Subsisting EPC contract does not give continuing cause of action under IBC: Supreme Court
A bench of Justices J.B. Pardiwala and Manoj Misra held a Section 9 application was time-barred, ruling default under the IBC occurs once and is not a continuing cause of action.
The Supreme Court has set aside the initiation of insolvency proceedings against a power project developer, holding that an operational creditor’s claim under Section 9 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation. In Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd., a bench of Justices J.B. Pardiwala and Manoj Misra held that although the engineering, procurement and construction contract between the parties continued to subsist, its subsistence did not create a continuing cause of action that could extend the three-year limitation period. The Court found that default occurred in early 2012 when the appellant acknowledged the dues, and the claim was pursued far beyond three years. The appeal was allowed, and the orders of the NCLT and NCLAT admitting the application were set aside.
How the dispute reached the Court
The appellant, the corporate debtor, invited an international competitive bid in December 2010 for a 225 MW gas-based combined cycle power station at Bikkavolu, East Godavari District, Andhra Pradesh. The respondent, the operational creditor, was awarded the project as the lowest bidder, and a Letter of Award dated 24 December 2010 was issued for Rs. 827 crore.
The parties signed an EPC agreement dated 9 February 2011, to be completed in 14 months, with disputes referable to arbitration. Payment was staged across milestones. The appellant paid only Rs. 50.15 crore against Rs. 82.7 crore due on the first milestone, and only Rs. 50.15 crore out of the cumulative Rs. 165.4 crore due after the first three milestones.
The respondent issued a notice of suspension dated 30 July 2011 over non-payment, stopped EPC activities, and demobilised by November 2011. It sent legal notices dated 25 July 2014, 16 September 2014 and 15 July 2015, none of which drew a response. A statutory demand notice under Section 8 followed on 2 July 2018, and the Section 9 application was filed on 12 October 2018. The NCLT admitted it on 13 December 2019, and the NCLAT dismissed the appellant’s appeal on 1 February 2021.
Frustration by efflux of time rejected
The Court held the EPC contract continued to subsist. Under Clause 14, either party could terminate; neither did, and the agreement was silent on whether time was the essence. The Court drew a distinction between effluxion of time, where a contract closes automatically on completion of obligations or expiry of its stipulated period, and frustration under Section 56 of the Indian Contract Act, 1872, triggered by an unforeseen supervening event.
Relying on Boothalinga Agencies v. V.T.C. Poriaswami Nadar, the Court held that a circumstance brought about by a party’s own election cannot frustrate a contract. Since the suspension arose from the appellant’s non-payment, it was not a supervening impossibility. “There can be no frustration due to efflux of time,” the Court said.
What qualifies as operational debt
The Court partly accepted the appellant’s challenge on the character of the claim. Amounts payable under the milestone payment schedule qualified as operational debt under Section 5(21), being consideration for works undertaken under a works contract involving goods and construction.
Suspension, idling and demobilisation charges, however, were in the nature of damages. The Court held that damages, whether liquidated or unliquidated, cannot be treated as operational debt until assessed and crystallised by adjudication by a competent court, since the NCLT and NCLAT are not fora for determining such disputes.
No pre-existing dispute
On the appellant’s claim of a pre-existing dispute, the Court applied Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., noting that a dispute need not have reached suit or arbitration but must be genuine, and not spurious, hypothetical or illusory. The word “or” in Section 8(2)(a) was inserted to give effect to Mobilox.
The appellant had responded to none of the legal notices, nor to the Section 8 demand notice. While silence generally is not proof of the absence of a dispute, the Court held that the appellant’s total and consistent silence over seven years was strong evidence that no dispute existed. Raising a defence for the first time in reply to the Section 9 application was, in the Court’s view, an afterthought.
Why the claim was time-barred
The Court held that default under Section 3(12) occurs at a singular point in time when the debt becomes due and is not paid. An unpaid debt causes continuous damage but not continuing legal injury; the legal default happens once. The subsistence of the EPC contract therefore gave no continuing cause of action.
The respondent’s claims crystallised on 5 January 2012 and 3 February 2012 when the liability was acknowledged by the appellant. Action was required within three years, governed by Article 137 of the Limitation Act, 1963, read with Section 238A of the IBC. The legal notices of 2014 and 2015 could not extend limitation, because Section 18 requires acknowledgment by the party against whom the claim is made. Mere service of a demand notice neither revives a time-barred claim nor creates a fresh cause of action.
Applying Next Education India (P) Ltd. v. K12 Techno Services, the Court held that limitation is tied to each invoice’s own due date, and invoices within three years preceding the application must be considered. It also referred to Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., restating that the IBC is not meant to give a new lease of life to time-barred debts. The Court distinguished the EPC limitation principle in Union of India v. West Coast Paper Mills Ltd., holding it inapplicable to Section 9 applications, where substantive contractual disputes are not adjudicated.
The Court found the default had occurred over three years before the application was filed. The NCLT should not have admitted the petition without condoning delay under Section 5 of the Limitation Act, and the NCLAT erred in upholding the admission.
Order
The appeal was allowed. The Court set aside the NCLAT judgment dated 1 February 2021 and the NCLT order admitting the Section 9 application. It granted liberty to the respondent to approach the appropriate dispute resolution forum under the EPC contract to contest its claims. Pending applications were disposed of. The Registry was directed to forward a copy of the judgment to the NCLAT Principal Bench, New Delhi, for onward circulation to all NCLTs.