Subsisting Contract, Continuous Damage, But Expired Claim: Supreme Court Clarifies Issue Of Limitation Under The IBC

A Division Bench of the Supreme Court of India (“Court”), in Srinivasa Reddy Velagala v. Sravanthi Infratech Private Limited, Civil Appeal No. 876 of 2021., while examining an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“Code”), reiterated that a default arising from the non-payment of a due and payable debt creates a cause of action on the date the default occurs; and the mere subsistence of the underlying contract does not constitute a continuing cause of action, even if it results in continuous damage, and therefore does not extend the limitation period under the Limitation Act, 1963 (“Limitation Act”). The Court held that mere subsistence of the underlying contract in cases where the debt had already matured would not lend a new lease of life to such debts in case they already stood time-barred.

Brief Facts

An Engineering, Procurement and Construction contract was entered into between the Corporate Debtor (Appellant) and the Operational Creditor (Respondent) on February 9, 2011 (“EPC Contract”) under which the Respondent was to execute specified works against milestone?based payments aggregating to Rs. 827 crore (Rupees eight hundred twenty-seven crore), with the EPC Contract providing for dispute resolution by way of arbitration. The Respondent achieved steps up to the fourth milestone, however, the Appellant failed to make payments under such milestones. Accordingly, the Respondent sent a suspension notice on July 30, 2011 to the Appellant and stopped all EPC activities. Further, various legal notices were also sent by the Respondent to which no response was given by the Appellant. Thereafter, the Respondent served a notice under Section 8 of the Code upon the Appellant on July 2, 2018 demanding Rs. 1292,13,35,000 (Rupees one thousand two hundred ninety-two crore and thirteen lakh thirty-five thousand) which fell due on February 25, 2011, to which the Appellant failed to provide any response. Accordingly, the Respondent filed an application under Section 9 of the Code on October 12, 2018.

The Section 9 application was admitted by the National Company Law Tribunal (“NCLT”) on December 13, 2019 on the following grounds, namely: (i) the amount demanded was an operational debt; (ii) EPC contract between the parties continued to subsist; (iii) as no response was given to the Section 8 notice, there was no question of a pre-existing dispute; and (iv) the application was not barred by limitation as the EPC contract was a continuing contract. The Appellant thereafter preferred an appeal before the National Company Law Appellate Tribunal (“NCLAT”) which was dismissed on the ground that there was no error in the NCLT’s order admitting the Section 9 application.

Issue

1. Whether the EPC contract entered into was frustrated by the efflux of time?
2. Whether the monies claimed by the respondent constitute operational debt under the Code?
3. Whether there was a pre-existing dispute in respect of the claims of respondent?
4. Whether the application filed by the respondent was time-barred in respect of such dues?

Contentions of the Appellant/ Corporate Debtor

On limitation, it was argued by the Appellant that the starting point for the period of limitation for the operational creditor to maintain the cause began much earlier than the filing of the section 9 petition. Even if the legal notice dated July 25, 2014 issued by the operational creditor to the corporate debtor was considered to be the date on which the default crystallized, the three?year period under Article 137 of the Schedule to the Limitation Act expired long before the Section 8 notice which was served only on July 2, 2018. Further, no material was produced to justify exclusion or extension of limitation by acknowledgment, part?payment or otherwise. Relying on the decision of the Supreme Court in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (Private) Limited, (2020) 15 SCC 1., it was argued that the Code does not intend to give a new lease of life to debts that are time-barred, and limitation being a mixed question of law and fact, any plea for extension or enlargement of limitation must be accompanied by relevant facts and evidence, which in the instant case was missing. Further relying upon Asset Reconstruction Company (India) Limited v. Bishal Jaiswal, (2021) 6 SCC 366., it was submitted that the statement on which a plea of acknowledgment is based, must relate to a present subsisting liability and acknowledgment does not create a new right of action, it merely renews the debt. It was further contended relying on Sabarmati Gas Limited. v. Shah Alloys Limited, (2023) 3 SCC 229., that the period of limitation for a Section 9 application is three years from the date of default, extendable only under Section 5 of the Limitation Act, and that the mere continuation of the EPC Contract or its non?termination cannot create a continuing cause of action for the same default. Also, it was stated that filing a time-barred claim under the Code and not electing for arbitration as a method for dispute resolution indicated lack of bona fide on the part of the Respondent.

Coming to the issue of pre-existing dispute, it was submitted that the legal notices sent by the Respondent indicated that there were disputes arising out of the EPC Contract and placing reliance upon the decision of the Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software (Private) Limited, (2018) 1 SCC 353., it was argued that the Section 9 application ought to be rejected as there was a pre-existing dispute in respect of the debt forming the subject matter of the application, and the Code cannot be used for the purpose of recovery of debt.

Contentions of the Respondent/ Operational Creditor

It was submitted that the EPC Contract was a continuous, subsisting contract that neither party terminated; mere suspension of work did not amount to termination, and the EPC Contract could have been revived by fulfilling the terms of the contract. Thus, there was no question of frustration due to efflux of time in such a case. Accordingly, it was argued that there exists a continuous cause of action, and hence the claim was well within limitation.

It was argued that the claim was in the nature of “operational debt”, falling squarely within Section 5(21) of the Code, as the resolution professional had already undertaken the scrutiny of the books of accounts of the Appellant as well as the claim of the Respondent, basis which the resolution professional rejected the claim in the nature of damages and proceeded with the claim that was found to be due and payable as operational debts under the law.

As to pre-existing dispute, it was submitted that at no stage any dispute as regards the claim amount in question was raised by the Appellant and that it was 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 Section 9 application was filed. The Appellant never denied or disputed any of the legal notices sent by the Respondent. Therefore, there could not be said to be any pre-existing dispute.

