The National Company Law Appellate Tribunal has clarified that a profit-sharing arrangement under an Operation & Management Agreement cannot constitute operational debt under the Insolvency and Bankruptcy Code, 2016. The judgment reinforces that mere contractual entitlement to a share of profits, without a clear obligation to pay for goods or services rendered, falls outside the statutory definition of operational debt.
Background & Facts
The Dispute
The dispute arose between M/s. Durgapur Corporation Private Limited (DCPL), the Appellant and Operational Creditor, and M/s. Aryan Ispat & Power Private Limited (Aryan Ispat), the Corporate Debtor. DCPL sought to initiate Corporate Insolvency Resolution Process (CIRP) against Aryan Ispat under Section 9 of the Insolvency and Bankruptcy Code, 2016, claiming an unpaid operational debt of Rs. 34,12,10,212. Aryan Ispat opposed the application, asserting that no debt was due and that a pre-existing dispute existed.
Key Facts
- Aryan Ispat owned a sponge iron manufacturing plant and 18MW power plant in Odisha, operating on leasehold and privately owned land.
- On 01.02.2021, the parties entered into an Operation & Management Agreement (O&M Agreement) for a term of 10 years.
- Under the O&M Agreement, DCPL (Operator) was to manage and operate the plant, while Aryan Ispat (Owner) retained ownership of assets.
- DCPL was required to pay a fixed monthly Usage Fee of Rs. 2 crore to Aryan Ispat, escalating by Rs. 15 lakh per month upon power export and by 7% every three years.
- DCPL’s compensation, termed "Service Fees," was defined as its share of profits earned by the plant after deduction of Usage Fees and operational expenses.
- The Agreement explicitly excluded the Railway Siding business from profit-sharing, assigning it to Aryan Ispat with a 75:25 profit split.
- On 25.11.2022, the parties executed a Termination Agreement, effective 01.10.2022, which stated that all liabilities arising from 01.02.2021 to 30.09.2022 were to be borne and settled by DCPL.
- A Balance Settlement Sheet dated 18.10.2022, signed by both parties, indicated that DCPL owed Aryan Ispat Rs. 11,32,24,945.
- On 16.12.2023, Aryan Ispat issued a demand notice under Section 8 and filed a Section 9 application against DCPL for Rs. 5,66,26,383.
- DCPL issued its own demand notice on 12.03.2024 and filed the Section 9 application now under appeal on 16.04.2024.
- DCPL relied on an email dated 15.06.2023 from Aryan Ispat’s Finance Department as an acknowledgment of Rs. 14,74,72,100, but the email bore no signature, stamp, or authorized sender identification.
Procedural History
- 01.02.2021: O&M Agreement executed between DCPL and Aryan Ispat.
- 18.10.2022: Balance Settlement Sheet prepared and signed by both parties.
- 25.11.2022: Termination Agreement executed, effective 01.10.2022.
- 16.12.2023: Aryan Ispat issued Section 8 demand notice and filed Section 9 application before NCLT Kolkata (C.P. IB-123(KE)/2023).
- 12.03.2024: DCPL issued Section 8 demand notice for Rs. 34,12,10,212.
- 16.04.2024: DCPL filed Section 9 application before NCLT Delhi (C.P. IB-241(ND)/2024).
- 12.06.2025: NCLT Delhi rejected DCPL’s Section 9 application on two grounds: (i) no operational debt existed; (ii) pre-existing dispute.
- 28.06.2025: DCPL filed Company Appeal (AT) (Insolvency) No. 1218 of 2025 before NCLAT.
- 10.04.2026: NCLAT delivered judgment dismissing the appeal.
The Parties' Positions
For the Appellant (DCPL)
- Argued that the O&M Agreement was a service contract where it provided operational expertise in exchange for Service Fees.
- Contended that the Service Fees were payable regardless of profit, and the profit-sharing mechanism was merely a calculation method.
- Relied on the email dated 15.06.2023 as an acknowledgment of debt under the Information Technology Act, 2000.
- Asserted that the Termination Agreement and Balance Settlement Sheet were not binding as they were not fully implemented.
- Claimed that Aryan Ispat’s Section 9 application was withdrawn on 23.04.2025, negating any pre-existing dispute.
For the Respondent (Aryan Ispat)
- Maintained that the O&M Agreement was not a service contract but a profit-sharing arrangement where DCPL bore all operational costs and risks.
- Argued that Service Fees were contingent on profits and thus not a fixed liability.
- Highlighted that the Termination Agreement explicitly made DCPL liable for all past and future liabilities.
- Pointed to the Balance Settlement Sheet signed by DCPL as conclusive evidence of its liability to Aryan Ispat.
- Emphasized that its Section 8 notice and Section 9 application predated DCPL’s claim, establishing a pre-existing dispute.
Relief Sought
DCPL sought: (i) setting aside of the NCLT order dated 12.06.2025; (ii) admission of its Section 9 application; (iii) initiation of CIRP against Aryan Ispat for Rs. 34,12,10,212; (iv) recovery of Rs. 5 crore security deposit; and (v) costs.
