 Payment on Commissioning 5% payment

shall be made on

Commissioning

in Open Cycle or

45 days of

readiness of

facilities and

against

submission of

performance

corporate

guarantee for 5%

41.35 crore

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of the contract

value.

6 Payment on Commissioning 5% payment

shall be made on

Commissioning

in Combined

Cycle or 45 days

of readiness of

facilities and

against

submission of

performance

corporate

guarantee for 5%

of the contract

value.

41.35 crore

TOTAL 827 CRORE

6. On the basis of the aforesaid payment schedule, the respondent was supposed

to receive the payment of 10% of the contract price, i.e., Rs. 82.7 crore upon

completion of the first milestone. The first milestone was achieved when the

LOA was issued to the respondent on 24.12.2010 and the Corporate

Performance Guarantee and Advance Corporate Guarantee respectively was

provided by the respondent to the appellant on 26.04.2011 and 29.04.2011

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respectively. However, the appellant made payment of Rs. 50.15 crore as

advance out of Rs. 82.7 crore that was supposed to be paid.

7. Further, the second instalment of 10% of the contract price, i.e., Rs. 82.7

crore was supposed to be paid once the respondent achieved the second and

third milestones. The respondent, having finalized the purchase order copy

for GTG, STG and HRSG respectively, submitted the same on 15.02.2011.

The status reports in regard to the work done by the respondent on the site

were also being forwarded to the appellant regularly. The appellant vide its

letter dated 05.01.2012 to the Chief Engineer IRP Division Central

Electricity Authority, New Delhi, duly acknowledged in detail the work done

by the respondent.

8. Though the respondent achieved the first, second and third milestones

respectively yet, the appellant made payment of only Rs. 50.15 crore out of

the cumulative Rs. 165.4 crore that remained due to the respondent.

9. The respondent, in order to finish the contract works in a timely manner and

to achieve the fourth milestone, placed various on shore and offshore orders

and hired sub-contractors for completion of the works. The respondent

accordingly sent the Billing Break-up (“BBU”) to the appellant on

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13.07.2011. The BBU was submitted once again on 03.01.2012 on demand

by the appellant and the same was acknowledged without any dispute by the

appellant. However, no payment was made by the appellant to the respondent

in pursuance of the BBU.

10. Aggrieved by the non-payment of its dues by the appellant, the respondent

sent a notice of suspension dated 30.07.2011 to the appellant on the ground

that the amount of Rs. 32.55 crore was pending from the advance payment

which became due after the first milestone. Pursuant to the suspension

notice, the respondent stopped all EPC activities and stated that the same

would be resumed only after the receipt of the initial advance. The

respondent also terminated its contracts with the vendors and sub-contractors

hired for completing the contract works.

11. The respondent sent legal notices dated 25.07.2014, 16.09.2014 and

15.07.2015 respectively wherein it demanded payment in terms of the

payment provisions enumerated in the EPC contract. It was stated in the said

notices that the appellant’s failure to complete the payment caused the

respondent to suspend the works, as it was unable to continue with full

mobilization at the site and subsequently, it had to completely demobilize by

November 2011. It was clarified that the works remained suspended as the

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appellant had failed to cure its default in payments. It was further clarified

that the appellant had not terminated the EPC agreement and therefore, the

duties and obligations thereunder continued to operate as regards the parties.

No response to the aforesaid legal notices is present in the record.

12. The respondent after the lapse of almost three years sent a demand notice

dated 02.07.2018 in due compliance of the statutory stipulation under

Section 8 of the IBC. The total amount of debt demanded thereunder was

stated to be Rs. 1292,13,35,000/- (Rupees One thousand Two hundred and

Ninety Two Crores Thirteen Lakhs and Thirty Five Thousand Only) which

fell due on 25.02.2011. It was also stated therein that the BBUs sent on

03.01.2012 were acknowledged by the appellant but remained unpaid.

13. As there was no response to the aforesaid demand letter, the respondent filed

the application under Section 9 of the IBC on 12.10.2018, which came to be

admitted on 13.12.2019 by the NCLT. The NCLT admitted the Section 9

application on the following grounds:

a) The application under Section 9 of the IBC was maintainable as the

amount demanded by the respondent herein was an operational debt in

terms of the definition under Section 5(21) of the IBC.

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b) Despite non-payment of the operational debt to the respondent, neither

the appellant nor the respondent terminated the EPC contract. The EPC

contract was a continuous contract which could only be completed upon

fulfilment of the obligations stipulated thereunder or be terminated by

invocation of the termination clause by either of the parties. Since

neither course of action was taken by the parties, it was held that the

EPC contract between the parties continued to subsist. Hence, the

appellant owed an operational debt to the respondent in terms of the

contractual provisions.

c) As regards the prior existence of a dispute between the parties, it was

held that since the appellant did not respond to the respondent’s demand

notice dated 02.07.2018 issued under Section 8 of the IBC, therefore,

there was no question of a pre-existing dispute barring the Section 9

application of the respondent.

d) As regards the issue of Section 9 application being barred by limitation,

it was held that since the EPC contract had neither been terminated by

the parties, nor did it get frustrated due to efflux of time, the contract

continued to subsist. Hence, the plea of the appellant herein that the

Section 9 application was time-barred was rejected.

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14. Aggrieved by the aforesaid order, the appellant preferred an appeal with the

NCLAT. The NCLAT dismissed the appeal by way of the impugned

judgment on the following grounds:

a) The question whether the claim of the respondent under Section 9 of the

IBC was barred by limitation was answered in the negative. The NCLAT

observed that none of the parties terminated the EPC contract. As a result,

the same continued to subsist till date. As such, the appellant’s plea of

limitation could not be accepted as there was no termination of the EPC

contract.

b) As regards the issue whether the claim of the respondent was an

operational debt in terms of Section 5(21) of the IBC, it was held that the

respondent’s claim in the Section 9 application was an operational debt.

c) It was further held that since the EPC contract was silent on the frustration

of contract due to efflux of time, it could not be said that the contract had

automatically been frustrated.

d) As regards the question whether there existed any prior dispute in respect

of the claims of the respondent under Section 9 application, it was held

that the appellant raised no dispute once the respondent issued the

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demand notice under Section 8 of the IBC. Therefore, it could not be said

that the application under Section 9 of the IBC was liable to be rejected

on this ground.

e) In the last, it was observed that the EPC agreement was a continuing

contract. Therefore, the debt sought to be claimed by the respondent

continued to fall even on the date of the judgment as the EPC contract

was never terminated by either of the parties, be it the appellant or the

respondent. Thus, there was no error in the NCLT’s order admitting the

Section 9 application filed by the respondent.

B. SUBMISSIONS OF THE PARTIES

i. Submissions on behalf of the appellant

15. Mr. Shyam Divan, the learned senior counsel appearing on behalf of the

appellant, addressed himself on the following points:

• First, the operational debt being claimed is a time-barred debt and the

insolvency procedure under the IBC cannot be used to revive such time-

barred claims.

C.A. No. 876 of 2021 Page 16 of 62

• Secondly, the application under Section 9 of the IBC could not have

been filed in light of the pre-existing dispute between the parties in

respect of the operational debt.

