Profit-sharing O&M agreements do not constitute operational debt; prior cross-demands establish valid pre-existing disputes.

The Respondent (Owner) and the Appellant (Operator) entered into an Operation & Management (O&M) Agreement on 01.02.2021 for the operation of a sponge iron and power plant

Under the agreement, the Appellant was to pay a fixed "Usage Fee" to the Respondent, while the Appellant's "Service Fee" was based on a profit-sharing mechanism after deducting expenses and usage fees

The agreement was terminated via a Termination Agreement dated 25.11.2022, effective from 01.10.2022

A Balance Settlement Sheet dated 18.10.2022 indicated that Rs. 11,32,24,945/- was payable by the Appellant to the Respondent

Subsequently, the Respondent issued a Section 8 demand notice on 16.12.2023 and filed a Section 9 application against the Appellant

Months later, on 12.03.2024, the Appellant issued its own demand notice and filed a cross Section 9 application

The Adjudicating Authority (NCLT) rejected the Appellant's Section 9 application on 12.06.2025, citing a pre-existing dispute and the nature of the debt

1. Whether the profit-sharing arrangement under the O&M Agreement constitutes an "Operational Debt" under Section 5(21) of the Insolvency and Bankruptcy Code (IBC), 2016?

2. Whether there existed a "pre-existing dispute" between the parties prior to the issuance of the demand notice by the Appellant?

The court applied Section 5(21) of the IBC, which defines "operational debt" as a claim in respect of the provision of goods or services

It further applied the definition of "dispute" under Section 5(6) of the IBC, which includes the existence of the amount of debt or quality of service

The court relied on the "plausible contention" test established in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which requires the Adjudicating Authority to reject a Section 9 application if a dispute truly exists in fact and is not spurious or hypothetical

It also referenced the principle that courts must strictly interpret the clear and unequivocal terms of a contract as per Annaya Kocga Shetty v. Laxmibai Narayan

The Tribunal analyzed the O&M Agreement and observed that the "Service Fees" were not for a fixed service but were contingent on profit-sharing after the Operator (Appellant) paid "Usage Fees" to the Owner (Respondent)

Consequently, the agreement did not create a standard debtor-creditor relationship for the supply of goods or services under Section 5(21)

Regarding the pre-existing dispute, the Tribunal noted that the Respondent had already issued a Section 8 demand notice and filed a Section 9 petition against the Appellant before the Appellant issued its own demand notice

The Termination Agreement explicitly stated that the Operator would bear all liabilities and that no further consideration was due

The Tribunal dismissed the Appellant's reliance on an unsigned internal email regarding balance confirmation, holding that it did not override the formal settlement and the record of litigation initiated by the Respondent

The Tribunal held that the claim did not qualify as an operational debt due to the profit-sharing nature of the O&M Agreement

the court held that the Section 9 application was liable for rejection under Section 9(5)(ii)(d) as a pre-existing dispute was clearly established by the prior Section 8 notice and Section 9 filing by the Respondent, alongside the terms of the Termination Agreement