A Subsisting Contract Does Not Keep Limitation Alive: Supreme Court Sets Aside Section 9 Admission Over Power Plant EPC Dues

Case at a glance: The Supreme Court has set aside the admission of a Section 9 IBC application by an EPC contractor against a power project developer, holding the claim time-barred. Although it agreed that the contract subsisted, that payment-schedule dues were operational debt and that there was no pre-existing dispute, it held that default occurs on non-payment of each instalment and that the mere subsistence of the contract is not a continuing cause of action.

In February 2011 the parties signed an EPC contract worth Rs 827 crore for a 225 MW gas-based power station in East Godavari, Andhra Pradesh. Of the 10% advance of Rs 82.7 crore, about Rs 50.15 crore was paid. The contractor suspended work on 30 July 2011 and demobilised by November 2011; the developer acknowledged liability in January and February 2012.

Legal notices followed in 2014 and 2015 without response. A Section 8 demand notice was issued on 2 July 2018 and a Section 9 application filed on 12 October 2018. The NCLT, Amaravati admitted it on 13 December 2019, and the NCLAT dismissed the appeal on 1 February 2021.

The Key Question Before the Court

Was the Section 9 application within limitation, and are idling and demobilisation charges operational debt?

Operational Debt, Dispute and Limitation

The Court held that the contract was not frustrated by efflux of time, since neither side exercised its termination options and suspension caused by non-payment was ‘self-induced’. Payments due under the payment schedule were operational debt under Section 5(21), but suspension, idling and demobilisation charges are in the nature of damages and are not operational debt unless adjudicated. Applying Mobilox, it found the debtor’s silence across notices showed no genuine pre-existing dispute.

On limitation, relying on Article 137 of the Limitation Act, Section 238A of the IBC and decisions including Babulal Vardharji Gurjar, the Court held that default occurs on non-payment of each due instalment, so the subsistence of the contract cannot serve as a continuing cause of action. The acknowledgments of early 2012 were the last valid ones; the creditor’s own later notices could not extend time under Section 18. “The IBC proceedings cannot be used to provide a fresh timeline for the period of limitation to run,” the Court said.

What the Court Actually Held

• The appeal was allowed and the NCLAT and NCLT orders were set aside.
• The Section 9 application was time-barred, and admission without considering condonation was erroneous.
• Idling and demobilisation charges are not operational debt unless adjudicated.
• The contractor was given liberty to approach the dispute resolution forum under the EPC contract, and a copy was directed to be circulated to all NCLTs through the NCLAT.

Why This Judgment Matters

• It clarifies that a live contract does not give a continuing cause of action for IBC limitation.
• It separates scheduled contract payments from unliquidated damages claims.
• It reminds creditors that their own notices do not extend limitation.

What Should Advocates Take Away From the Judgment?

For Operational Creditors

• Compute limitation from the date each instalment fell due, extended only by the debtor’s acknowledgments.
• Do not include idling or demobilisation claims as operational debt unless adjudicated.

For Corporate Debtors

• Raise limitation squarely, relying on the default date in the demand notice and Form 3.
• Silence in response to notices may defeat a later plea of pre-existing dispute.

Key Takeaways

Frequently Asked Questions

No. It succeeded on subsistence of contract, operational debt and absence of dispute, but failed on limitation.

No. Under Section 18, only an acknowledgment by the debtor extends time.

No. The Court gave liberty to approach the forum under the EPC contract.

Conclusion