16. As regards the question whether the claim of the respondent under Section 9

application is barred by limitation, the learned senior counsel submitted that

in the facts of the present matter, the due amount claimed by the respondent

was first quantified to the tune of Rs. 1210.78 crore for the first time in its

legal notice dated 25.07.2014. On the strength of this notice, the recovery

proceedings against the appellant ought to have been initiated within 3 years

of such breach, in terms of Article 137 of the Schedule to the Limitation Act,

1963.

17. It was submitted that even if the legal notice dated 25.07.2014 was

considered to be the date on which the default crystallized, yet the claim of

the respondent would remain hopelessly time-barred as the proceedings

under the IBC were initiated on 02.07.2018 when the statutory demand

notice was sent by the respondent to the appellant. It was the submission of

the appellant that the starting point for limitation began even earlier.

C.A. No. 876 of 2021 Page 17 of 62

18. The learned senior counsel submitted that the application of the respondent

under Section 9 of the IBC was liable to be rejected as the respondent placed

no explanation/averment on record as regards the exclusion or extension of

the limitation period in any manner whatsoever. It was submitted that the

respondent was unable to show any acknowledgment of the debt on behalf

of the appellant in writing or in the balance sheet, or through payment.

19. The learned senior counsel placed reliance on this Court’s dictum in Babulal

Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., reported

in (2020) 15 SCC 1, to submit that it cannot be the intention of the IBC to

give a new lease of life to debts that are time-barred. The period of limitation

starts running from the date of the default of non-payment and the right to

apply under the IBC accrues from such date. If such default occurred over

three years prior to the date of filing of the application, the application would

be time-barred unless and until there has been an acknowledgment of the

debt.

20. It was further submitted that the judgment in Babulal Vardharji Gurjar

(supra) makes it clear that limitation is a mixed question of fact and law, and

therefore, any plea for extension or enlargement of the period of limitation

C.A. No. 876 of 2021 Page 18 of 62

must necessarily be accompanied by the relevant facts and evidence. Since

no such pleadings were made in the present matter, there could be no

extension or enlargement of the period of limitation.

21. As regards the acknowledgment of debt by a debtor, it was submitted by the

learned senior counsel that acknowledgment does not create a new right of

action, it merely renews the debt. He relied on this Court’s judgment in Asset

Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, reported in (2021) 6 SCC

366 to submit that it is imperative that the statement on which a plea of

acknowledgment is based, must relate to a present subsisting liability.

22. Mr. Divan also brought to our attention this Court’s observations in

Sabarmati Gas Ltd. v. Shah Alloys Ltd., reported in (2023) 3 SCC 229

wherein it was held that the period of limitation for an application under

Section 9 of the IBC would be three years from the date when the right to

apply accrues as provided by Article 137 of the Limitation Act, 1963 (the

“Limitation Act”). It was further explained that the right to apply under the

IBC accrues on the date when default occurs and it is extendable only by

application of Section 5 of the Limitation Act.

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23. It was further submitted by the learned senior counsel that though the EPC

contract provided for arbitration as a method for dispute resolution, yet the

respondent elected not to exercise the same and instead, chose to file a time-

barred claim under the IBC. Mr. Divan argued that such conduct indicated

lack of bona fide on the part of the respondent in approaching the NCLT.

24. As regards the question whether there was a pre-existing dispute between the

parties, the learned senior counsel submitted that the legal notices dated

25.07.2014, 16.09.2014 and15.07.2015 respectively, sent by the respondent,

indicated that there were disputes arising out of the EPC contract. Mr. Divan

placed reliance on the judgment of this Court in Mobilox Innovations Pvt.

Ltd. v. Kirusa Software (P) Limited, reported in (2018) 1 SCC 353 to submit

that the application filed by an operational creditor under Section 9 of the

IBC was liable to be rejected if there was a pre-existing dispute between the

parties in respect of the debt which forms the subject matter of the

application. It was argued that the resolution process under the IBC cannot

be used for the purpose of recovery of debt.

25. In the last, the learned senior counsel prayed for the relief to set aside the

judgment and order delivered by the NCLAT dated 01.02.2021 and to reject

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the admission of the Section 9 application of the respondent on the grounds

that the debt is time-barred and there exists a pre-existing dispute between

the parties.

ii. Submissions on behalf of the respondent

26. Mr. Nitin Bhardwaj, the learned counsel appearing on behalf of the

respondent, addressed himself on the following questions:

• Whether the EPC contract came to be terminated or frustrated due to

efflux of time?

• Whether the debt claimed by the respondent under the Section 9 IBC

application was barred by limitation?

• Whether the amount claimed by the respondent under the Section 9 IBC

application was in the nature of operational debt under Section 5(21) of

the IBC or damages?

• Whether there was a pre-existing dispute between the parties that would

bar the respondent from filing the application under Section 9 of the

IBC?

27. The learned counsel placed the material facts before us to submit that non-

payment of the entire advance amount and the amounts due upon completion

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of the subsequent milestones was a failure on the part of the appellant to fulfil

its obligations under the EPC contract. This compelled the respondent to

issue notice of suspension of works dated 30.07.2011.

28. It was submitted by the learned counsel that the suspension in no manner

amounted to termination, and the EPC contract could have been revived by

either of the parties by fulfilling the terms of the contract. He submitted that

treating suspension as termination of the EPC contract would be contrary to

the terms of the contract.

29. It was submitted that the contract could have been terminated only by way

of invocation of Clause 14 of the EPC contract which reads thus:

“14. l Termination for Owner's Convenience. Owner may

for its convenience terminate any part of the Supplies or

any or all remaining Supplies hereunder at any time upon

at least 30 (Thirty) days' prior written notice to Supplier

specifying the part of the Supplies to be terminated and the

effective date of termination. Upon receipt of such notice,

Supplier shall promptly initiate steps to stop provision of

such terminated Supplies. In the event of a partial

termination, Supplier shall continue to produce the part of

the Supplies not terminated. In case of a termination of

part of the Supplier's Work, Owner shall authorize a Scope

Change Order making reasonable adjustments to one or

more of the Schedule Unit(s). Completion date, Scheduled

Facility Completion Date, the Contract Price, the Contract

C.A. No. 876 of 2021 Page 22 of 62

Schedule, the Performance Guarantees and any other

affected provisions of this Agreement, as applicable. In the

event of termination by Owner under this Article 14.1,

Owner shall pay to Supplier (or Supplier may retain) such

amounts as are required pursuant to Article 4.4 hereof In

case of a termination of all or remaining part of the

Supplier's Work, the Owner shall provide at least 30 days'

prior written notice to Supplier providing details of the

reasons for such termination and the effective date of

termination. Owner will authorize a Scope Change Order

making reasonable adjustments to the Contract Price as

applicable.

