NCLT clarifies IBC applicability: Commercial profit-sharing not a trigger for CIRP

 In a recent ruling, the NCLT, Mumbai Bench (‘Tribunal’) held that a claim arising from a revenue or profit-sharing arrangement under film rights and co-production agreements does not qualify as 'operational debt' within the meaning of Section 5(12) of the IBC. The Tribunal held that the petitioner, being a commercial partner, sharing profits from the exploitation of cinematographic rights, could not be treated as a supplier of goods or services so as to invoke the corporate insolvency resolution process.

In this case, the operational creditor, filed a petition for initiation of Corporate Insolvency Resolution Process against the corporate debtor, for an alleged default. The claim arose under two agreements — a Film Rights Acquisition Agreement executed in respect of the film English Vinglish, and a Film Co-Production Agreement in respect of the film Ki and Ka. Under both agreements, the parties had agreed to share profits in the ratio of 50:50 after recoupment of the minimum guarantee amount, commission, and distribution expenses by the corporate debtor. The petitioner contended that the corporate debtor had, vide an email dated 15th February 2023, acknowledged the amounts of Rs. 2.10 crs and Rs. 1.22 crs as payable in respect of both films, and that its failure to remit these amounts constituted a default. The corporate debtor opposed the petition on several grounds, including that the claim was barred by limitation, that the agreements were insufficiently stamped, that the petitioner was a commercial co-investor and not a service provider, and that negotiations for mutual adjustment of accounts under other films were ongoing between the parties.

Upon examining the nature of the claim, the Tribunal noted that the petitioner had not raised any invoice for goods supplied or services rendered, and that its claim was, in essence, a demand for its 50% share of profits arising from exploitation of cinematographic rights across various commercial sources. The Tribunal held that a revenue-sharing or profit-sharing arrangement is fundamentally different from a transaction involving supply of goods or services as such an arrangement is essentially in the nature of a joint venture and that the amounts recoverable thereunder cannot be equated with an operational debt under the IBC. It further held that such a claim is more appropriately agitated before a Civil Court. On the question of time barred limitation, the Tribunal noted that the corporate debtor's acknowledgment of dues vide email and the dates of last payments were not conclusively established, and accordingly decided this point in favour of the petitioner. However, since the petitioner failed on the primary issue of the claim not constituting an operational debt, the Tribunal dismissed the petition.

This ruling provides important clarity on the scope of “operational debt” under the IBC, particularly in the context of businesses where revenue-sharing structures are common. It reinforces the principle that claims arising from commercial profit-sharing arrangements, even where amounts are acknowledged as payable, may not meet the threshold for initiation of insolvency proceedings and would need to be pursued through appropriate civil remedies.