TaxTMI 
TaxTMI 
2026 (8) TMI 804
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....by limitation 43 E. DETERMINATION OF THE ISSUES IDENTIFIED 56 I. Whether the EPC contract entered into by and between the appellant and respondent was frustrated by the efflux of time? 56 I. Whether the monies claimed by the respondent in the application under Section 9 of the IBC constitute 'operational debt' as defined under Section 5(21) of the IBC? 57 II. Whether there existed a prior dispute in respect of the claims of respondent? 58 III. Whether the application filed by the respondent under Section 9 of the IBC was time-barred in respect of the dues amounting to 'operational debt'? 60 F. CONCLUSION 61 1. This appeal arises from the judgment and order dated 01.02.2021 passed by the National Company Law Appellate Tribunal at New Delhi ("NCLAT") in the Company Appeal (AT) (Insolvency) No. 188 of 2020, preferred by the appellant herein against the admission of the insolvency application filed by the respondent herein under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), by which the NCLAT affirmed the order of the National Company Law Tribunal, Amravati Bench ("NCLT") admitting the Section 9 application an....
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....arantee for 5% of the contract value. (...)" 5. The monetary break-up of the contract price in terms of the aforesaid payment schedule is provided below: Sl.No. Milestone Payment Amount to be paid in milestones (In Rs.) 1 Initial Advance Payment 10% of Contract Price against Corporate Guarantee 82.7 crore 2 Payment against ordering major equipment; e) Against ordering of GTGs f) Against ordering of STG g) Against ordering of HRSGs h) Against ordering of CT / ACC 5% of Contract Price 41.35 crore 3 Payment against release of advances e) Against release of advance of GTGs f) Against release of advance of STG g) Against release of advance of HRSGs h) Against release of advance of CT / ACC 5% of Contract Price 41.35 crore 4 Payment against Billing Break-up (BBU) 70% of the contract price shall be paid as per agreed billing break up. 578.9 crore 5 Payment on Commissioning 5% payment shall be made on Commissioning in Open Cycle or 45 days of readiness of facilities and against submission of performance corporate guarantee for 5% of the co....
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....ground that the amount of Rs. 32.55 crore was pending from the advance payment which became due after the first milestone. Pursuant to the suspension notice, the respondent stopped all EPC activities and stated that the same would be resumed only after the receipt of the initial advance. The respondent also terminated its contracts with the vendors and sub-contractors hired for completing the contract works. 11. The respondent sent legal notices dated 25.07.2014, 16.09.2014 and 15.07.2015 respectively wherein it demanded payment in terms of the payment provisions enumerated in the EPC contract. It was stated in the said notices that the appellant's failure to complete the payment caused the respondent to suspend the works, as it was unable to continue with full mobilization at the site and subsequently, it had to completely demobilize by November 2011. It was clarified that the works remained suspended as the appellant had failed to cure its default in payments. It was further clarified that the appellant had not terminated the EPC agreement and therefore, the duties and obligations thereunder continued to operate as regards the parties. No response to the aforesaid legal notice....
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....by way of the impugned judgment on the following grounds: a) The question whether the claim of the respondent under Section 9 of the IBC was barred by limitation was answered in the negative. The NCLAT observed that none of the parties terminated the EPC contract. As a result, the same continued to subsist till date. As such, the appellant's plea of limitation could not be accepted as there was no termination of the EPC contract. b) As regards the issue whether the claim of the respondent was an operational debt in terms of Section 5(21) of the IBC, it was held that the respondent's claim in the Section 9 application was an operational debt. c) It was further held that since the EPC contract was silent on the frustration of contract due to efflux of time, it could not be said that the contract had automatically been frustrated. d) As regards the question whether there existed any prior dispute in respect of the claims of the respondent under Section 9 application, it was held that the appellant raised no dispute once the respondent issued the demand notice under Section 8 of the IBC. Therefore, it could not be said that the application under Sect....
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....ebt on behalf of the appellant in writing or in the balance sheet, or through payment. 19. The learned senior counsel placed reliance on this Court's dictum in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., reported in (2020) 15 SCC 1, to submit that it cannot be the intention of the IBC to give a new lease of life to debts that are time-barred. The period of limitation starts running from the date of the default of non-payment and the right to apply under the IBC accrues from such date. If such default occurred over three years prior to the date of filing of the application, the application would be time-barred unless and until there has been an acknowledgment of the debt. 20. It was further submitted that the judgment in Babulal Vardharji Gurjar (supra) makes it clear that limitation is a mixed question of fact and law, and therefore, any plea for extension or enlargement of the period of limitation must necessarily be accompanied by the relevant facts and evidence. Since no such pleadings were made in the present matter, there could be no extension or enlargement of the period of limitation. 21. As regards the acknowledgment of debt by a debtor, ....