14.2 Termination Upon Non-Payment by Owner. If Owner

fails to pay to Supplier any payment as required hereunder

and such failure continues for 25 days after written notice

thereof has been given to Owner by Supplier, then Supplier

shall give ten days' prior written notice thereof to Owner

and the Financing Parties, and thereafter may stop all

performance of Supplier's obligations hereunder until

Supplier receives payment of all amounts then due plus

reasonable suspension and resumption expenses. Owner

shall be responsible for reimbursement of all costs

incurred by Supplier as a result of the stoppage of

Supplier's work. If Supplier's performance hereunder is

suspended by Supplier pursuant to this Article 14.2, Owner

will authorise a Scope Change Order making an equitable

adjustment to the Scheduled Unit(s) Completion Date,

Scheduled Facility Completion Date and the Contract

Schedule and required reasonable adjustments to one or

more of the Contract Price, the Terms of Payment and any

relevant terms and conditions of this Agreement, as

appropriate. If such suspension continues uninterrupted

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for at least four months, or if two or more suspensions exist

for an aggregate of at least four months, Supplier may

terminate this Agreement; provided that Supplier shall

give the Financing Parties a further 60 days prior written

notice, and opportunity to cure, before terminating this

Agreement. In the event of such a termination by Supplier,

Own.er shall pay to Supplier (or Suppler may retain) such

amounts as are required pursuant to Article 4.4. hereof.”

30. It was vehemently argued by the learned counsel that the EPC contract had

never been terminated by either of the parties. Further in a suspended EPC

contract which had not been terminated or revived, there was no question of

frustration due to efflux of time.

31. Mr. Bhardwaj submitted that the appellant was always in a position to

terminate the EPC contract after paying the dues of the respondent that had

accrued as on the date, as per the terms of the contract. However, no such

action was taken by the appellant. Therefore, the EPC contract continued to

exist, and the appellant was duty bound to clear the dues payable to the

respondent. In such a scenario, there could be no frustration of contract by

efflux of time.

32. As regards the issue whether the claim of the respondent was barred by

limitation, it was submitted that the law of limitation would not jeopardize

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its claim because there exists a continuous cause of action between the

parties. The learned counsel placed the aforesaid submission on the ground

that the EPC contract had been suspended vide notice dated 30.07.2011

because of non-payment of dues by the appellant. However, the works could

start again at any time once the appellant cleared dues or alternatively, the

EPC agreement could have been terminated as per Clause 14 by clearing all

the dues payable to the respondent till date. It was submitted by the

respondent that since the appellant had chosen neither of the said courses of

action, the EPC contract subsists. Therefore, there was a continuing cause of

action thereby putting the claim of the respondent well within the limitation

period.

33. As regards the question whether the claims of the respondent amounted to

operational debt under Section 5(21) of the IBC or were in the nature of

damages, Mr. Bhardwaj submitted that the Resolution Professional (“RP”)

had already undertaken the scrutiny of the books of accounts of the appellant

as well as the claim of the respondent. It was submitted that the quantification

of claim was the sole responsibility of the RP and he had accordingly rejected

the parts of the claim that were concluded to be in the nature of damages and

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proceeded with the part of the claim that was found to be due and payable as

operational debts under the law.

34. Mr. Bhardwaj also canvassed submissions on whether there was pre-existing

dispute between the parties. He submitted that at no stage of the contractual

relationship between the parties had any dispute as regards the claim amount

in question was raised by the appellant. It is an admitted fact that the

existence of the debt due and payable to the respondent had never been

denied by the appellant in any manner before the application under Section

9 of the IBC was filed.

35. It was submitted that the notices dated 25.07.2014, 16.09.2014 and

15.07.2015 respectively, were sent by the respondent to seek the payment of

their dues through the years and none of the aforesaid notices were ever

denied or disputed by the appellant. Therefore, the Section 9 application filed

by the respondent was not barred in law on account of the existence of a prior

dispute between the parties in respect of the same claim.

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C. ISSUES TO BE DETERMINED

36. Having heard the learned counsel appearing for the parties and having gone

through the materials on record, the following questions fall for our

consideration:

(i) Whether the EPC contract entered into by and between the appellant

and respondent was frustrated by the efflux of time?

(ii) Whether the monies claimed by the respondent in the application under

Section 9 of the IBC constitute ‘operational debt’ as defined under

Section 5(21) of the IBC?

(iii) Whether there existed a prior dispute in respect of the claims of

respondent?

(iv) Whether the application filed by the respondent under Section 9 of the

IBC was time-barred in respect of the dues amounting to ‘operational

debt’?

D. ANALYSIS

(i) Subsistence of the EPC contract

37. The parties have extensively canvassed submissions on whether the EPC

contract continued to subsist or got frustrated due to the efflux of time. It is

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necessary for us to look into the clauses that stipulate the terms of termination

of the EPC contract, i.e., Clauses 14.1 and 14.2 respectively. The aforesaid

clauses read thus:

“14.1 Termination for Owner's Convenience. Owner may

for its convenience terminate any part of the Supplies or

any or all remaining Supplies hereunder at any time upon

at least 30 (Thirty) days' prior written notice to Supplier

specifying the part of the Supplies to be terminated and the

effective date of termination. Upon receipt of such notice,

Supplier shall promptly initiate steps to stop provision of

such terminated Supplies. In the event of a partial

termination, Supplier shall continue to produce the part of

the Supplies not terminated. In case of a termination of

part of the Supplier's Work, Owner shall authorize a Scope

Change Order making reasonable adjustments to one or

more of the Scheduled Unit(s) Completion Date, Scheduled

Facility Completion Date, the Contract Price, the Contract

Schedule, the Performance Guarantees and any other

affected provisions of this Agreement, as applicable. In the

event of termination hy Owner under this Article 14.1.

Owner shall pay to Supplier (or Supplier may retain) such

amounts as are required pursuant to Article 4.4 hereof. In

case of a termination of all or remaining part of the

Supplier's Work, the Owner shall provide at least 30 days'

prior written notice to Supplier providing details of the

reasons for such termination and the effective date of

termination. Owner will authorize a Scope Change Order

making reasonable adjustments to the Contract Price as

applicable.

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14.1.1 Owner's Right to Suspend Completion of the

Supplier's Work. Owner may elect to suspend completion

of all or any part of the Supplies hereunder upon at least

15 (fifteen) days' prior written notice to Supplier (or, in

emergency situations, upon such prior notice as

circumstances permit) indicating (a) the portion of the

Supplies the completion of which Owner has elected to

defer; (b) Owner's estimate of the duration of such

suspension; and (c) the effective date of such suspension of

such Supplies. Upon receipt of and consistent with the

effective date of such notice, Supplier shall stop production

of the Supplies that Owner has elected to defer and shall

continue to complete production of the balance of the

Supplies. In the event of a suspension of the Supplier's

performance hereunder pursuant to this Article 14.1.1,

Owner will authorize a Scope Change Order making

required adjustments to one or more of the Scheduled

Unit(s) Completion Date, Scheduled Facility Completion

Date, the Contract Price, the Terms of Payment, the

Contract Schedule, and the Performance Guarantees, as

applicable.

