Overview
In this matter, the Supreme Court had to determine whether the respondent could file a Section 9 application under the Insolvency and Bankruptcy Code 2016 (IBC) for the claims arising from an EPC contract when the default was made several years back.

The dispute arose between the parties from a 225 MW gas-based power project in Andhra Pradesh. The Supreme Court had to determine whether the EPC contract related to the project had ended through frustration or efflux of time and whether the Section 9 application was within limitation.

Facts of the Case

In December 2010, Srinivasa Reddy, the appellant herein, invited bids for a 225 MW gas-based combined cycle Power Station in Andhra Pradesh. Sravanthi Infratech, the respondent, received a letter of acceptance on 24 December 2010 for ?827 crore. 

The parties then entered into an EPC contract on 9 February 2011, which provided the completion of the work within 14-months and payment against different milestones.

After completing the first milestone, the respondent was to be paid ?82.7 crore, but the appellant only paid ?50.15 crore out of ?165.4 crore that had become payable. The respondent later achieved the second and third milestones, but only ?50.15 crore still remained paid out of ?165.4 crore that had become payable. Billing Break-Ups submitted in July 2011 and January 2012 were acknowledged but still remained unpaid.

The respondent suspended the work on 30 July 2011 because of non-payment and demobilised by November 2011. It later sent legal notices on 25 July 2014, 16 September 2014 and 15 July 2015 demanding payment, but still there was no response from the appellant.

On 2 July 2018, the respondent issued a Section 8 demand notice and filed a Section 9 application under the IBC on 12 October 2018. The NCLT admitted it on 13 December 2019. The appellant challenged the same before the NCLAT, but the appeal was dismissed on 1 February 2021. The matter then reached the Supreme Court.

Legal Issues

1. Whether the EPC Contract had ended through frustration or efflux of time.
2. Whether the amounts claimed constituted “operational debt” under Section 5(21) of the IBC.
3. Whether there was a genuine pre-existing dispute between the parties.
4. Whether the Section 9 application under IBC was barred by limitation.

Decision

The Supreme Court allowed the appeal and set aside the orders of NCLT and NCLAT. It held that the EPC contract had not been frustrated merely because the completion period had passed.

The Court found that the work was suspended due to parties’ own actions and could not amount to frustration under Section 56 of the Contract Act. 

It also differentiated between unpaid contractual milestone amounts from claims for suspension and demobilisation charges. While genuine contractual dues may constitute operational debt, damages which remain unadjudicated cannot be considered as operational debt until they are crystallised.

The Court further held that there was no pre-existing dispute as the appellant remained silent, despite being asked repeatedly. Most importantly, the Section 9 application was time-barred. The default arose when the amounts became due and remained unpaid, and the continued existence of the EPC contract did not extend the limitation period. The respondent was left free to pursue arbitration under the EPC contract.

Case Reference :- Srinivasa Reddy Velagala Vs. Sravanthi Infratech Pvt. Ltd. Civil Appeal No. 876 of 2021 (DB, Before J.B. Pardiwala and Manoj Misra, JJ., Delivered by J.B. Pardiwala, J.)