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.... debt is time-barred and there exists a pre-existing dispute between the parties. ii. Submissions on behalf of the respondent 26. Mr. Nitin Bhardwaj, the learned counsel appearing on behalf of the respondent, addressed himself on the following questions: * Whether the EPC contract came to be terminated or frustrated due to efflux of time? * Whether the debt claimed by the respondent under the Section 9 IBC application was barred by limitation? * Whether the amount claimed by the respondent under the Section 9 IBC application was in the nature of operational debt under Section 5(21) of the IBC or damages? * Whether there was a pre-existing dispute between the parties that would bar the respondent from filing the application under Section 9 of the IBC? 27. The learned counsel placed the material facts before us to submit that non-payment of the entire advance amount and the amounts due upon completion of the subsequent milestones was a failure on the part of the appellant to fulfil its obligations under the EPC contract. This compelled the respondent to issue notice of suspension of works dated 30.07.2011. 28. It was submitted by the le....
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....uspension and resumption expenses. Owner shall be responsible for reimbursement of all costs incurred by Supplier as a result of the stoppage of Supplier's work. If Supplier's performance hereunder is suspended by Supplier pursuant to this Article 14.2, Owner will authorise a Scope Change Order making an equitable adjustment to the Scheduled Unit(s) Completion Date, Scheduled Facility Completion Date and the Contract Schedule and required reasonable adjustments to one or more of the Contract Price, the Terms of Payment and any relevant terms and conditions of this Agreement, as appropriate. If such suspension continues uninterrupted for at least four months, or if two or more suspensions exist for an aggregate of at least four months, Supplier may terminate this Agreement; provided that Supplier shall give the Financing Parties a further 60 days prior written notice, and opportunity to cure, before terminating this Agreement. In the event of such a termination by Supplier, Own.er shall pay to Supplier (or Suppler may retain) such amounts as are required pursuant to Article 4.4. hereof." 30. It was vehemently argued by the learned counsel that the EPC contract had never b....
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....s had any dispute as regards the claim amount in question was raised by the appellant. It is an admitted fact that the existence of the debt due and payable to the respondent had never been denied by the appellant in any manner before the application under Section 9 of the IBC was filed. 35. It was submitted that the notices dated 25.07.2014, 16.09.2014 and 15.07.2015 respectively, were sent by the respondent to seek the payment of their dues through the years and none of the aforesaid notices were ever denied or disputed by the appellant. Therefore, the Section 9 application filed by the respondent was not barred in law on account of the existence of a prior dispute between the parties in respect of the same claim. C. ISSUES TO BE DETERMINED 36. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following questions fall for our consideration: (i) Whether the EPC contract entered into by and between the appellant and respondent was frustrated by the efflux of time? (ii) Whether the monies claimed by the respondent in the application under Section 9 of the IBC constitute 'operational debt' as def....
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....cy situations, upon such prior notice as circumstances permit) indicating (a) the portion of the Supplies the completion of which Owner has elected to defer; (b) Owner's estimate of the duration of such suspension; and (c) the effective date of such suspension of such Supplies. Upon receipt of and consistent with the effective date of such notice, Supplier shall stop production of the Supplies that Owner has elected to defer and shall continue to complete production of the balance of the Supplies. In the event of a suspension of the Supplier's performance hereunder pursuant to this Article 14.1.1, Owner will authorize a Scope Change Order making required adjustments to one or more of the Scheduled Unit(s) Completion Date, Scheduled Facility Completion Date, the Contract Price, the Terms of Payment, the Contract Schedule, and the Performance Guarantees, as applicable. 14.2 Termination Upon Non-Payment by Owner. If Owner fails to pay to Supplier any payment as required hereunder and such failure continues for 25 days after written notice thereof has been given to Owner by Supplier, then Supplier shall give ten days' prior written notice thereof to Owner and the F....
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....or the respondent herein is not automatic when the suspension period crosses more than four months. The usage of the word 'may' indicates that an option has been provided to the respondent to terminate. 40. In the present matter, neither the appellant nor the respondent elected to terminate the EPC contract despite severe delays in fulfilment of obligations. Since the agreement between the parties is silent on whether time is the essence of the contract, we say without any manner of doubt that the parties intended for the EPC contract to subsist. 41. As regards the appellant's contention that the EPC contract got frustrated due to efflux of time, the same is liable to be rejected. We say so because there can be no frustration due to efflux of time. The expression "effluxion of time" is used to describe situations in which a particular contract comes to a close automatically upon completion of all obligations thereunder or with the expiry of the time period stipulated for the operation of the agreement. 42. On the other hand, the doctrine of frustration of contract is triggered when a supervening event results in the automatic discharge of liability of parties to the contra....
