Agreement for Profit Sharing, Not Service Provision; Claim Does Not Qualify as 'Operational Debt' Under IBC S.5(21): NCLT New Delhi - 2025-08-22

Profit-Sharing Agreement Does Not Create 'Operational Debt', NCLT Dismisses Insolvency Plea

New Delhi: The National Company Law Tribunal (NCLT), New Delhi Bench, has dismissed a petition to initiate insolvency proceedings, ruling that claims arising from a profit-sharing based 'Operation and Management Agreement' do not qualify as "operational debt" under the Insolvency and Bankruptcy Code (IBC), 2016. The bench, comprising Hon'ble Member (Judicial) Shri Bachu Venkat Balaram Das and Hon'ble Member (Technical) Dr. Sanjeev Ranjan, held that the applicant was not an "Operational Creditor" as defined by the Code.

Case Background

The application was filed by M/s. Durgapur Corporation Private Limited (DCPL) under Section 9 of the IBC, seeking to initiate a Corporate Insolvency Resolution Process (CIRP) against M/s. Aryan Ispat & Power Private Limited (Aryan Ispat). DCPL claimed a default of ₹34.12 crores, stemming from an "Operation and Management Agreement" dated February 1, 2021.

Under this agreement, DCPL was appointed as the "Operator" to manage Aryan Ispat's Sponge Iron Plant, Power Plant, and Coal Washery for a ten-year period. The agreement was, however, mutually terminated effective October 1, 2022. DCPL's claim was composed of outstanding service fees, a security deposit, capital expenditure on a coal washery, and accrued interest.

Arguments of the Parties

Operational Creditor (DCPL): DCPL's counsel argued that they were appointed as a service provider to operate and manage the plant. They contended that Aryan Ispat had defaulted on payments for these services, including the reimbursement of a ₹5.72 crore capital expenditure and the refund of a ₹5 crore security deposit. To support their claim, DCPL presented balance confirmation letters from June 2023, which they argued constituted an admission of a liability of ₹14.74 crores by Aryan Ispat.

Corporate Debtor (Aryan Ispat): Representing Aryan Ispat, the counsel argued that the agreement was not for the provision of goods or services but was a contractual arrangement for profit sharing. They submitted that DCPL, as the "Operator," was responsible for all operational expenses and was entitled to the profits generated from the plant after paying a fixed monthly "Usage Fee" of ₹2 crores to Aryan Ispat.

Aryan Ispat's defense highlighted that the balance confirmation letters were unsigned and unstamped, making them unreliable as an acknowledgment of debt. Furthermore, they pointed to a clause in the termination agreement that explicitly stated all liabilities pertaining to the operational period would be borne by DCPL. It was also revealed that Aryan Ispat had already filed a Section 9 application against DCPL before the NCLT Kolkata Bench, indicating a pre-existing dispute between the parties.

Tribunal's Analysis and Key Findings

The NCLT conducted a thorough analysis of the "Operation and Management Agreement" to determine the nature of the relationship between the parties. The Tribunal's decision hinged on the interpretation of key clauses.

Nature of Agreement is Key: The bench found that the core of the agreement was a profit-sharing mechanism, not a typical service contract. The judgment emphasized Clause 5.1 of the agreement, which stated:

"As consideration for providing the services, the Operator shall be entitled to all the profits earned by the Owner from the plant... after deduction of the Usage Fees..."

The Tribunal observed that this structure negates a standard creditor-debtor relationship. It concluded, "We are further of the view that the instant case is not a typical case of providing goods or services by the Operational Creditor to the Corporate Debtor. As per the clauses of the said agreement it is purely a profit sharing mechanism."

Capital Expenditure Suggests Commercial Venture: The Tribunal noted that DCPL's own claim of making capital expenditure of over ₹5.72 crores supported the view that the arrangement was a commercial venture undertaken to earn profits, rather than a simple provision of services.

Claim Does Not Fall Under 'Operational Debt': Referring to Section 5(21) of the IBC, which defines "operational debt" as a claim related to the provision of goods or services, the NCLT concluded that the amount claimed by DCPL did not fit this definition. The judgment stated:

"From the nature of the Operation and Management Agreement... it is very much clear that the said agreement did not provided for transaction between operational creditor and corporate debtor for supply of goods or rendering of services within the meaning of Section 5(21) of the Insolvency and Bankruptcy Code, 2016, thus in the present application the claim is not in the nature of operational debt."

Consequently, the Tribunal held that DCPL could not be termed an "Operational Creditor" under Section 5(20) of the Code.

The Final Verdict

Based on its findings that the claim did not constitute an operational debt and that DCPL was not an operational creditor, the NCLT dismissed the application. The ruling underscores the importance of the underlying contractual relationship in determining the nature of a debt under the IBC and clarifies that claims arising from profit-sharing or joint venture-style agreements fall outside the scope of "operational debt."