14.2 Termination Upon Non-Payment by Owner. If Owner

fails to pay to Supplier any payment as required hereunder

and such failure continues for 25 days after written notice

thereof has been given to Owner by Supplier, then Supplier

shall give ten days' prior written notice thereof to Owner

and the Financing Parties, and thereafter may stop all

performance of Supplier's obligations hereunder until

Supplier receives payment of all amounts then due plus

reasonable suspension and resumption expenses. Owner

shall be responsible for reimbursement of all costs

incurred by Supplier as a result of the stoppage of

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Supplier's work. If Supplier's performance hereunder is

suspended by Supplier pursuant to this Article 14.2, Owner

will authorize a Scope Change Order making an equitable

adjustment to the Scheduled Unit(s) Completion Date,

Scheduled Facility Completion Date and the Contract

Schedule and required reasonable adjustments to one or

more of the Contract Price, the Terms of Payment and any

relevant terms and conditions of this Agreement, as

appropriate. If such suspension continues uninterrupted

for at least four months, or if two or more suspensions exist

for an aggregate of at least six months, Supplier may

terminate this Agreement; provided that Supplier shall give

the Financing Parties a further 60 days prior written

notice, and opportunity to cure, before terminating this

Agreement. In the event of such a termination by Supplier,

Owner shall pay to Supplier (or Supplier may retain) such

amounts as are required pursuant to Article 4.4 hereof.”

(Emphasis supplied)

38. The bare perusal of the aforesaid clauses indicates that the EPC contract

could have been terminated by either of the parties. Clause 14.1 provides that

the appellant may terminate the EPC contract subject to a notice of 30 days

to the respondent and clearing of the respondent’s dues for the works already

completed. Alternatively, Clause 14.1.1 empowers the appellant to suspend

a portion of works and defer their completion upon provision of a notice of

15 days to the respondent.

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39. Clause 14.2 provides for two tier of actions by the respondent. First, if the

appellant fails to make payments as per the payment schedule to the EPC

contract for more than 25 days after the written notice, the respondent has

the right to stop the performance of its obligations under the contract till the

time payment is received. Secondly, if the period of suspension is prolonged

due to non-payment of the respondent’s dues for a period of at least four

months, the respondent is conferred with the right to terminate the EPC

contract. It is worth noting that termination by the Supplier or the respondent

herein is not automatic when the suspension period crosses more than four

months. The usage of the word ‘may’ indicates that an option has been

provided to the respondent to terminate.

40. In the present matter, neither the appellant nor the respondent elected to

terminate the EPC contract despite severe delays in fulfilment of obligations.

Since the agreement between the parties is silent on whether time is the

essence of the contract, we say without any manner of doubt that the parties

intended for the EPC contract to subsist.

41. As regards the appellant’s contention that the EPC contract got frustrated due

to efflux of time, the same is liable to be rejected. We say so because there

C.A. No. 876 of 2021 Page 31 of 62

can be no frustration due to efflux of time. The expression “effluxion of time”

is used to describe situations in which a particular contract comes to a close

automatically upon completion of all obligations thereunder or with the

expiry of the time period stipulated for the operation of the agreement.

42. On the other hand, the doctrine of frustration of contract is triggered when a

supervening event results in the automatic discharge of liability of parties to

the contract. This is because such supervening event makes it impossible or

unlawful for the contract to be performed. Unlike effluxion of time which is

natural and foreseen mode of discharge of obligations, frustration is

discharge of the contract because of an unforeseen extraneous event.

Therefore, it would be incorrect to say that there can be frustration of contract

due to efflux of time.

43. Further, the perusal of the EPC contract and the conduct of the parties at the

material time, indicate that the contractual obligations stipulated in the

contract remained unfulfilled. We find it apposite to clarify at the outset that

we are not concerned with the causes due to which the appellant did not make

payments in consonance with the payment schedule, as the substantive

dispute in that regard cannot be adjudged in a statutory appeal from the

C.A. No. 876 of 2021 Page 32 of 62

NCLAT. However, there is no gainsaying that the works were suspended

because of such non-payment.

44. In our considered view, the suspension of works cannot be considered as a

supervening impossibility as per the requirement under Section 56 of the

Indian Contract Act, 1872 for the doctrine of frustration to apply. This Court

in Boothalinga Agencies v. V.T.C. Poriaswami Nadar, reported in 1968

SCC OnLine SC 135 observed that a circumstance brought about by a

party’s election cannot frustrate the contract. The relevant paragraph reads

thus:

“12. (…) We think the principle of this case applies to the

Indian law and the provisions of Section 56 of the Indian

Contract Act cannot apply to a case of “self-induced

frustration”. In other words, the doctrine of frustration of

contract cannot apply where the event which is alleged to

have frustrated the contract arises from the act or election

of a party. (…)”

(Emphasis supplied)

45. Since the suspension of works by the respondent arose from the non-

performance of obligations under the EPC contract, the same cannot be

categorized as a supervening impossibility that was outside the control of the

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parties. Therefore, there was no question of the EPC contract being

frustrated.

46. Further, it must be clarified that since the parties did not complete their

respective obligations under the EPC contract, it cannot be said that the

agreement came to a natural close. This is especially so because the EPC

contract itself provides no strict timeline for the completion of works.

Furthermore, the provisions regarding extension of time and performance

guarantee tests indicate that the EPC contract could not have come to a close

without completion of works or final inspection of the facility to be

constructed. Therefore, in our considered view, the principle of efflux of time

is also not applicable to the case at hand.

47. In view of the aforesaid, we say without any manner of doubt that the EPC

contract continued to subsist.

(ii) Amount claimed by the respondent is operational debt

48. The appellant had submitted before the NCLAT that the amount claimed by

the respondent was not in the nature of ‘operational debt’ under Section 5(21)

of the IBC. In our considered view, the material on record shows that the

respondent in its legal notices had claimed monies under two broad heads:

C.A. No. 876 of 2021 Page 34 of 62

• Payment of the amounts due under the first, second, third and fourth

milestones in the payment schedule to the EPC contract;

• Suspension and demobilization charges and interest thereupon.

49. Before we deal with the question whether the above-mentioned heads can be

the subject matter of an application under Section 9 of the IBC, it is apposite

to understand the meaning and scope of ‘operational debt’ under Section

5(21) of the IBC.

50. Section 5(21) of the IBC defines ‘operational debt’ as “a claim in respect of

the provisions of goods or services, including employment or a debt in

respect of the [payment] of dues arising under any law for the time being in

force and payable to the Central Government, any State Government or any

local authority.”

51. A bare textual reading of the provision indicates that any amount that accrues

to an operational creditor on account of the goods and services provided by

it to an operational creditor would be treated as operational debt. There is no

doubt that the EPC contract is a works contract which involves procurement

of goods as well as construction of the natural gas facility. Therefore, all

payments that the parties agreed to pay upon completion of the stages of the

C.A. No. 876 of 2021 Page 35 of 62

works as mentioned in the payment schedule to the EPC contract, can be

categorized as operational debt once they become payable.

52. Insofar as the amount claimed under the heads of suspension and

demobilization charges is concerned, there is no gainsaying that the same

would be in the nature of damages. 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.

53. Therefore, 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

C.A. No. 876 of 2021 Page 36 of 62

crystallized these claims, the amounts claimed under these heads cannot be

treated as operational debt.

54. However, the amounts required to be paid by the appellant to the respondent

as per the EPC contract and the payment schedule thereto, qualify as

operational debt as they were supposed to be fulfilled as a consideration for

the works undertaken by the respondent in terms of the EPC contract.