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....on of works. Furthermore, the provisions regarding extension of time and performance guarantee tests indicate that the EPC contract could not have come to a close without completion of works or final inspection of the facility to be constructed. Therefore, in our considered view, the principle of efflux of time is also not applicable to the case at hand. 47. In view of the aforesaid, we say without any manner of doubt that the EPC contract continued to subsist. (ii) Amount claimed by the respondent is operational debt 48. The appellant had submitted before the NCLAT that the amount claimed by the respondent was not in the nature of 'operational debt' under Section 5(21) of the IBC. In our considered view, the material on record shows that the respondent in its legal notices had claimed monies under two broad heads: * Payment of the amounts due under the first, second, third and fourth milestones in the payment schedule to the EPC contract; * Suspension and demobilization charges and interest thereupon. 49. Before we deal with the question whether the above-mentioned heads can be the subject matter of an application under Section 9 of the IBC, it is app....
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....ct and the payment schedule thereto, qualify as operational debt as they were supposed to be fulfilled as a consideration for the works undertaken by the respondent in terms of the EPC contract. (iii) Pre-existing dispute between the parties 55. The third leg of the appellant's argument was that there was pre-existing dispute between the parties on the date when the respondent sent the statutory demand notice under Section 8 of the IBC and filed an application under Section 9 thereof. 56. It is a settled position of law that an insolvency application under the IBC cannot be filed for such amounts/debts that are the subject matter of a dispute between the parties. Such dispute must be substantive and must be a matter of clear contestation by both the parties. 57. This Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., reported in (2018) 1 SCC 353 held that a Section 9 application under the IBC is liable to be rejected if it was found that there was a pre-existing dispute between the parties in respect of the same claims as raised by the operational creditor in its insolvency application. 58. As regards the question, when the dispute would be considered....
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....ncy proceedings pursuant to Section 9 of the IBC. The rationale for holding thus was that allowing insolvency proceedings in respect of claims that had already been disputed through notices or otherwise could result in multiplicity of proceedings. The insolvency process would be delayed as there would be no bar on the parties to pursue the resolution of the dispute by way of a suit or arbitration. Therefore, there is no requirement that the parties must show that a pre-existing dispute was being litigated or was the subject matter of an arbitration. The relevant observations in Mobilox (supra) read thus: "38. It is, thus, clear that so far as an operational creditor is concerned, a demand notice of an unpaid operational debt or copy of an invoice demanding payment of the amount involved must be delivered in the prescribed form. The corporate debtor is then given a period of 10 days from the receipt of the demand notice or copy of the invoice to bring to the notice of the operational creditor the existence of a dispute, if any. We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which "the existence of a dispute" alone is mention....
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....tion utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application." (Emphasis supplied) 61. What is discernible from the aforesaid exposition is that it is not necessary that a suit or arbitration proceeding be pre-existing to evidence a dispute. Rather, what is required to be highlighted is that the....
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....mained unpaid since February 2011 and February 2012 respectively. 66. The respondent was constrained to issue the notice of suspension of works on 30.07.2011 after it did not receive payments even after completion of the first, second and third milestone in the payment schedule to the EPC contract. The right to suspend works by the respondent, as discussed in the aforesaid part of this judgment, arose from Clause 14.2 of the EPC contract. However, despite suspension of works, subsequent idling and demobilization of the site and the consistent non-payment of dues by the appellant, none of the parties elected to terminate the EPC contract in terms of Clause 14.1 and 14.2 respectively. Therefore, the contract continued to subsist. 67. The respondent sent legal notices dated 25.07.2014, 16.09.2014 and 15.07.2015 respectively after the lapse of more than four years since its claim crystallized and the right to sue accrued to it. The learned senior counsel appearing for the appellant would argue that the legal notices raised the dispute as regards the non-payment of the amounts specified in the payment schedule after the limitation period of three years had already passed. Further,....
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....tinuing cause of action is incorrect and liable to be rejected. 73. The "default" envisaged under Section 3(12) of the IBC occurs on non-payment of debt when whole or any part/instalment of the debt becomes due and payable but is not paid by the debtor. Thus, Section 3(12) grounds the occurrence of default at a singular point in time. The mere subsistence of the EPC contract will not give continuing cause of action in respect of the defaulted amount. 74. This Court in Next Education India (P) Ltd. v. K12 Techno Services, reported in 2023 SCC OnLine SC 1117, has held that the Adjudicating Authority must consider invoices for payment in respect of which the default occurred during the three years preceding the date of filing the application under Section 9. This implies that to determine whether the application under Section 9 is within limitation or not, one would have to consider whether the default had occurred within three years of filing the application. The relevant portion of the judgment reads thus: "2. At the outset, it is required to be noted that, in fact, the appellant herein, who claimed to be the "operational creditor" raised 187 different invoices for th....
