Uncrystallized Contractual Damages Not Operational Debt under IBC

Source: Supreme Court  

Why in News? 

A Bench of Justice JB Pardiwala and Justice Manoj Misra, in Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd. (2026), held that uncrystallized claims for damages arising from breach of contract cannot form the basis of an "operational debt" under the Insolvency and Bankruptcy Code, 2016, and set aside the concurrent orders of the NCLT and NCLAT admitting a Section 9 application on this ground. 

What was the Background of Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd. (2026) Case? 

• The dispute arose out of an Engineering, Procurement and Construction (EPC) contract for setting up a 225 MW gas-based power station in Andhra Pradesh, awarded to the respondent for Rs. 827 crore. 
• The respondent claimed that despite achieving contractual milestones, the appellant paid only Rs. 50.15 crore against a cumulative Rs. 165.4 crore due, following which the respondent suspended work and claimed damages for the appellant's alleged breach. 
• The payments in question fell due between 2011 and 2012, but the respondent filed an application under Section 9 of the IBC only in 2018. 
• The NCLT admitted the Section 9 application, and the NCLAT upheld the admission, prompting the appellant to approach the Supreme Court in appeal. 

What were the Court's Observations? 

• On crystallization of debt: The Court held that damages arising from breach of contract, whether liquidated or unliquidated, cannot be treated as operational debt unless they have been assessed and crystallized through adjudication before a competent court, since the NCLT and NCLAT are not the appropriate fora for adjudicating such disputes and are instead concerned with the survival of the corporate debtor and maximization of recovery in liquidation. 
• On the suspension and idling charges claimed: The Court found that since there was no suit or arbitral proceeding that had assessed or crystallized the suspension, idling, and demobilization charges claimed by the respondent, these amounts could not be treated as operational debt for the purpose of a Section 9 application. 
• On limitation: The Court held that the respondent's claim was barred by limitation, as the debt arose in 2011–2012 but the insolvency application was filed only in 2018, well beyond the three-year limitation period. 
• On revival of stale claims through legal notices: The Court rejected the respondent's argument that the contract, being technically un-terminated, kept its claim alive, holding that repeated legal notices do not revive an expired claim unless the debtor acknowledges the debt in writing, and reiterating that the IBC is not intended to give a fresh lease of life to time-barred debts. 
• On the relief granted: The Court allowed the appeal, set aside the admission of the Section 9 application, and granted the respondent liberty to pursue its claims before the appropriate dispute resolution forum contemplated under the EPC agreement. 

What is Operational Debt under the IBC? 

About: 

• Operational debt refers to a claim in respect of the provision of goods or services, including employment, or a debt in respect of dues payable under any law for the time being in force to the Central or State Government. 
• It is distinguished from "financial debt," which arises from a disbursal against consideration for the time value of money. 
• A claim becomes an enforceable "debt" only when it is due and payable in law; a mere disputed or unadjudicated claim for damages does not automatically qualify. 

Key Requirements for a Section 9 Application: 

• There must be a debt, its default, and the amount must exceed the threshold prescribed under the Code. 
• The debt must not be disputed, or any dispute raised must not be a genuine, pre-existing dispute known before the demand notice. 
• Unliquidated damages, until crystallized by a competent adjudicatory forum, cannot be computed with certainty and therefore cannot support a Section 9 application. 

Significance of Crystallization: 

• Crystallization ensures that only ascertained, legally enforceable amounts are brought within the summary and time-bound insolvency process. 
• It prevents the IBC from being converted into a forum for recovery of disputed or speculative claims, preserving its objective of resolution rather than adjudication of underlying contractual disputes.