(iii) Pre-existing dispute between the parties

55. The third leg of the appellant’s argument was that there was pre-existing

dispute between the parties on the date when the respondent sent the statutory

demand notice under Section 8 of the IBC and filed an application under

Section 9 thereof.

56. It is a settled position of law that an insolvency application under the IBC

cannot be filed for such amounts/debts that are the subject matter of a dispute

between the parties. Such dispute must be substantive and must be a matter

of clear contestation by both the parties.

57. This Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,

reported in (2018) 1 SCC 353 held that a Section 9 application under the

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IBC is liable to be rejected if it was found that there was a pre-existing

dispute between the parties in respect of the same claims as raised by the

operational creditor in its insolvency application.

58. As regards the question, when the dispute would be considered to be pre-

existing before the application under Section 9 of the IBC, it was observed

that in terms of Section 8(2) of the IBC, it would be necessary for the

corporate debtor to respond to the statutory demand notice sent by the

operational creditor under Section 8(1) of the IBC within ten days. In such

reply, the corporate debtor must bring to the notice of the operational

creditor, inter alia, the existence of a dispute or record of the pendency of

the suit or arbitration proceedings filed before the receipt of the statutory

demand notice. Section 8 of the IBC reads thus:

“8. Insolvency resolution by operation creditor––

(1) An operational creditor may, on the occurrence of a

default, deliver a demand notice of unpaid operational

debtor copy of an invoice demanding payment of the

amount involved in the default to the corporate debtor in

such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days

of the receipt of the demand notice or copy of the invoice

mentioned in sub-section (1) bring to the notice of the

operational creditor

C.A. No. 876 of 2021 Page 38 of 62

(a) existence of a dispute, if any, or record of the pendency

of the suit or arbitration proceedings filed before the

receipt of such notice or invoice in relation to such dispute;

(b) the payment of unpaid operational debt

(i) by sending an attested copy of the record of electronic

transfer of the unpaid amount from the bank account of the

corporate debtor; or

(ii) by sending an attested copy of record that the

operational creditor has encashed a cheque issued by the

corporate debtor.

Explanation.--For the purposes of this section, a "demand

notice" means a notice served by an operational creditor

to the corporate debtor demanding payment of the

operational debt in respect of which the default has

occurred.”

(Emphasis supplied)

59. It is worth noting that the word ‘or’ in Section 8(2)(a) was inserted after the

pronouncement of the judgment in Mobilox (supra) to give effect to its

observations that the existence of dispute cannot be determined solely on,

whether the parties had instituted a suit or arbitration proceeding. It was held

in Mobilox (supra) that the existence of a prior dispute irrespective of

whether it had already progressed to the stage of civil suit or arbitration,

C.A. No. 876 of 2021 Page 39 of 62

would be a bar to insolvency proceedings pursuant to Section 9 of the IBC.

The rationale for holding thus was that allowing insolvency proceedings in

respect of claims that had already been disputed through notices or otherwise

could result in multiplicity of proceedings. The insolvency process would be

delayed as there would be no bar on the parties to pursue the resolution of

the dispute by way of a suit or arbitration. Therefore, there is no requirement

that the parties must show that a pre-existing dispute was being litigated or

was the subject matter of an arbitration. The relevant observations in

Mobilox (supra) read thus:

“38. It is, thus, clear that so far as an operational creditor

is concerned, a demand notice of an unpaid operational

debt or copy of an invoice demanding payment of the

amount involved must be delivered in the prescribed form.

The corporate debtor is then given a period of 10 days from

the receipt of the demand notice or copy of the invoice to

bring to the notice of the operational creditor the existence

of a dispute, if any. We have also seen the notes on clauses

annexed to the Insolvency and Bankruptcy Bill of 2015, in

which “the existence of a dispute” alone is mentioned.

Even otherwise, the word “and” occurring in Section

8(2)(a) must be read as “or” keeping in mind the

legislative intent and the fact that an anomalous situation

would arise if it is not read as “or”. If read as “and”,

disputes would only stave off the bankruptcy process if they

are already pending in a suit or arbitration proceedings

and not otherwise. This would lead to great hardship; in

that a dispute may arise a few days before triggering of the

C.A. No. 876 of 2021 Page 40 of 62

insolvency process, in which case, though a dispute may

exist, there is no time to approach either an Arbitral

Tribunal or a court. Further, given the fact that long

limitation periods are allowed, where disputes may arise

and do not reach an Arbitral Tribunal or a court for up to

three years, such persons would be outside the purview of

Section 8(2) leading to bankruptcy proceedings

commencing against them. Such an anomaly cannot

possibly have been intended by the legislature nor has it so

been intended. We have also seen that one of the objects of

the Code qua operational debts is to ensure that the

amount of such debts, which is usually smaller than that of

financial debts, does not enable operational creditors to

put the corporate debtor into the insolvency resolution

process prematurely or initiate the process for extraneous

considerations. It is for this reason that it is enough that a

dispute exists between the parties.”

(Emphasis supplied)

60. This Court in Mobilox (supra) further held that the inquiry into whether a

dispute already existed between the parties qua the claim amount, it is

necessary to ascertain the genuineness of the same. In other words, the

dispute whose existence is sought to be evidenced should not be spurious,

hypothetical, illusory or misconceived. We also find it apposite to reiterate

the observation in Mobilox (supra) that the court’s function is restricted to

perceiving the genuineness of the dispute and it cannot travel beyond to make

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observations as regards the merits of the dispute. The relevant paragraphs in

Mobilox (supra) are reproduced below:

“51. It is clear, therefore, that once the operational creditor

has filed an application, which is otherwise complete, the

adjudicating authority must reject the application under

Section 9(5)(i)(d) if notice of dispute has been received by

the operational creditor or there is a record of dispute in

the information utility. It is clear that such notice must

bring to the notice of the operational creditor the

“existence” of a dispute or the fact that a suit or

arbitration proceeding relating to a dispute is pending

between the parties. Therefore, all that the adjudicating

authority is to see at this stage is whether there is a

plausible contention which requires further investigation

and that the “dispute” is not a patently feeble legal

argument or an assertion of fact unsupported by evidence.

It is important to separate the grain from the chaff and to

reject a spurious defence which is mere bluster. However,

in doing so, the Court does not need to be satisfied that the

defence is likely to succeed. The Court does not at this

stage examine the merits of the dispute except to the extent

indicated above. So long as a dispute truly exists in fact

and is not spurious, hypothetical or illusory, the

adjudicating authority has to reject the application.”

(Emphasis supplied)

61. What is discernible from the aforesaid exposition is that it is not necessary

that a suit or arbitration proceeding be pre-existing to evidence a dispute.

Rather, what is required to be highlighted is that there was a pre-existing

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dispute between the parties vide the conduct of the parties, communication,

etc.

62. We may now proceed to consider the appellant’s submission that a dispute

was evident from the respondent’s legal notices dated 25.07.2014,

16.09.2014 and 15.07.2015 respectively. We may be tempted to hold that

there was a pre-existing dispute if we constrain ourselves to the aforesaid

legal notices and the observations made in Mobilox (supra). However, what

is also required to be seen is the conduct of the appellant as the corporate

debtor. It is an admitted fact that the appellant responded to none of the

notices sent by the respondent. It also did not reply to the statutory demand

notice dated 02.07.2018 to highlight that the legal notices by the respondent

indicated a dispute as regards the amount being claimed.