Decision

The Court, answering the first issue in negative, held that under the EPC Contract, the Respondent had an option to terminate in cases of suspension beyond a certain period, and the EPC Contract would not automatically terminate. As neither the Appellant nor the Respondent elected to terminate the EPC Contract, and the EPC Contract was silent on whether time is the essence of the contract, it could be inferred that the parties intended for the EPC Contract to subsist, and hence, the EPC Contract had not been frustrated by efflux of time and continued to subsist. The expression “effluxion of time” was distinguished from the doctrine of frustration of contract by stating that the former is a natural and foreseen mode of discharge of obligations while the latter is a discharge of the contract because of an unforeseen extraneous event. Therefore, it cannot be said that there can be frustration of contract due to efflux of time. Thus, the Court observed that: (i) the doctrine of frustration cannot apply as the suspension of works which arose cannot be categorized as a supervening impossibility; and (ii) the EPC Contract cannot be said to have come to a natural close since the parties did not complete their respective obligations thereunder.

Coming to the second issue which was answered in affirmative, the Court affirmed that amounts claimed by the Respondent in respect of unpaid milestone?based consideration for works and services rendered under the EPC Contract constituted “operational debt” within the meaning of Section 5(21) of the Code. However, for claims in the nature of damages, the Court emphasized 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.

Answering the issue of pre-existing dispute in negative, the Court, referring to its earlier decision in Mobilox Innovations (Private) Limited v. Kirusa Software (Private) Limited, (2018) 1 SCC 353., held that it is not necessary that a suit or arbitration proceeding be pre-existing to evidence a dispute, rather it is to be highlighted that there was a pre-existing dispute between the parties vide the conduct of the parties, communication, etc. It was reiterated that the adjudicating authority is required only to assess the genuineness of the dispute and it cannot travel beyond to make observations as regards the merits of the dispute. Applying this to the facts, the Court, while cautioning that though silence per se is not conclusive, observed that the Appellant had maintained consistent and total silence over approximately 7 (seven) years in response to notices sent prior to the Section 9 application to hold that such silence is a strong evidence to support that there was no dispute that in fact existed at the relevant time, and hence, there cannot be said to be any pre-existing dispute and the conduct of the Appellant was an afterthought to resist exposure to the insolvency process.

On the fourth issue of limitation, the Court answered the question in affirmative. The Court emphasised that in terms of Section 238A of the Code read with Article 137 of the Schedule to the Limitation Act, the ‘right to sue’ accrues on the date when the default takes place, where default under the Code is anchored to a specific point in time when a due and payable debt is not paid. 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 mere subsistence of the underlying contract cannot serve as a continuing cause of action, even though it may cause continuous damage. Relying upon the observation of the Supreme Court in B. Prashanth Hegde v. SBI, 2026 SCC OnLine SC 197., as to the importance of the forms prescribed in the National Company Law Tribunal Rules, 2016 in bringing out the necessary ingredients for presentation of the insolvency application, it was held that the same would be applicable even in case of an application under Section 9 of the Code.

It was held that the benefit of extension of limitation by way of acknowledgment in terms of Section 18 of the Limitation Act would be available only where, before expiry of the prescribed period, an acknowledgment has been made in writing, in absence of which mere service of a notice of demand would neither revive a time-barred claim nor would give rise to a fresh cause of action. The decision of the Supreme Court in Next Education India (Private) Limited v. K12 Techno Services, 2023 SCC OnLine SC 1117., was relied upon to state that all invoices must be considered separately when determining the date of default. Further, relying upon Babulal Vardharji Gurjar (supra), it was stated that the Code does not intend to give a new lease of life to the debts that were already time-barred and default occurs on the date of actual non-payment by the corporate debtor when the debt becomes due and payable.

Lastly, the Court relied upon Union of India v. West Coast Paper Mills Limited, (2004) 2 SCC 747, to observe 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. However, as default envisaged under Section 3(12) of the Code means the date when the default of non-payment came to be crystallized, therefore, the Court opined that the question in case of petition under the Code is not whether the amount is payable, but when the ‘default’ occurred in terms of the Code. Thus, it was held that such understanding of limitation in relation to EPC contracts under substantive proceedings would not be applicable for insolvency applications under Section 9 of the Code.

In light of the above facts and circumstances, the Court set aside the judgment passed by the NCLAT and the NCLT with liberty to the Respondent to approach the appropriate dispute resolution forum as provided in the EPC Contract to contest its claims.

Argus Comment

The Court’s ruling in Srinivasa Reddy Velagala is a pointed reaffirmation that the Code is not a backdoor mechanism to revive stale claims. It delivers a vital and pragmatic clarification on the intersection of the Code and the Limitation Act in the context of long-term commercial contracts. By firmly rejecting the notion that continuous non-payment equates to a continuing cause of action, the Court has established that the mere formal subsistence or non-termination of an underlying contract cannot serve as an open-ended mechanism to revive stale claims. Limitation is strictly default-specific, accruing on the precise date when a particular due and payable amount is unpaid, and can only be renewed through a timely written acknowledgment under Section 18 of the Limitation Act.

Equally significant is the Court’s strict demarcation between operational debt and contractual damages, reaffirming that unadjudicated damage claims cannot bypass civil or arbitral adjudication to trigger the corporate insolvency resolution process. Concurrently, the ruling preserves commercial balance by holding that a debtor’s unexplained silence across several years militates against the existence of a bona fide pre-existing dispute.

Ultimately, from the decision it follows that the Code is designed to address present corporate distress rather than serve as a substitute for ordinary debt recovery, placing a heavy onus on operational creditors to actively monitor recovery of milestone-linked invoices and enforce their contractual rights well within the statutory window of limitation.

Please find attached a copy of the Judgment, here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.