Underlying Contract's Subsistence Cannot Revive Time-Barred Debt Under IBC: Supreme Court

The Supreme Court on Wednesday held that the mere subsistence of an underlying contract cannot give a creditor a continuing cause of action for an IBC default that has already occurred.

It consequently ruled that a time-barred debt cannot be revived through insolvency proceedings.

Justices J.B. Pardiwala and Manoj Misra held that the operational creditor's claims had crystallized in 2012, but it failed to pursue them within three years. The Court held that the insolvency application filed in 2018 was therefore barred by limitation.

“The “default” envisaged under Section 3(12) of the IBC occurs on nonpayment 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 EPC contract will not give continuing cause of action in respect of the defaulted amount. ,” the court held.

The court further held that an unpaid debt may have continuing consequences, but the legal default itself occurs only once.

“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.,” it held.

The dispute arose from an Engineering, Procurement, and Construction (EPC) contract for setting up a 225 MW gas-based combined-cycle power station in Andhra Pradesh. Sravanthi Infratech was awarded the ₹827 crore project by Srinivasa Reddy Velagala in December 2010. The EPC agreement was executed in February 2011.

Although Sravanthi completed the first three milestones, Reddy paid only ₹50.15 crore against ₹165.4 crore that had become due. Sravanthi suspended the works in July 2011 over non-payment.

Sravanthi issued legal notices in 2014 and 2015 seeking payment. Reddy did not respond. In July 2018, Sravanthi issued a demand notice under the IBC claiming ₹1,292.13 crore and filed a Section 9 insolvency application in October 2018.

The National Company Law Tribunal (NCLT) admitted the application, holding that the EPC contract continued to subsist because neither party had terminated it.

The National Company Law Appellate Tribunal (NCLAT) affirmed the order, holding that the claim was not time-barred as the contract continued.

Before the Supreme Court, Reddy argued that the operational debt was time-barred. Sravanthi contended that the continuing EPC contract gave it a continuing cause of action.

The Supreme Court held that the EPC contract had not been frustrated by the passage of time. It noted that neither party had terminated the agreement and that the contract did not prescribe a strict timeline for completion.

“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,” the Court held.

On the nature of the claims, the court held that amounts payable under the EPC contract constituted operational debt. However, suspension, idling and demobilisation charges were damages and could not constitute operational debt unless assessed and crystallised through adjudication.

The court also found no pre-existing dispute that would bar the Section 9 application. While cautioning that silence by itself does not establish the absence of a dispute, it held that Reddy's consistent and total silence over seven years was strong evidence that he did not dispute the claims.

On limitation, the court held that the operational debt became due on February 15, 2011 and July 13, 2011. Reddy acknowledged liability on January 5, 2012 and February 3, 2012, but Sravanthi did not pursue its claims within three years.

The court held that the subsequent legal notices could not reset limitation.

“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,” it held.

The bench reiterated that IBC proceedings cannot give a “new lease of life” to time-barred debts. It ultimately held that the application was “clearly time barred," set aside the NCLAT and NCLT orders, and gave Sravanthi liberty to approach the appropriate dispute-resolution forum under the EPC contract.

For Petitioner: Advocate Shashank Manish

For Respondent: Advocate Nitin Bhardwaj