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.... the appellant its BBU. After acknowledgment in January and February 2012 by the appellant, the limitation in respect of the aforesaid defaults started afresh. These dates have also been mentioned by the respondent in its demand notice dated 02.07.2018 as the dates when the default occurred. 78. At this juncture, we may refer to Form 3 provided in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the "Rules, 2016") that stipulates the form in which the demand notice under Section 8 of the IBC is supposed to be issued. Form 3, inter alia, requires that the statutory demand notice should specify the date from which the debt fell due, i.e., the date on which the default occurred. 79. This Court in B. Prashanth Hegde v. SBI, reported in 2026 SCC OnLine SC 197 (wherein one of us, namely Manoj Misra, J., was a part of the Bench) observed in the context of applications made under Section 7 of the IBC, that the forms prescribed in the Rules, 2016 serve the purpose of bringing out the necessary ingredients for presentation of the insolvency application. As regards the requirement of providing the date on which the debt became due, it was observed that ....
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....nd February 2012. Therefore, the respondent was supposed to bring action on these defaults within three years from January and February, 2012. However, the same was not done. 81. Subsequently, after a lapse of four years, the respondent sent three legal notices dated 25.07.2014, 16.09.2014 and 15.07.2015 respectively. However, no response was given by the appellant. In such a scenario, could it be said that the act of sending legal notices would reset the period of limitation and commence the cause afresh? In our considered view, the answer to this question must be an emphatic 'No'. 82. The benefit of extension of limitation by way of acknowledgment in terms of Section 18 of the Limitation Act is available only where, before the expiration of the prescribed period, an acknowledgment of liability has been made in writing by the party against whom the claim stands. In the absence of any such acknowledgment, mere service of a notice of demand would neither revive a time-barred claim nor would give rise to a fresh cause of action. 83. It is apposite to clarify that though the statutory demand notice dated 02.07.2018 was issued within the period of three years from the last leg....
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....Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues; (e) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs; (f) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable; and (g) that if default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and (h) an application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application." (Emphasis supplied) 85. We may say, on the strength of the aforesaid exposition, that the respondent ought to have brought its claim within the period of three years from the date of default before a civil court for recovery of money. The IBC proceedings cannot be used to provide a ....
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....indicated that time was of the essence to the contract. Therefore, the EPC contract continued to subsist. 91. Insofar as the appellant's argument that the EPC contract got frustrated, is concerned, we find the same to be incorrect. We have said so because Section 56 of the Indian Contract Act, 1872 envisages frustration of contract to happen due to some supervening impossibility which was unforeseen by the parties to the contract. We have relied on this Court's decision in Boothalinga (supra) that frustration of contract cannot apply to a case of "self-induced frustration". In other words, the contract cannot be deemed to be impossible because of the breach of one of the parties to the contract. Therefore, there is no gainsaying that in the present matter, the EPC contract could not have gotten frustrated as it was the actions and conduct of the contracting parties that led to stalling of the performance of the same. I. Whether the monies claimed by the respondent in the application under Section 9 of the IBC constitute 'operational debt' as defined under Section 5(21) of the IBC? 92. The question whether the amounts claimed in the Section 9 application were in the nature ....
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....er, in cases such as the present matter, wherein the silence was consistent and total, over a period of seven years, it can be considered as a strong evidence of the appellant's intention to not dispute the respondent's claims. 96. Therefore, we have come to the conclusion that there was no pre-existing dispute that would bar the respondent's application under Section 9 of the IBC. III. Whether the application filed by the respondent under Section 9 of the IBC was time-barred in respect of the dues amounting to 'operational debt'? 97. We have answered the aforesaid question in the affirmative. In our considered view, the respondent's claims crystallized on 05.01.2012 and 03.02.2012 when the liability to pay was acknowledged by the appellant. However, the respondent took no action to pursue its claims within three years from the said dates. 98. The respondent sent legal notices dated 25.07.2014, 16.09.2014 and 15.07.2015 respectively after the lapse of more than four years. However, the legal notices sent by the respondent could not have extended the period of limitation as Section 18 of the Limitation Act, 1963 requires acknowledgment of the liability to be by the perso....