The Legal Issue
The central question was whether a contractual arrangement entitling a party to a share of profits, after deduction of usage fees and expenses, constitutes "operational debt" under Section 5(21) of the Insolvency and Bankruptcy Code, 2016, and whether a pre-existing dispute, evidenced by a prior Section 8 notice and Section 9 application, bars initiation of CIRP under Section 9(5)(ii)(d).
Arguments Presented
For the Appellant
DCPL relied on Annaya Kocga Shetty v. Laxmibai Narayan (2025 SCC Online SC 758) to argue that the O&M Agreement’s language must be read as written, and the term "Service Fees" clearly indicated a service obligation. It cited Sudarshan Cargo v. Techvac Engineering (2013 SCC Online Kar 5063) to assert that email acknowledgments are legally valid under the IT Act, 2000. It further contended that the Termination Agreement was not a final settlement and that Aryan Ispat’s Section 9 application had been withdrawn, eliminating any pre-existing dispute.
For the Respondent
Aryan Ispat relied on Mobilox Innovations v. Kirusa Software (2018 SCC 353) to argue that the existence of a plausible dispute, supported by documentary evidence (Termination Agreement, Balance Settlement Sheet), was sufficient to reject the Section 9 application. It emphasized that the O&M Agreement’s structure - where DCPL paid Usage Fees and received only residual profits - demonstrated no debt-creating obligation. It also cited Shree Ambica Medical Stores v. Surat People’s Coop. Bank (2020 SCC 564) to assert that courts cannot rewrite contracts.
The Court's Analysis
The NCLAT undertook a detailed textual analysis of the O&M Agreement, focusing on Clause 5.1, which defined Service Fees as "all the profits earned by the Owner from the Plant after deduction of the Usage Fees." The Tribunal held that this structure did not create a debt obligation on Aryan Ispat to pay DCPL, but rather made DCPL’s compensation contingent on the plant’s profitability. The Tribunal observed:
"The Agreement does not create any debt or financial liability payable by the Corporate Debtor to the Operational Creditor, but merely defines the entitlement of the operator to a share of profits arising from the operations of the plant."
The Court further noted that the payment of Usage Fees was an obligation of DCPL to Aryan Ispat, not vice versa, and that the Service Fees were not a fixed fee but a residual share after all expenses and Usage Fees were deducted. This, the Court held, was inconsistent with the definition of operational debt under Section 5(21), which requires a claim for goods or services rendered.
Regarding the pre-existing dispute, the Tribunal examined the timeline: Aryan Ispat issued its Section 8 notice on 16.12.2023 and filed its Section 9 application before DCPL’s claim. The Termination Agreement and Balance Settlement Sheet, both dated prior to DCPL’s demand notice, clearly indicated that DCPL owed Aryan Ispat Rs. 11,32,24,945. The Court held that this constituted a dispute under Section 5(6), which includes "the existence of the amount of debt."
The Court rejected DCPL’s reliance on the email dated 15.06.2023, noting it lacked authentication, sender identification, or formal acknowledgment. It affirmed that under Mobilox, the Adjudicating Authority need not determine the merits of the dispute, only whether a plausible contention exists. The Court concluded:
"The dispute raised by the Corporate Debtor is neither spurious nor illusory. It is based on a signed termination agreement, a balance sheet, and a prior Section 9 application - all of which satisfy the threshold for rejecting a Section 9 application under Section 9(5)(ii)(d)."
The Verdict
The appeal was dismissed. The NCLAT upheld the NCLT’s order rejecting the Section 9 application. The Court held that: (i) the O&M Agreement did not create operational debt as defined under Section 5(21) of the I&B Code; (ii) a pre-existing dispute existed as of 16.12.2023, prior to DCPL’s demand notice; and (iii) the email acknowledgment was inadmissible as evidence of debt. No CIRP was initiated. The security deposit claim was not adjudicated as it was not part of the Section 9 application.
What This Means For Similar Cases
Profit-Sharing Does Not Equal Operational Debt
- Practitioners must distinguish between service contracts with fixed fees and profit-sharing arrangements where compensation is contingent on business outcomes.
- Claims based on profit-sharing mechanisms will not qualify as operational debt unless there is a clear, fixed obligation to pay for services rendered.
- Drafters of O&M agreements must explicitly state whether fees are fixed or profit-linked to avoid ambiguity in insolvency proceedings.
Pre-Existing Dispute Threshold Is Low
- A prior Section 8 notice and Section 9 application by the corporate debtor, even if later withdrawn, constitute a plausible dispute under Mobilox.
- Signed settlement documents, even if unimplemented, can establish a dispute if they reflect a claim for money.
- Operational creditors must ensure their claims are not preceded by any counter-claim, even if unresolved.
Email Acknowledgments Require Authentication
- Unauthenticated emails from internal departments, without signatures or authorized senders, cannot serve as proof of debt.
- To establish acknowledgment under Section 18 of the Limitation Act or for debt recognition, parties must ensure emails are sent by authorized signatories with clear identification.
- Best practice: Use digital signatures or formal letters for debt acknowledgments in commercial agreements.
