The Supreme Court has set aside insolvency proceedings initiated against a power company, ruling that an operational creditor cannot use the Insolvency and Bankruptcy Code (IBC) to recover a claim that had already gone stale under the law of limitation - even if the underlying contract was never formally terminated.
A bench of Justice J.B. Pardiwala and Justice Manoj Misra allowed the appeal filed by Srinivasa Reddy Velagala against Sravanthi Infratech Pvt. Ltd., overturning the NCLAT's Delhi bench order that had upheld admission of a Section 9 IBC application against him.
Background of the Case
The dispute traces back to a 225 MW gas-based power project in Bikkavolu, Andhra Pradesh. The appellant had awarded an EPC (engineering, procurement and construction) contract worth Rs 827 crore to the respondent in 2011, to be completed within 14 months.
According to the respondent, payments due after the first three milestones were not released in full, forcing it to suspend work in July 2011 and eventually demobilise its site by November of that year. Legal notices followed in 2014 and 2015, but the appellant never replied. It was only in July 2018 - nearly seven years after the alleged default - that the respondent issued a formal demand notice under Section 8 of the IBC, followed by the Section 9 insolvency application in October 2018.
Both the NCLT and the NCLAT had ruled in the respondent's favour, reasoning that since the EPC contract was never terminated, it continued to subsist and the claim could not be treated as time-barred.
Court's Observations
The bench rejected the idea that a subsisting contract automatically means a "continuing cause of action" for limitation purposes. The judges clarified that default under the IBC occurs at a specific point in time - when payment becomes due and isn't paid - and that this triggers the three-year limitation clock under Article 137 of the Limitation Act, regardless of whether the contract itself remains alive.
The bench observed that damages, whether liquidated or unliquidated, cannot be treated as operational debt unless assessed and crystallized by way of adjudication by a court of competent jurisdiction, while drawing a distinction between the milestone payments (which did qualify as operational debt) and suspension or demobilisation charges (which did not, being in the nature of unadjudicated damages).
On the question of a pre-existing dispute, the Court sided with the respondent, noting that the appellant's total silence over multiple legal notices spanning several years suggested no genuine dispute existed before the insolvency application was filed - raising it only in its reply was seen as an afterthought.
However, on limitation, the Court held that the claim had crystallized as early as January-February 2012, when the appellant acknowledged the billing break-ups. Since no fresh acknowledgment of liability was made thereafter, and legal notices alone cannot restart the limitation clock under Section 18 of the Limitation Act, the claim was already time-barred by the time the Section 9 application was filed in 2018.
The judgment also cited earlier precedents including Babulal Vardharji Gurjar and Mobilox Innovations, reiterating that the Code is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation, and that limitation rules cannot be bypassed simply because a contract technically remains in force.
Decision
The Supreme Court allowed the appeal, setting aside both the NCLAT's and NCLT's orders admitting the insolvency application.
It, however, gave the respondent liberty to pursue its claims before the appropriate dispute resolution forum as provided under the EPC contract.
Case Details:
Case Title: Srinivasa Reddy Velagala vs. Sravanthi Infratech Pvt. Ltd.
Case Number: Civil Appeal No. 876 of 2021
Judges: Justice J.B. Pardiwala and Justice Manoj Misra
Decision Date: 12th August 2026
