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Cannot Create for : Supreme Court
In a significant ruling that clarifies the interplay between the (IBC) and the , the has held that the mere subsistence of an underlying EPC contract cannot give an operational creditor a for a payment that has already occurred. The bench of Justice J.B. Pardiwala and Justice Manoj Misra set aside the admission of a Section 9 IBC application, ruling that the claim was time-barred and could not be revived through insolvency proceedings.
The Dispute: A ₹827 Crore EPC Contract Gone Sour
The dispute arose from an Engineering, Procurement and Construction (EPC) contract awarded to Sravanthi Infratech Pvt. Ltd. for setting up a 225 MW gas-based combined cycle power station at Bikkavolu, East Godavari District, Andhra Pradesh. The corporate debtor, Srinivasa Reddy Velagala, issued a Letter of Award on for ₹827 crore, followed by the EPC agreement dated . The contract stipulated a 14-month completion period and included milestone-based payment provisions.
The respondent completed the first three milestones, making dues of ₹165.4 crore, but received only ₹50.15 crore as advance payment. After repeated demands, the respondent suspended work on under Clause 14.2 of the agreement, citing non-payment. Despite this, neither party terminated the contract. Legal notices followed in 2014 and 2015, and finally a statutory demand notice under was issued on , claiming ₹1,292.13 crore. The Section 9 application was filed on .
The admitted the application on , holding that the contract continued to subsist and therefore the claim was not time-barred. The affirmed this reasoning, prompting the appeal to the Supreme Court.
Arguments at the Apex Court
Appellant's Submission: The appellant argued that the was hopelessly time-barred. Even if the legal notice of were taken as the crystallisation date, the IBC demand notice in 2018 fell beyond the three-year period prescribed under . No had been made by the debtor to extend limitation, and the IBC cannot revive stale debts. Reliance was placed on and .
Respondent's Counter: The respondent contended that the EPC contract was never terminated and remained subsisting. Therefore, a existed, keeping the claim within limitation. It also argued that milestone payments constituted under , and that there was no because the appellant had remained silent throughout.
The Court's Analysis: Disentangling the Legal Threads
The Supreme Court addressed four key issues sequentially. First, it rejected the notion that the EPC contract had been frustrated by efflux of time. The contract's suspension was a result of the parties' own conduct—specifically the non-payment—not a supervening impossibility under . The Court drew on to note that "" cannot discharge contractual obligations. Thus, the contract continued to subsist.
Second, the Court determined that amounts payable under the contractual milestones for goods and services supplied qualified as "" under . However, it drew a crucial line: suspension, idling, and demobilisation charges were in the nature of damages. Such damages, whether liquidated or unliquidated, cannot constitute unless they are assessed and through adjudication by a competent court. Since no such adjudication had occurred, those amounts could not form part of the Section 9 claim.
Third, the Court found no sufficient to bar the application. Applying , it held that a genuine dispute—even if not litigated—can defeat a Section 9 application. But here, the appellant's consistent and total silence over seven years, despite repeated legal notices, was strong evidence that no genuine dispute existed.
The Decisive Issue: Limitation and
The fourth issue proved determinative. The Court emphatically rejected the respondent's argument that the subsistence of the EPC contract created a . It observed:
“The '' envisaged under occurs on non-payment of debt when whole or any part/instalment of the amount of debt has become due and payable and is not paid by the debtor. Thus, Section 3(12) grounds the occurrence of at a singular point in time. The mere subsistence of the EPC contract will not give in respect of the defaulted amount.”
The Court further explained that an unpaid debt may cause continuing damage, but it does not represent continuing legal injury. The itself occurs only once, even if its financial consequences persist.
The Court also noted that the had in , when the appellant acknowledged liability in communications to the . The respondent, however, did not initiate proceedings within three years from those dates. The legal notices of 2014 and 2015 could not reset the limitation clock because requires a written from the party against whom the claim is made—an acknowledgment that was never forthcoming.
Key Observations
The judgment contains several pointed observations:
- “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 .”
- “The intention of the IBC is not to give a new lease of life to debts which are time-barred.”
- “A arising out of non-payment of the due and payable amount, provides cause of action on the date when the occurs and cannot serve as a .”
Decision and Implications
The Supreme Court allowed the appeal, setting aside both the judgment and the order that had admitted the Section 9 application. It held that the application was "clearly time barred" and that the had erred in affirming its admission.
Importantly, the Court did not extinguish the respondent's underlying contractual claims. It granted liberty to Sravanthi Infratech to approach the appropriate dispute-resolution forum provided in the EPC contract—such as arbitration or civil suit—to pursue its dues. This distinction underscores that the IBC is not a substitute for ordinary debt recovery; it is a mechanism for resuscitation of viable companies, not a tool to bypass limitation laws.
This ruling provides much-needed clarity for operational creditors: a does not extend the limitation period for an insolvency application. Creditors must act within three years of the , or rely on a valid acknowledgment to reset the clock. The decision reinforces the principle that time-barred debts cannot be revived through the IBC, a stance consistent with the Supreme Court's earlier dicta in Babulal Vardharji Gurjar and .
For the construction and EPC sectors, where long-term contracts often straddle multiple payment milestones, this judgment serves as a cautionary tale: payment defaults must be pursued promptly, or the right to invoke insolvency may be lost forever.
