Unadjudicated damages are not operational debt under the insolvency code

Supreme Court Clarifies: Unadjudicated Damages Cannot Form Basis of Operational Debt Under Section 9 of Insolvency Code

The Supreme Court of India delivered a significant judgment on 12 August 2026, establishing that claims for damages arising from breach of contract cannot be classified as operational debt under the Insolvency and Bankruptcy Code, 2016, unless they have been previously adjudicated and crystallised by a competent court. The ruling provides critical clarity on the scope of operational debt and has immediate practical consequences for Section 9 of the Insolvency and Bankruptcy Code, 2016, particularly in the context of demand notices filed by operational creditors seeking to initiate corporate insolvency resolution proceedings.

The Supreme Court reiterated in its judgment that damages—whether liquidated or unliquidated—do not qualify as operational debt until they have been assessed and crystallised through formal adjudication. This principle marks an important boundary in insolvency law, distinguishing between quantified contractual obligations and contested or contingent claims that remain subject to dispute. The Court's pronouncement addresses a persistent problem in insolvency practice: operational creditors frequently attempt to inflate their claims by including unquantified or unadjudicated damages components in demand notices filed under Section 9 of the Insolvency and Bankruptcy Code, 2016.

Operational Debt and the Threshold Test

Under the Insolvency and Bankruptcy Code, 2016, operational debt forms the foundation for initiating corporate insolvency resolution proceedings through a Section 9 application. An operational creditor is defined as a person who supplies goods or provides services to the corporate debtor, or who has extended credit to the corporate debtor in the ordinary course of business. The creditor must serve a demand notice on the corporate debtor for payment of undisputed operational debt, and if the debtor fails to pay within ten days, the operational creditor may file an application for corporate insolvency resolution with the National Company Law Tribunal.

The Supreme Court's ruling clarifies that the quantum of default claimed in the demand notice must be confined to amounts that are either admitted by the debtor or have been conclusively determined through adjudication. Damages claims—whether arising from delay in performance, defective delivery of goods or services, or wrongful termination of contract—cannot be included in the operational debt computation unless a decree, award, or final judgment has already fixed the amount with certainty. This distinction is critical because it prevents operational creditors from using the insolvency mechanism as a shortcut to recover contested or unliquidated damages without first obtaining a legal determination of liability and quantum.

Implications for Demand Notices and Section 9 Applications

The practical impact of this ruling on Section 9 of the Insolvency and Bankruptcy Code, 2016, is substantial. Operational creditors who have supplied goods, provided services, or extended credit often face disputes not only about whether payment is due, but also about the amount payable. In such situations, they may seek to include damages components—for breach of warranty, delay penalties, or consequential loss—in their demand notice. The Supreme Court's judgment now makes clear that such damages claims have no place in a Section 9 application unless they have been adjudicated beforehand.

Where an operational creditor's claim comprises both an admitted invoice amount and a disputed damages component, the applicant must confine the default computation to the admitted portion alone. Attempting to inflate the default figure by including unadjudicated damages invites a pre-existing dispute defence under Section 8 of the Insolvency and Bankruptcy Code, 2016, and significantly increases the risk of dismissal of the Section 9 application. The National Company Law Tribunal has consistently held that where a substantial part of the claim is disputed, the entire application may fail at the threshold stage itself, without reaching the merits of whether the corporate debtor is insolvent.

The Pre-Existing Dispute Defence

The Supreme Court's ruling reinforces the importance of the pre-existing dispute defence in insolvency law. Section 8 of the Insolvency and Bankruptcy Code, 2016, provides that if the corporate debtor disputes the debt, either in whole or in part, the Tribunal may dismiss the application. This provision serves as a critical safeguard against the misuse of insolvency proceedings as a debt collection tool for contested claims.

By holding that unadjudicated damages do not constitute operational debt, the Supreme Court has strengthened the position of corporate debtors resisting admission of Section 9 applications. A corporate debtor facing an application that includes damages claims should carefully scrutinise the demand notice and identify all components that remain unadjudicated or disputed. Taking this point at the threshold stage—that is, at the stage of admission of the Section 9 application—can result in dismissal without the corporate debtor needing to prove insolvency or engage in lengthy litigation over the underlying commercial dispute.

Distinguishing Operational Debt from Contingent Claims

The judgment also clarifies the conceptual distinction between operational debt and contingent or unliquidated claims. Operational debt, by its nature, must be certain and quantified. It represents a definite obligation to pay a fixed sum for goods supplied, services rendered, or credit extended in the ordinary course of business. Damages claims, by contrast, are often contingent on proof of breach and causation, and their quantum depends on evidence and legal principles of remoteness and mitigation.

This distinction reflects a broader principle in insolvency law: that the insolvency process is designed to deal with quantified debts and to determine whether a corporate debtor is unable to pay its debts as they fall due. The process is not intended to serve as a forum for resolving contested contractual disputes or awarding unliquidated damages. Such matters must be resolved through suits in civil courts or through arbitration proceedings, where parties have the opportunity to lead evidence, cross-examine witnesses, and obtain a reasoned adjudication.