The Supreme Court this week clarified how damages from a contract breach are treated under the Insolvency and Bankruptcy Code, a decision that could reshape financing for large infrastructure projects.
Damages not automatically operational debt
In a case involving a power‑project owner, the apex court set aside the admission of an insolvency proceeding. The bench held that while milestone payments due under an engineering‑procurement‑construction (EPC) agreement are classified as operational debt, other charges such as suspension, idling and demobilisation remain damages.
Those damages, the court said, only become operational debt when a court or arbitral tribunal “crystallises” them. Without that formal determination, they cannot be included in the debt schedule of an insolvency petition.
The judgment also noted that the claim in question had become time‑barred. The court found the damages had crystallised back in 2012, well before the insolvency petition was filed, and therefore the contractor must pursue the matter through arbitration rather than the insolvency route.
By drawing a line between payments that are immediately operational and those that remain contingent, the ruling adds a procedural step for lenders and borrowers alike.
Related: Supreme Court endorses bustard protection panel recommendations
Impact on future bankruptcy filings
Legal practitioners say the decision may prompt parties to seek quicker arbitration outcomes to avoid the risk of claims becoming stale. It also signals that insolvency courts will scrutinise the nature of each claim more closely before admitting it to the debt pool.
In practice, this could mean that project sponsors will need to document suspension or demobilisation costs with greater precision, ensuring they are either settled before an insolvency filing or clearly earmarked for arbitration.
For creditors, the judgment offers a clearer view of what can be pursued in a corporate collapse. They can now differentiate between debts that are immediately enforceable and those that require a separate adjudicative process.
One practical implication is that lenders may tighten covenants, demanding that any potential damages be earmarked in escrow or otherwise secured. This would reduce uncertainty about the total exposure in the event of a default.
From a policy perspective, the court’s approach aligns with the intent of the Insolvency and Bankruptcy Code to preserve viable businesses while protecting creditor rights.
Related: Your NYC Lawyer Knows What Insurance Companies Don’t Want You to Find Out
The decision also highlights the importance of timing. Since the damages were deemed crystallised in 2012, the statutory limitation period had already run its course, leaving the contractor without recourse in the insolvency forum.
Legal analysts note that the court’s language was a bit clunky, describing the damages as “uncrystallized,” which may prompt future litigants to use more precise terminology in their filings.
In everyday terms, the ruling means that companies facing financial distress cannot automatically pull in every cost associated with a stalled project. They must first obtain a formal judgment that the expense qualifies as debt, otherwise it stays outside the insolvency process.
This clarification could lead to more proactive dispute resolution. Parties may opt for expedited arbitration clauses in future EPC contracts, anticipating that unresolved damages will not automatically feed into a bankruptcy case.
Overall, the Supreme Court’s interpretation shows a subtle view of debt classification, reinforcing the need for clear contractual provisions and timely legal action.