diff --git a/pkg/util/provider/machinecontroller/machine_util.go b/pkg/util/provider/machinecontroller/machine_util.go
index 29125113a..46e011e0a 100644
--- a/pkg/util/provider/machinecontroller/machine_util.go
+++ b/pkg/util/provider/machinecontroller/machine_util.go
@@ -992,24 +992,24 @@ func (c *controller) reconcileMachineHealth(ctx context.Context, machine *v1alph
 		var (
 			description     string
 			timeOutDuration time.Duration
+			timeElapsed     time.Duration
 		)
 
 		isMachinePending := machine.Status.CurrentStatus.Phase == v1alpha1.MachinePending
 		isMachineInPlaceUpdating := machine.Status.CurrentStatus.Phase == v1alpha1.MachineInPlaceUpdating
 		disableHealthTimeout := machine.Spec.MachineConfiguration != nil && ptr.Deref(machine.Spec.DisableHealthTimeout, false)
 		sleepTime := 1 * time.Minute
-
 		if isMachinePending {
 			timeOutDuration = c.getEffectiveCreationTimeout(machine).Duration
+			timeElapsed = metav1.Now().Sub(machine.CreationTimestamp.Time)
 		} else if isMachineInPlaceUpdating {
 			timeOutDuration = c.getEffectiveInPlaceUpdateTimeout(machine).Duration
+			timeElapsed = metav1.Now().Sub(machine.Status.CurrentStatus.LastUpdateTime.Time)
 		} else {
 			timeOutDuration = c.getEffectiveHealthTimeout(machine).Duration
+			timeElapsed = metav1.Now().Sub(machine.Status.CurrentStatus.LastUpdateTime.Time)
 		}
-
-		// Timeout value obtained by subtracting last operation with expected time out period
-		timeOut := metav1.Now().Add(-timeOutDuration).Sub(machine.Status.CurrentStatus.LastUpdateTime.Time)
-		if timeOut > 0 {
+		if timeElapsed > timeOutDuration {
 			// Machine health timeout occurred while joining or rejoining of machine
 
 			if !isMachinePending && !isMachineInPlaceUpdating && !disableHealthTimeout {
diff --git a/pkg/util/provider/machinecontroller/machine_util_test.go b/pkg/util/provider/machinecontroller/machine_util_test.go
index f4f29932a..26d928a9b 100644
--- a/pkg/util/provider/machinecontroller/machine_util_test.go
+++ b/pkg/util/provider/machinecontroller/machine_util_test.go
@@ -2154,13 +2154,45 @@ var _ = Describe("machine_util", func() {
 			Expect(getErr).To(BeNil())
 			Expect(data.expect.expectedPhase).To(Equal(updatedTargetMachine.Status.CurrentStatus.Phase))
 		},
-			Entry("simple machine with creation Timeout(20 min)", &data{
+			Entry("Pending machine is marked as Failed when creation timeout (20min) has elapsed", &data{
 				setup: setup{
 					machines: []*machinev1.Machine{
 						newMachine(
 							&machinev1.MachineTemplateSpec{ObjectMeta: *newObjectMeta(&metav1.ObjectMeta{GenerateName: machineSet1Deploy1}, 0)},
-							&machinev1.MachineStatus{CurrentStatus: machinev1.CurrentStatus{Phase: machinev1.MachinePending, LastUpdateTime: metav1.NewTime(time.Now().Add(-25 * time.Minute))}},
-							nil, nil, map[string]string{machinev1.NodeLabelKey: "node-0-0"}, true, metav1.Now()),
+							&machinev1.MachineStatus{CurrentStatus: machinev1.CurrentStatus{Phase: machinev1.MachinePending}},
+							nil, nil, map[string]string{machinev1.NodeLabelKey: "node-0-0"}, true, metav1.NewTime(time.Now().Add(-25*time.Minute))),
+					},
+					targetMachineName: machineSet1Deploy1 + "-" + "0",
+				},
+				expect: expect{
+					retryPeriod:   machineutils.ShortRetry,
+					err:           errSuccessfulPhaseUpdate,
+					expectedPhase: machinev1.MachineFailed,
+				},
+			}),
+			Entry("Pending machine stays in the Pending phase if creation timeout (20min) has not elapsed", &data{
+				setup: setup{
+					machines: []*machinev1.Machine{
+						newMachine(
+							&machinev1.MachineTemplateSpec{ObjectMeta: *newObjectMeta(&metav1.ObjectMeta{GenerateName: machineSet1Deploy1}, 0)},
+							&machinev1.MachineStatus{CurrentStatus: machinev1.CurrentStatus{Phase: machinev1.MachinePending}},
+							nil, nil, map[string]string{machinev1.NodeLabelKey: "node-0-0"}, true, metav1.NewTime(time.Now().Add(-15*time.Minute))),
+					},
+					targetMachineName: machineSet1Deploy1 + "-" + "0",
+				},
+				expect: expect{
+					retryPeriod:   machineutils.LongRetry,
+					err:           nil,
+					expectedPhase: machinev1.MachinePending,
+				},
+			}),
+			Entry("Pending machine is marked as Failed when creation timeout (20min) has elapsed, even if lastUpdate time is recent", &data{
+				setup: setup{
+					machines: []*machinev1.Machine{
+						newMachine(
+							&machinev1.MachineTemplateSpec{ObjectMeta: *newObjectMeta(&metav1.ObjectMeta{GenerateName: machineSet1Deploy1}, 0)},
+							&machinev1.MachineStatus{CurrentStatus: machinev1.CurrentStatus{Phase: machinev1.MachinePending, LastUpdateTime: metav1.NewTime(time.Now().Add(-15 * time.Minute))}},
+							nil, nil, map[string]string{machinev1.NodeLabelKey: "node-0-0"}, true, metav1.NewTime(time.Now().Add(-25*time.Minute))),
 					},
 					targetMachineName: machineSet1Deploy1 + "-" + "0",
 				},