Introduction

The Supreme Court held that claims for damages arising from breach of contract cannot be treated as "operational debt" under the Insolvency and Bankruptcy Code, 2016, unless previously adjudicated and crystallized by a competent court. This decision affects companies and creditors involved in contractual disputes. Creditors can no longer invoke insolvency proceedings based on uncrystallized damages claims. The ruling clarifies the distinction between operational debt and other forms of debt, placing limits on the use of insolvency proceedings for resolving contractual disputes.

Full News Breakdown

The dispute arose from an Engineering, Procurement and Construction (EPC) contract for setting up a 225 MW gas-based power station in Andhra Pradesh.

• Case Name: SRINIVASA REDDY VELAGALA. SRAVANTHI INFRATECH PVT. LTD

• Court: Supreme Court

• Bench: Justice JB Pardiwala and Justice Manoj Misra

• Date: August 12

• Citation: 2026 LiveLaw (SC) 793

• Statutes Cited: Insolvency and Bankruptcy Code, 2016

• Key Provisions: Section 9 of the IBC

• Primary Legal Issue: Whether uncrystallized damages from breach of contract constitute operational debt under the IBC

• Petitioner Arguments: The appellant argued that the respondent's claims for damages were not operational debt as they were not crystallized.

• Respondent Arguments: The respondent argued that the claims for damages were operational debt as they arose from the breach of contract.

• Court Reasoning: The court held that operational debt must be crystallized and legally enforceable, and that disputes arising from breach of contract cannot give rise to an operational debt until the debt becomes crystallized.

• Operative Order: The appeal was allowed, and the respondent was granted liberty to pursue its claims before the appropriate dispute resolution forum.

• Practical Outcome: The respondent's insolvency application was dismissed, and the appellant was relieved of the insolvency proceedings.

How Does This Affect You?

The court has clarified that uncrystallized damages from breach of contract do not qualify as operational debt. This shift affects companies and creditors involved in contractual disputes. The ruling creates a compliance obligation for creditors to crystallize damages before invoking insolvency proceedings under Section 9 of the IBC.
The distinction between operational debt and other forms of debt is now clearer, and creditors can no longer use insolvency proceedings to recover uncrystallized damages claims.
This change has practical implications for companies and creditors, and lawyers, law students, and businesses may want to review their contracts and consider alternative dispute resolution mechanisms.

For Lawyers & Advocates

When advising clients on contractual disputes, lawyers may consider the requirement for crystallization of damages before invoking insolvency proceedings under Section 9 of the IBC.
In drafting contracts, lawyers may review the provisions for damages to ensure they are clear and enforceable.
Lawyers may find it useful to be aware of the distinction between operational debt and other forms of debt, and advise clients accordingly on the use of insolvency proceedings.
The ruling highlights the importance of alternative dispute resolution mechanisms, such as arbitration, for resolving contractual disputes and avoiding insolvency proceedings.
Lawyers may want to consider the implications of this ruling on pending client matters, particularly those involving contractual disputes and insolvency proceedings.

For Law Students

The decision provides an opportunity to examine the distinction between operational debt and other forms of debt under the IBC.
The case of Babulal Vardharji Gurjar deals with the intention of the IBC and the concept of operational debt.
The case of Swiss Ribbons Pvt. Ltd. v. Union of India discusses the constitutional validity of the IBC and the concept of operational debt.
The ruling raises questions about the scope of Section 9 of the IBC and the requirements for invoking insolvency proceedings.
An examiner may ask about the implications of this ruling on the use of insolvency proceedings for resolving contractual disputes.

For Businesses

Businesses may want to consider reviewing their contracts and ensuring that the provisions for damages are clear and enforceable.
Companies involved in EPC contracts may want to review their contracts and consider alternative dispute resolution mechanisms, such as arbitration, to resolve contractual disputes and avoid insolvency proceedings.
CFOs and boards may want to decide on the approach to take in contractual disputes, taking into account the implications of this ruling on the use of insolvency proceedings.

Key Takeaways

• The legal principle established: Uncrystallized damages from breach of contract do not constitute operational debt under the IBC.

• The practice consequence: Lawyers may find it useful to advise clients on the requirement for crystallization of damages before invoking insolvency proceedings.

• The enforcement consequence: Regulators and courts cannot admit insolvency applications based on uncrystallized damages claims.

• What to watch next: The upcoming amendments to the IBC, which may clarify the requirements for operational debt and the use of insolvency proceedings.

• A named audience and a named action: Companies involved in contractual disputes may want to review their contracts and consider alternative dispute resolution mechanisms before the next contractual dispute arises.

Source: S. 9 IBC | Uncrystallized Damages From Breach Of Contract Not Operational Debt : Supreme Court