63. Before we make observations as regards the conduct of the appellant, we find

it apposite to clarify that as a general rule, silence cannot be considered to be

an indicator of no dispute. However, in the present matter, the appellant’s

total and consistent silence across multiple legal notices sent prior to the

filing of the Section 9 application is strong evidence to support the

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respondent’s submission that there was no dispute that in fact existed at the

relevant time.

64. Further, in our considered view, the fact that the appellant placed its defence

for the first time in the reply to the Section 9 application and disputed the

respondent’s claims without anchoring such defence in its conduct at the

material time indicates that there was no dispute that existed before the

Section 9 application, as far as the appellant was concerned. Such conduct,

in our opinion, was an afterthought to resist exposure to the insolvency

process. Hence, the issue as regards the existence of a prior dispute between

the parties must be answered in the negative.

(iv) Respondent’s claim is barred by limitation

65. In the present matter, the respondent’s claim crystallized in 2012 when the

invoices with the BBU were acknowledged by the appellant in its

communication to the Chief Engineer, IRP Division, Central Electricity

Authority. It is apposite to mention that the debt (partial amount which can

be categorized as operational debt in view of the aforesaid part of this

judgment) arising from non-payment of amount due under the payment

schedule, remained unpaid since February 2011 and February 2012

respectively.

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66. The respondent was constrained to issue the notice of suspension of works

on 30.07.2011 after it did not receive payments even after completion of the

first, second and third milestone in the payment schedule to the EPC contract.

The right to suspend works by the respondent, as discussed in the aforesaid

part of this judgment, arose from Clause 14.2 of the EPC contract. However,

despite suspension of works, subsequent idling and demobilization of the site

and the consistent non-payment of dues by the appellant, none of the parties

elected to terminate the EPC contract in terms of Clause 14.1 and 14.2

respectively. Therefore, the contract continued to subsist.

67. The respondent sent legal notices dated 25.07.2014, 16.09.2014 and

15.07.2015 respectively after the lapse of more than four years since its claim

crystallized and the right to sue accrued to it. The learned senior counsel

appearing for the appellant would argue that the legal notices raised the

dispute as regards the non-payment of the amounts specified in the payment

schedule after the limitation period of three years had already passed.

Further, the statutory demand notice under Section 8 of the IBC was sent by

the respondent after the lapse of more than seven years since the default

occurred and its claim crystallized.

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68. The learned counsel appearing for the respondent would argue that its

statutory demand notice dated 02.07.2018 was within a period of three years

from its last legal notice dated 15.07.2015. Even otherwise, the limitation

period would not start running as the continuity of the EPC contract provided

continuous cause of action.

69. In such circumstances referred to above, could it be said that because the

contract continued to subsist, the respondent had continuous cause of action?

In other words, would the subsistence of the EPC contract result in the

extension of the limitation period beyond the statutory three years period

provided in Article 137 of the Limitation Act, 1963 for the purpose of filing

an application under Section 9 of the IBC? In our considered view, the

answer to the aforesaid question must be an emphatic ‘No’.

70. We say so because Section 238A of the IBC states that the provisions of the

Limitation Act, 1963, as far as maybe, would apply to the proceedings or

appeals before, inter alia, the Adjudicating Authority/ NCLT or NCLAT.

Therefore, the ‘right to sue’ accrues on the date when the default takes place.

Section 3(12) of the IBC defines ‘default’ which reads thus:

“(12) "default" means non-payment of debt when whole or

any part or instalment of the amount of debt has become

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due and payable and is not paid by the debtor or the

corporate debtor, as the case may be;”

71. In the present matter, the operational debt became due and payable on the

date of the default, i.e., on 15.02.2011 and 13.07.2011. The liability to pay in

respect of both the defaults came to be acknowledged by the appellant on

05.01.2012 and 03.02.2012 respectively.

72. A default arising out of non-payment of the due and payable amount,

provides cause of action on the date when the default occurs and cannot serve

as a continuing cause of action. We say so because though an unpaid debt

may cause continuous damage, yet it does not cause continuing legal injury.

In other words, the legal default itself happens only once even though its

consequences may be continuing in nature. Therefore, the respondent’s

assertion that the subsistence of contract would provide it with continuing

cause of action is incorrect and liable to be rejected.

73. The “default” envisaged under Section 3(12) of the IBC occurs on non-

payment of debt when whole or any part/instalment of the debt becomes due

and payable but is not paid by the debtor. Thus, Section 3(12) grounds the

occurrence of default at a singular point in time. The mere subsistence of the

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EPC contract will not give continuing cause of action in respect of the

defaulted amount.

74. This Court in Next Education India (P) Ltd. v. K12 Techno Services,

reported in 2023 SCC OnLine SC 1117, has held that the Adjudicating

Authority must consider invoices for payment in respect of which the default

occurred during the three years preceding the date of filing the application

under Section 9. This implies that to determine whether the application under

Section 9 is within limitation or not, one would have to consider whether the

default had occurred within three years of filing the application. The relevant

portion of the judgment reads thus:

“2. At the outset, it is required to be noted that, in fact, the

appellant herein, who claimed to be the "operational

creditor" raised 187 different invoices for the digital

classroom solution services provided for the period

between March 12, 2011 and June 30, 2017. The amounts

under different invoices were unpaid, which gave rise to

the appellant to initiate the proceedings under section 9 of

the IBC before the NCLT. The NCLT considering the

starting point of limitation as March 12, 2011 held that the

claim is barred by limitation. However, the NCLT did not

take into consideration the subsequent invoices at least

preceding three years from the date of filing of section 9

application, which ought to have been considered. Under

the circumstances, the NCLT ought to have considered the

invoices at least for the period preceding three years from

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the date of the application under section 9, rather than

considering the starting point of limitation as March 12,

2011. Under the circumstances, the order(s) passed by the

NCLT and affirmed by the NCLAT are unsustainable.”

(Emphasis supplied)

75. The aforesaid exposition of law clarifies that under the IBC, the Adjudicating

Authority cannot treat all invoices for payment in aggregate and consider the

date on which the first invoice came to be issued as the starting point for

limitation in respect of the entire set of invoices for which the claim was

filed.

76. For the purpose of determining the starting point of limitation, the governing

principle is that each invoice generates its own date of default when it

becomes due and payable. What is discernible from the exposition in Next

Education (supra) is that where the claim is founded on multiple invoices

spanning several dates of defaults, the invoices that fall within the three years

preceding the date of application ought to be considered. What has been said

in so many words is that limitation is tied to each invoice’s own due date.

Where the claim arises from multiple invoices, it cannot be said that

limitation would start from the date of the first invoice or the last invoice as

per the wishes of the applicant. Put simply, the decision in Next Education

C.A. No. 876 of 2021 Page 49 of 62

(supra) lends to the understanding that all invoices must be considered

separately when determining the date of default.

