A commercial contract can generate several monetary claims at once. An unpaid invoice may sit alongside idling charges, demobilisation costs, compensation for delay and other amounts claimed because contractual performance has broken down. They may all arise from the same agreement, but under the Insolvency and Bankruptcy Code, 20161, they do not necessarily carry the same legal character.
The Supreme Court confronted this distinction in Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd2., arising from an Engineering, Procurement and Construction contract for setting up a 225 MW gas-based power project. The ₹827 crore EPC contract contemplated milestone-based payments. After several milestones were achieved, payments remained outstanding, work was suspended and the contractor subsequently claimed not only the unpaid contractual amounts, but also suspension, idling and demobilisation charges.
A Section 93 application followed. The dispute therefore raised a question that goes beyond EPC contracts: when does a monetary claim arising from a contract become an operational debt capable of triggering insolvency proceedings? The Supreme Court’s answer draws a clear line between consideration that has accrued for goods or services and compensation claimed because the contract has been breached.
From Contractual Claim to Operational Debt, When Must Damages First Be Crystallised?
Section 5(21)4 of the IBC defines an “operational debt” as a claim in respect of the provision of goods or services, including employment, or specified statutory dues. The word “claim” itself is defined broadly under Section 3(6), while Sections 3(11) and 3(12)5 distinguish a debt from the event of default that occurs when a debt has become due and payable but remains unpaid.
That statutory sequence matters. In Srinivasa Reddy Velagala, the contractor’s claim had two broad components. The first consisted of amounts payable against milestones under the EPC payment schedule. The second comprised suspension, idling and demobilisation charges arising from the alleged failure to make contractual payments.
The Supreme Court treated the two differently. Amounts payable upon completion of contractual milestones were consideration for work undertaken under the EPC contract. Once those amounts became payable, they could constitute operational debt because they arose directly from the provision of goods and services.
Suspension, idling and demobilisation charges stood on a different footing. These amounts arose because of the alleged breach of the EPC contract. The Court characterised them as damages and held that damages, whether liquidated or unliquidated, cannot be treated as operational debt until they have been assessed and crystallised through adjudication by a competent court.
That distinction is important for Section 9 practice. A contractual clause may provide a mechanism for calculating damages. A party may quantify those damages in a notice or demand. Neither circumstance, by itself, necessarily converts the asserted amount into an operational debt. Where liability arises from an alleged breach and requires adjudication, the insolvency process cannot become the forum in which that substantive contractual liability is first determined.
The Supreme Court connected this conclusion to the institutional limits of the NCLT and NCLAT. Insolvency tribunals are not forums for adjudicating substantive contractual disputes and assessing damages. Their jurisdiction under the IBC operates once the statutory requirements for insolvency are satisfied. A disputed damages claim cannot therefore acquire the character of operational debt merely by being included alongside unpaid contractual consideration in a Section 86 demand notice.
For creditors under EPC, construction, infrastructure and supply contracts, the practical consequence is substantial. Claims presented under Section 9 may need to be separated by their juridical basis. Amounts representing consideration already earned for goods or services must be distinguished from amounts asserted as compensation for breach.
The judgment also adds another layer to this exercise: identifying when default occurred. The EPC contract in this case had never been formally terminated. Both the NCLT and NCLAT had treated its continued subsistence as relevant to limitation. The Supreme Court rejected the proposition that a subsisting contract creates a continuing cause of action for an earlier non-payment.
Under Section 3(12), default occurs when a debt becomes due and payable and remains unpaid. The Court explained that while the consequences of an unpaid debt may continue, the legal default occurs at a particular point in time. The continued existence of the underlying contract does not continuously reset that date.
This becomes particularly significant in long-running commercial arrangements. The Court acknowledged that under general contract law, complex EPC contracts may generate a fresh right to sue upon final reconciliation of bills or final testing of works. However, it distinguished that analysis from the statutory concept of “default” under the IBC. The limitation analysis applicable to substantive claims pursued through a civil suit or arbitration cannot automatically determine the date of default for a Section 9 application.
The judgment therefore requires an operational creditor to answer two separate questions before invoking insolvency:
First, what part of the monetary claim has legally matured into operational debt?
Second, when did default in respect of that operational debt actually occur?
A large contractual claim may fail at either stage. Part of it may remain an uncrystallised claim for damages. Another part may qualify as operational debt but have become time-barred because the relevant default occurred more than three years before the insolvency application.
Conclusion
The IBC does not treat every monetary entitlement arising from a commercial contract as interchangeable. Srinivasa Reddy Velagala reinforces a structured inquiry under Section 9. Consideration that has accrued for goods or services may constitute operational debt once it becomes payable. Compensation arising from an alleged breach occupies a different legal position. Until such damages are adjudicated and crystallised, they cannot ordinarily perform the function of operational debt for triggering CIRP.
The judgment also separates the life of the contract from the life of the default. A contract may continue to subsist while limitation for a particular unpaid debt continues to run.
For operational creditors, particularly under complex EPC and infrastructure contracts, the Section 9 analysis must therefore begin before the demand notice is issued. The claim must first be dissected into accrued contractual consideration and breach-related compensation, followed by identification of the independent date of default applicable to each legally enforceable operational debt. That distinction determines whether Section 9 is available at all.
Citations
Expositor(s): Adv. Vatsala Pandit
