Uncrystallised Contract Damages Are Not Operational Debt Under IBC: Supreme Court
The Supreme Court has held that damages claimed for an alleged breach of contract are not operational debt under the Insolvency and Bankruptcy Code, 2016 (IBC) until they are assessed and crystallised by adjudication. The ruling came in Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd., Civil Appeal No. 876 of 2021, 2026 INSC 835, decided on 12 August 2026 by a bench of Justice J.B. Pardiwala and Justice Manoj Misra.
In the Court's words (para 52), "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". A creditor cannot use a section 9 application to have an unresolved damages claim decided for the first time.
The dispute
| Event | Detail |
|---|---|
| Project | 225 MW gas-based combined cycle power station at Bikkavolu, East Godavari district, Andhra Pradesh |
| EPC agreement | 9 February 2011, contract value Rs 827 crore, 14-month completion period |
| Payments | Rs 50.15 crore paid against Rs 165.4 crore due for the first three milestones |
| Works suspended | 30 July 2011 |
| Section 8 demand notice | 2 July 2018, for Rs 1,292.13 crore |
| Section 9 application | 12 October 2018 |
| NCLT, Amravati Bench | Admitted the application on 13 December 2019 |
| NCLAT | Upheld admission on 1 February 2021 |
The EPC contractor's claim had two parts. The first was the money due under the milestones in the contract's payment schedule. The second was suspension and demobilisation charges, with interest, which the contractor said had accrued because of the employer's breach.
What counts as operational debt
The Court split the claim along that line. Amounts payable under the EPC contract and its payment schedule were consideration for the works and qualified as operational debt under section 5(21) of the IBC (para 54). The suspension and demobilisation charges were a different kind of claim: they arose from an alleged breach and were damages, so they could not be treated as operational debt without prior adjudication (para 52).
The distinction matters because a damages claim depends on proving a breach, responsibility for it and the resulting loss. Putting a figure in a demand notice does not make the counterparty liable for it. Until a court or the contractual forum decides liability and quantum, the claim remains uncrystallised.
The claim also failed on limitation
Even the part that was operational debt was time-barred. Under Article 137 of the Limitation Act, 1963, a section 9 application must be filed within three years. The employer had last acknowledged liability on 5 January 2012 and 3 February 2012 (para 71), but the application came only in October 2018. The Court rejected the argument that a subsisting contract keeps the cause of action alive, holding that a default "provides cause of action on the date when the default occurs and cannot serve as a continuing cause of action" (para 72).
The appeal was allowed and both the NCLAT judgment and the NCLT admission order were set aside (para 101). The contractor was given liberty to approach the dispute resolution forum provided in the EPC contract to pursue its claims (para 102). The ruling therefore does not extinguish the damages claim; it only decides that the claim cannot found an insolvency application in its current form.
What operational creditors should check
- Separate contractual dues (invoices, milestone payments) from damages (idling, suspension, demobilisation, loss of profit) before issuing a section 8 notice.
- Ask whether any damages component has been accepted by the debtor or decided by a court or arbitral tribunal. If not, leave it out of the section 9 claim.
- Work out limitation invoice by invoice from each default date and from any written acknowledgment, not from the life of the contract.
- Where damages are the main claim, use the contract's dispute resolution clause first; the IBC is not the forum for fixing them.
What corporate debtors and advisers can take from it
A debtor facing a section 9 application can test each head of the claim: which amounts are contractual consideration and which are compensation for alleged breach. For finance teams, the case is a reminder that a quantified claim in board notes or recovery assessments is not the same as a debt enforceable under the IBC. Receivable records should show bill dates, due dates, part-payments and dated acknowledgments separately from any damages claims.
Updated on 27 September 2026: added the case name, citation, bench, facts and the paragraphs of the Supreme Court judgment on damages, limitation and the final order.