77. In the present matter, the default arises from non-payment of dues despite

completion of the first, second and third milestones in the payment schedule

to the EPC contract. Further, as regards the fourth milestone, the respondent

sent to the appellant its BBU. After acknowledgment in January and

February 2012 by the appellant, the limitation in respect of the aforesaid

defaults started afresh. These dates have also been mentioned by the

respondent in its demand notice dated 02.07.2018 as the dates when the

default occurred.

78. At this juncture, we may refer to Form 3 provided in the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the

“Rules, 2016”) that stipulates the form in which the demand notice under

Section 8 of the IBC is supposed to be issued. Form 3, inter alia, requires

that the statutory demand notice should specify the date from which the debt

fell due, i.e., the date on which the default occurred.

79. This Court in B. Prashanth Hegde v. SBI, reported in 2026 SCC OnLine

SC 197 (wherein one of us, namely Manoj Misra, J., was a part of the Bench)

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observed in the context of applications made under Section 7 of the IBC, that

the forms prescribed in the Rules, 2016 serve the purpose of bringing out the

necessary ingredients for presentation of the insolvency application. As

regards the requirement of providing the date on which the debt became due,

it was observed that specifying the date of default helps the Adjudicating

Authority to assess whether the debt has become time-barred or not. The

relevant observations in Prashanth Hegde (supra) read thus:

“40. In our view, a conjoint reading of sub-sections (1), (2)

and (5) of section 7 makes it clear that an application

under section 7 of a financial creditor for initiating the

corporate insolvency resolution process of the corporate

debtor hinges on a default on part of the corporate debtor

of financial debt of an amount exceeding the specified

threshold. The form prescribed for making the application

inter alia serves the purpose of bringing out the necessary

ingredients for presentation of an application under

section 7(1) of the Insolvency and Bankruptcy Code. The

purpose of providing the date of default is to show that the

debt is due and payable, i.e., it has not become time barred.

Therefore, in our view, if the application is substantially in

conformity with the prescribed form and discloses the

necessary ingredients for making an application under

sub-section (1) of section 7 and provides the relevant

materials/information to substantiate those ingredients,

the purpose of adhering to the form is served, and such

application is not liable to be rejected under clause (b) of

sub-section (5) of section 7 of the Insolvency and

Bankruptcy Code on the ground of any insignificant

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omission or error in the application. The aforesaid view

finds support from use of the expression “may” before

“reject” in section 7(5)(b) of the Insolvency and

Bankruptcy Code. This means that if the Adjudicating

Authority is satisfied from the materials placed before it in

the application that all the necessary ingredients are

satisfied for presentation of an application under section

7(1) of the Insolvency and Bankruptcy Code, it may not

reject the application for an insignificant omission or non-

adherence to the form.”

(Emphasis supplied)

80. In our considered view, the observations of this Court in the aforesaid

decision are applicable on the demand notice to be issued for making an

application under Section 9 of the IBC. The respondent itself mentioned in

its demand notice dated 02.07.2018 that the debt fell due on 25.02.2011. The

portion of the debt amount mentioned in the demand notice that would

qualify as operational debt, was acknowledged by the appellant in January

and February 2012. Therefore, the respondent was supposed to bring action

on these defaults within three years from January and February, 2012.

However, the same was not done.

81. Subsequently, after a lapse of four years, the respondent sent three legal

notices dated 25.07.2014, 16.09.2014 and 15.07.2015 respectively.

However, no response was given by the appellant. In such a scenario, could

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it be said that the act of sending legal notices would reset the period of

limitation and commence the cause afresh? In our considered view, the

answer to this question must be an emphatic ‘No’.

82. The benefit of extension of limitation by way of acknowledgment in terms

of Section 18 of the Limitation Act is available only where, before the

expiration of the prescribed period, an acknowledgment of liability has been

made in writing by the party against whom the claim stands. In the absence

of any such acknowledgment, mere service of a notice of demand would

neither revive a time-barred claim nor would give rise to a fresh cause of

action.

83. It is apposite to clarify that though the statutory demand notice dated

02.07.2018 was issued within the period of three years from the last legal

notice dated 15.07.2015 sent by the respondent, yet it would still be outside

the bounds of limitation considering that the legal notice dated 15.07.2015

could not have reset the clock by itself in the absence of any acknowledgment

of liability.

84. This Court in Babulal Vardharji Gurjar (supra) summarized and clarified

the scope of the IBC after Section 238A was enacted. It was observed that it

C.A. No. 876 of 2021 Page 53 of 62

was not the intention of the IBC to give a new lease of life to the debts that

were already time-barred. Further, default occurs on the date of actual non-

payment by the corporate debtor when the debt becomes due and payable. If

application is filed beyond the period of three years from the date of default,

the application would, without a doubt, be time-barred. The relevant

observations in Babulal Vardharji Gurjar (supra) read thud:

“32. When Section 238-A of the Code is read with the

above noted consistent decisions of this Court

in Innoventive Industries [Innoventive Industries

Ltd. v. Icici Bank, (2018) 1 SCC 407 : (2018) 1 SCC (Civ)

356] , B.K. Educational Services [B.K. Educational

Services (P) Ltd. v. Paras Gupta & Associates, (2019) 11

SCC 633 : (2018) 5 SCC (Civ) 528] , Swiss Ribbons [Swiss

Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] , K.

Sashidhar [K. Sashidhar v. Indian Overseas Bank, (2019)

12 SCC 150 : (2019) 4 SCC (Civ) 222] , Jignesh

Shah [Jignesh Shah v. Union of India, (2019) 10 SCC 750

: (2020) 1 SCC (Civ) 48] , Vashdeo R. Bhojwani [Vashdeo

R. Bhojwani v. Abhyudaya Coop. Bank Ltd., (2019) 9 SCC

158 : (2019) 4 SCC (Civ) 308] , Gaurav Hargovindbhai

Dave [Gaurav Hargovindbhai Dave v. Asset

Reconstruction Co. (India) Ltd., (2019) 10 SCC 572 :

(2020) 1 SCC (Civ) 1] and Sagar Sharma [Sagar

Sharma v. Phoenix ARC (P) Ltd., (2019) 10 SCC 353 :

(2020) 1 SCC (Civ) 175] respectively, the following basics

undoubtedly come to the fore:

C.A. No. 876 of 2021 Page 54 of 62

(a) that the Code is a beneficial legislation intended to put

the corporate debtor back on its feet and is not a mere

money recovery legislation;

(b) that CIRP is not intended to be adversarial to the

corporate debtor but is aimed at protecting the interests of

the corporate debtor;

(c) that intention of the Code is not to give a new lease of

life to debts which are time-barred;

(d) that the period of limitation for an application seeking

initiation of CIRP under Section 7 of the Code is governed

by Article 137 of the Limitation Act and is, therefore, three

years from the date when right to apply accrues;

(e) that the trigger for initiation of CIRP by a financial

creditor is default on the part of the corporate debtor, that

is to say, that the right to apply under the Code accrues on

the date when default occurs;

(f) that default referred to in the Code is that of actual non-

payment by the corporate debtor when a debt has become

due and payable; and

(g) that if default had occurred over three years prior to

the date of filing of the application, the application would

be time-barred save and except in those cases where, on

facts, the delay in filing may be condoned; and

(h) an application under Section 7 of the Code is not for

enforcement of mortgage liability and Article 62 of the

Limitation Act does not apply to this application.”

