Mere Subsistence Of EPC Contract Does Not Create Continuing Cause Of Action: Supreme Court Holds Section 9 IBC Application Time-Barred

"The period of limitation starts running from the date of the default of non-payment and the right to apply under the IBC accrues from such date. If such default occurred over three years prior to the date of filing of the application, the application would be time-barred unless and until there has been an acknowledgment of the debt." Today, Supreme Court, in a significant judgment dated August 12, 2026, held that the mere subsistence of an Engineering, Procurement, and Construction (EPC) contract does not give rise to a continuing cause of action for the purpose of computing limitation under the Insolvency and Bankruptcy Code, 2016.

A bench comprising Justice J.B. Pardiwala and Justice Manoj Misra observed that an operational creditor cannot bypass the three-year limitation period under Article 137 of the Limitation Act, 1963 by relying on the non-termination of a contract, reiterating that a legal default happens once at a singular point in time even if its financial consequences continue.

The appellant, Srinivasa Reddy Velagala, had invited international competitive bids in December 2010 for setting up a 225 MW gas-based combined cycle power station in Andhra Pradesh. The respondent, Sravanthi Infratech Pvt. Ltd., was awarded the EPC contract worth Rs. 827 crore. Disputes arose regarding non-payment of milestone dues, leading the respondent to suspend works in July 2011 and subsequently issue legal notices between 2014 and 2015. After issuing a statutory demand notice under Section 8 of the IBC in July 2018, the operational creditor filed a Section 9 application before the NCLT, which was admitted and later affirmed by the NCLAT, prompting the present civil appeal before the apex court.

The primary questions before the court were whether the EPC contract was frustrated by efflux of time, whether the claimed dues constituted an operational debt, whether a pre-existing dispute barred the application, and whether the Section 9 application was barred by limitation.

Court Clarifies Doctrine Of Frustration And Efflux Of Time

Addressing the subsistence of the contract, the bench noted that neither party had elected to terminate the agreement under Clause 14, thereby allowing the EPC contract to subsist. The court rejected the appellant's contention that the contract stood automatically frustrated by efflux of time or due to suspension of works.

"Efflux of time is a natural mode of discharge of obligations upon expiry of a stipulated period, whereas frustration is triggered by an unforeseen extraneous event making performance impossible," the court observed, holding that Section 56 of the Indian Contract Act, 1872 does not apply to self-induced frustration arising from a party's own actions or contractual breaches.

Operational Debt Versus Damages

The court examined the definition of 'operational debt' under Section 5(21) of the IBC and drew a clear distinction between contractual milestone payments and damages. The bench ruled that amounts due under the payment schedule of an EPC contract qualify as operational debt as they represent consideration for goods and services provided.

"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," the bench held, noting that the NCLT and NCLAT are not appropriate fora for adjudicating breach of contract claims or awarding demobilization and idling charges.

Consistent Total Silence Negates Pre-Existing Dispute

Evaluating the plea of a pre-existing dispute under Section 8(2) of the IBC read with the doctrine in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., the court observed that the appellant had maintained total and consistent silence across multiple legal notices served over a seven-year period.

"The fact that the appellant placed its defence for the first time in the reply to the Section 9 application indicates that there was no dispute that existed before the insolvency petition, making the defence a mere afterthought," the court noted, answering the issue of pre-existing dispute in the negative.

"The intention of the Code is not to give a new lease of life to debts which are time-barred. Therefore, the respondent ought to have pursued its claims within the period of limitation before a civil court or pleaded for condonation of delay before the NCLT."

Limitation Period And Each Invoice's Independent Date Of Default

On the critical question of limitation under Section 238A of the IBC, the Supreme Court ruled firmly against the operational creditor's plea of a continuing cause of action. Relying on Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd. and Next Education India (P) Ltd. v. K12 Techno Services, the bench emphasized that limitation is tied to each default's own due date as defined under Section 3(12) of the IBC.

The court held that although complex EPC contracts may involve continuous performance or reconciliation of final bills for civil suits, the statutory trigger for an IBC application remains the date of actual non-payment of a crystallized debt. Because the debt had crystallized following acknowledgment in early 2012 and the Section 9 petition was filed more than three years thereafter without seeking condonation of delay under Section 5 of the Limitation Act, the proceedings were legally unsustainable.

Concluding that the NCLAT and NCLT erred in admitting the time-barred insolvency application, the Supreme Court allowed the appeal and set aside the impugned orders, while granting liberty to the respondent to approach the appropriate dispute resolution forum provided under the EPC contract.

Date of Decision: 12 August 2026