In a decisive ruling preserving the core legislative objective of the corporate insolvency framework, the Supreme Court of India has held that unliquidated or uncrystallized claims for damages arising from alleged breach of contract do not constitute an “operational debt” under the Insolvency and Bankruptcy Code (IBC), 2016.
What Happened
An operational creditor filed a petition under Section 9 of the IBC seeking Corporate Insolvency Resolution Process (CIRP) against a corporate debtor based on unliquidated damages for premature contract termination, claiming the sum met the statutory default threshold of ₹1 crore.
What the Court Decided
The Supreme Court clarified that under Section 5(21) of the IBC, an operational debt must represent a claim in respect of the provision of goods or services, employment, or statutory dues. Damages arising from an alleged breach of contract do not crystallize into a debt due and payable until they have been formally adjudicated by a competent civil court or arbitral tribunal. Consequently, initiating insolvency proceedings based on disputed damages is an abuse of process and impermissible under Section 9.
Key Legal Issue
Whether an unadjudicated claim for damages for breach of contract qualifies as an operational debt to trigger corporate insolvency under Section 9 of the Insolvency and Bankruptcy Code, 2016.
Practical / Industry Implications
This judgment serves as a vital safeguard against using the IBC as a coercive recovery mechanism for contentious contractual disputes. Creditors must pursue civil suits or arbitration to establish and quantify damages before seeking debt-based enforcement remedies.
VNS Legal Perspective
The IBC is intended for corporate restructuring and genuine insolvency, not commercial debt collection. The Supreme Court’s clear demarcation between liquidated debt and unadjudicated damage claims protects corporate solvency while preserving the jurisdiction of civil courts and commercial arbitral forums.
Sources / Further Reading
1. Insolvency and Bankruptcy Code, 2016, Sections 5(21), 7, 8, and 9.
2. Supreme Court of India: Transmission Corporation of A.P. Ltd. v. Equipment Conductors & Cables Ltd.; 2026 IBC Jurisprudence.
3. Indian Contract Act, 1872, Section 73 (Compensation for breach of contract).