(Emphasis supplied)

85. We may say, on the strength of the aforesaid exposition, that the respondent

ought to have brought its claim within the period of three years from the date

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of default before a civil court for recovery of money. The IBC proceedings

cannot be used to provide a fresh timeline for the period of limitation to run.

As such, the NCLT should not have admitted the petition without condoning

the delay and therefore, the impugned order upholding the admission was

erroneous.

86. We agree that when it comes to complex contracts like those for engineering,

procurement and construction, the question of limitation is also complicated.

It is a settled principle of law that in EPC contracts, a fresh ‘right to sue’ may

accrue when the final bill is being reconciled or the works are being finally

tested, even though the initial cause of action may have arisen at the time of

intermediate payments [See: Union of India v. West Coast Paper Mills Ltd.,

reported in (2004) 2 SCC 747].

87. However, in our considered view, ‘default’ as envisaged in Section 3(12) of

the IBC means the date when the default of non-payment came to

crystallized. The substantive dispute whether the amount is payable or not,

is not in question in IBC proceedings. Therefore, the understanding of

limitation in cases of EPC contracts for the purpose of contesting substantive

C.A. No. 876 of 2021 Page 56 of 62

claims by way of either a civil suit or arbitration, is not applicable for

insolvency applications under Section 9 of the IBC.

88. In such view of the matter, we may say without any manner of doubt that the

admission of the Section 9 IBC application of the respondent was erroneous,

and the same could not have been done without condonation of delay as per

Section 5 of the Limitation Act, 1963.

E. DETERMINATION OF THE ISSUES IDENTIFIED

I. Whether the EPC contract entered into by and between the

appellant and respondent was frustrated by the efflux of time?

89. The issue as regards the frustration of the EPC contract due to efflux of time,

is answered in the negative. We have said so because though the EPC

contract was suspended by the respondent due to non-payment by the

appellant of the amount claimed in the Section 9 application, yet none of the

parties had gone further to even express, let alone act on the intention to

terminate the EPC contract in terms of Clause 14 thereof.

90. Further, the EPC contract could not have reached its natural completion due

to effluxion of time for the reason that the performance of the contract

remained suspended, the obligations required to be fulfilled by the appellant

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remained incomplete and there was no provision in the EPC contract which

indicated that time was of the essence to the contract. Therefore, the EPC

contract continued to subsist.

91. Insofar as the appellant’s argument that the EPC contract got frustrated, is

concerned, we find the same to be incorrect. We have said so because Section

56 of the Indian Contract Act, 1872 envisages frustration of contract to

happen due to some supervening impossibility which was unforeseen by the

parties to the contract. We have relied on this Court’s decision in

Boothalinga (supra) that frustration of contract cannot apply to a case of

“self-induced frustration”. In other words, the contract cannot be deemed to

be impossible because of the breach of one of the parties to the contract.

Therefore, there is no gainsaying that in the present matter, the EPC contract

could not have gotten frustrated as it was the actions and conduct of the

contracting parties that led to stalling of the performance of the same.

I. Whether the monies claimed by the respondent in the application

under Section 9 of the IBC constitute ‘operational debt’ as defined

under Section 5(21) of the IBC?

92. The question whether the amounts claimed in the Section 9 application were

in the nature of operational debt, is partially answered in the affirmative. We

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have said so because the amounts required to be paid by the appellant to the

respondent as per the EPC contract and the payment schedule thereto, would

qualify as operational debt. Such payments are the consideration for the

works undertaken by the respondent in terms of the EPC contract and non-

payment thereof would be treated as a claim in respect of the provisions of

goods and services, as per Section 5(21) of the IBC.

93. However, the amount claimed under the heads of suspension, idling or

demobilization charges would be in the nature of damages as they arise from

the alleged breach of the EPC contract by the appellant. It is a settled position

of law that damages, whether liquidated or unliquidated, cannot be treated as

operational debts unless and until they are assessed and crystallized by way

of adjudication by a court of competent jurisdiction. 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.

II. Whether there existed a prior dispute in respect of the claims of

respondent?

94. We have answered the aforesaid issue in the negative. The jurisprudence on

the pre-existing dispute in respect of same claims as those in the Section 9

application being a bar to insolvency proceedings, is well settled by this

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Court in Mobilox (supra). It was held therein that the corporate debtor must

show that there existed a genuine dispute between the parties irrespective of

whether the same had progressed to the stage of arbitration or suit. In cases

where the dispute had not escalated to the stage of a civil suit or arbitration

proceedings, the corporate debtor would be required to highlight the pre-

existing dispute vide the conduct of the parties and the communications

between them.

95. In the present matter, there was no material placed on the record to show that

the parties were litigating or arbitrating any dispute in respect of the claims

under Section 9 application. Further, the appellant consistently maintained

total silence across all legal notices sent by the respondent asserting their

right to be paid in terms of the EPC contract. We find it apposite to clarify

that silence by itself cannot be considered to be an indicator of whether the

dispute existed or not. However, in cases such as the present matter, wherein

the silence was consistent and total, over a period of seven years, it can be

considered as a strong evidence of the appellant’s intention to not dispute the

respondent’s claims.

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96. Therefore, we have come to the conclusion that there was no pre-existing

dispute that would bar the respondent’s application under Section 9 of the

IBC.

III. Whether the application filed by the respondent under Section 9 of

the IBC was time-barred in respect of the dues amounting to

‘operational debt’?

97. We have answered the aforesaid question in the affirmative. In our

considered view, the respondent’s claims crystallized on 05.01.2012 and

03.02.2012 when the liability to pay was acknowledged by the appellant.

However, the respondent took no action to pursue its claims within three

years from the said dates.

98. The respondent sent legal notices dated 25.07.2014, 16.09.2014 and

15.07.2015 respectively after the lapse of more than four years. However,

the legal notices sent by the respondent could not have extended the period

of limitation as Section 18 of the Limitation Act, 1963 requires

acknowledgment of the liability to be by the person or entity against whom

the action is instituted.

99. 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

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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.

100. As a result, we say without any manner of doubt in our minds that the default

had occurred over three years prior to the date of filing of the application

and, therefore, the application is clearly time barred. The NCLAT committed

an error in upholding the admission of Section 9 application.

F. CONCLUSION

101. In the result, the appeal succeeds and is hereby allowed. The impugned

judgment passed by the NCLAT is hereby set aside. The order passed by the

NCLT is also hereby set aside.

102. However, considering the peculiar facts in the present litigation, we give

liberty to the respondent to approach the appropriate dispute resolution

forum as provided in the EPC contract to contest its claims.

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103. Pending applications, if any, shall stand disposed of.

104. Registry shall forward one copy of this Judgment to the National Company

Law Appellate Tribunal, Principal Bench, New Delhi who, in turn, shall

forward one copy each to all the NCLTs across the country.

………………………………J.

(J. B. PARDIWALA)

………………………………J.

(MANOJ MISRA)

New Delhi.

12th August, 2026.