Supreme Court Clarifies that Uncrystallised Claims for Contractual Damages do not constitute Operational Debt under IBC

The Hon’ble Supreme Court, vide its order and judgment dated 12 August 2026, in the case of Srinivasa Reddy Velagala v. Sravanthi Infratech Pvt. Ltd. (Civil Appeal No. 876 Of 2021), has reiterated that claims for damages arising from an alleged breach of contract cannot constitute “Operational Debt” under the Insolvency and Bankruptcy Code, 2016 (“IBC”) unless such claims have been adjudicated and crystallized by a competent Court or Arbitral Tribunal.

The dispute arose from an EPC contract for setting up a 225 MW gas-based power station in Andhra Pradesh, under which the Respondent (Contractor) claimed amounts towards, inter alia, suspension, idling and demobilization charges allegedly arising from the Appellant’s breach of contract. The Respondent subsequently invoked Section 9 of the IBC, pursuant to which the Corporate Insolvency Resolution Process (“CIRP”) was admitted by the NCLT and subsequently upheld by the NCLAT.

Allowing the appeal against the orders of the NCLT and NCLAT, the Hon’ble Supreme Court observed that damages, whether liquidated or unliquidated, cannot be treated as “operational debt” until they have been assessed and crystallized through adjudication by a competent court or Arbitral Tribunal. The Court emphasized that the NCLT and NCLAT are not appropriate fora for determining disputed contractual claims, as their jurisdiction under the IBC is directed towards resolution of insolvency and maximization of value, rather than adjudication of contractual disputes.

The Hon’ble Apex Court further clarified that a dispute arising from breach of contract can give rise to an operational debt only when the underlying claim has become crystallized and legally enforceable. In the absence of any suit or arbitration proceedings resulting in assessment and adjudication of the Respondent’s claims, the amounts claimed towards suspension, idling and demobilization could not have been treated as “Operational Debt” for the purposes of Section 9 of IBC.

The Hon’ble Supreme Court also held that the Insolvency Application was barred by limitation. The amounts in question had become due in 2011-2012, whereas the Section 9 Application was filed only in 2018. The Hon’ble Supreme Court rejected the contention that the continued existence of the contract kept the claims alive, and thereby reiterated that repeated legal notices, without a written acknowledgment of liability by the Corporate Debtor, do not extend or restart the limitation period.

The judgment reinforces the settled position that IBC cannot be invoked as a mechanism to adjudicate disputed contractual claims, crystallize unliquidated damages, or revive claims that have become barred by limitation.