In a significant ruling on limitation under the Insolvency and Bankruptcy Code, the Supreme Court has asserted that the subsistence of a continuing contract does not provide a continuing cause of action, and mere service of legal notices cannot reset the limitation clock under Article 137 of the Limitation Act, 1963. The Apex Court held that an EPC contract cannot be said to be frustrated by efflux of time merely because works have been suspended due to non-payment, as frustration under Section 56 of the Indian Contract Act applies only to a supervening impossibility and not to self-induced frustration arising from the act or election of a party.
The Court further held that the existence of a pre-existing dispute under Section 8(2)(a) of the IBC must be assessed on the basis of the conduct of the parties and communications between them, and consistent silence over a prolonged period can be strong evidence of the absence of any genuine dispute. On limitation, the Court reaffirmed the principles laid down in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd. [(2020) 15 SCC 1] and held that the period of three years under Article 137 of the Limitation Act, 1963 runs from the date of default, and the IBC cannot be invoked to revive debts that have already become time-barred.
On the subsistence of the EPC contract, a Two-Judge Bench comprising Justice J.B. Pardiwala and Justice Manoj Misra observed that Clauses 14.1 and 14.2 of the contract governed termination, and neither party had invoked these clauses despite the prolonged suspension of works. The Court held that suspension of works cannot be treated as frustration of contract under Section 56 of the Indian Contract Act, 1872, as frustration arises only from a supervening impossibility outside the control of the parties, and not from self-induced frustration arising out of a party’s own breach or election. The Court further observed that since the EPC contract was silent on whether time was of the essence, and since the contractual obligations remained unfulfilled, the contract could not be said to have come to a natural close by efflux of time.
On the question of operational debt under Section 5(21) of the IBC, the Court observed that the amounts payable under the payment schedule of the EPC contract qualify as operational debt, as they constitute consideration for the goods and services provided by the respondent. However, the Court clarified that the heads of suspension, idling and demobilization charges are in the nature of damages, which cannot be treated as operational debt unless they are assessed and crystallised by a court of competent jurisdiction.
On the issue of pre-existing dispute, the Court observed that while silence by itself is not an indicator of the absence of a dispute, the appellant’s total and consistent silence across multiple legal notices spanning over seven years constituted strong evidence that no genuine dispute existed at the relevant time. The Court further noted that the appellant’s defence raised for the first time in its reply to the Section 9 application, without being anchored in any prior conduct, appeared to be an afterthought to resist exposure to the insolvency process.
On the question of limitation, the Court observed that the operational debt became due and payable on Feb 15, 2011 and July 13, 2011, and the liability was acknowledged by the appellant on Jan 05, 2012 and Feb 03, 2012 respectively. The Court held that a default arising out of non-payment provides cause of action on the date when the default occurs and cannot serve as a continuing cause of action merely because the contract continues to subsist. The Court further observed that mere service of a legal notice does not reset the period of limitation, and the benefit of extension under Section 18 of the Limitation Act, 1963 is available only where acknowledgment of liability is made in writing by the party against whom the claim stands, before the expiration of the prescribed period.
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Briefly, the dispute arose out of an Engineering, Procurement and Construction (EPC) contract dated Feb 09, 2011 entered into between Srinivasa Reddy Velagala (the appellant/corporate debtor) and Sravanthi Infratech Pvt Ltd. (the respondent/operational creditor) for setting up a 225 MW gas-based combined cycle Power Station at Bikkavolu, East Godavari District, Andhra Pradesh, against a Letter of Award dated Dec 24, 2010 for a total contract price of Rs. 827 crores. The contract was to be completed within 14 months and contained an arbitration clause for dispute resolution.
The payment schedule under the EPC contract provided for payment in six milestones — 10% as initial advance against corporate guarantee, 5% against ordering of major equipment, 5% against release of advances, 70% against the Billing Break-up (BBU), 5% on commissioning in open cycle, and 5% on commissioning in combined cycle. The respondent achieved the first milestone upon issuance of the LOA on Dec 24, 2010 and submitted the requisite corporate guarantees in April 2011, but the appellant paid only Rs. 50.15 crores out of the Rs. 82.7 crores advance that was due. The respondent also achieved the second and third milestones by finalising purchase orders for GTG, STG and HRSG on Feb 15, 2011, and the appellant acknowledged the work done to the Chief Engineer, IRP Division, Central Electricity Authority. However, the appellant paid only Rs. 50.15 crores out of the cumulative Rs. 165.4 crores that had fallen due.
The respondent submitted the BBU on July 13, 2011 and again on Jan 03, 2012, which was acknowledged by the appellant without any dispute, but no payment followed. Aggrieved by the non-payment, the respondent issued a notice of suspension dated July 30, 2011 and terminated its contracts with vendors and sub-contractors. The respondent thereafter sent legal notices demanding payment, to which the appellant gave no response. After a lapse of almost three years, the respondent issued a statutory demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC) dated July 02, 2018 claiming Rs. 1292.13 crores, stating that the debt fell due on Feb 25, 2011. Upon receiving no response, the respondent filed an application under Section 9 of the IBC on Oct 12, 2018, which was admitted by the NCLT and affirmed by the NCLAT on Feb 01, 2021.
