Is a Profit-Sharing Investment a Financial Debt under the IBC? Joint Ventures, Section 5(8) and the Realpro Realty Decision

Two parties pool money to develop a property. One puts in seventy-five per cent, the other twenty-five. They share costs, profits and losses in the same ratio. The document calls the contribution a “profit-sharing loan” and provides for interest if a payment is delayed. When the project sours, can the smaller contributor file a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as a financial creditor, or does the profit-sharing investment qualify as financial debt under the IBC?

The National Company Law Appellate Tribunal (“NCLAT”) answered no in M/s Realpro Realty Solutions Pvt. Ltd. v. Sanskar Projects and Housing Ltd., Company Appeal (AT) (Insolvency) No. 374 of 2023, decided on 13 December 2023 by a Bench of Justice Ashok Bhushan (Chairperson) with Barun Mitra and Arun Baroka (Members, Technical).

The Statutory Test

Section 5(8) defines “financial debt” as a debt along with interest, if any, which is disbursed against the consideration for the time value of money, and then lists nine inclusive categories, among them money borrowed against payment of interest and, in clause (f), any amount raised under any other transaction having the commercial effect of a borrowing. Section 5(7) defines a “financial creditor” as a person to whom a financial debt is owed.

The Supreme Court settled the essential condition in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401: there must be disbursal, and the disbursal must be against consideration for the time value of money. In Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, the Court held that an interest-free term loan also qualifies, so the absence of interest is not decisive.

The Facts and the Reasoning

The agreement recited that the parties had “decided to make joint investment/acquisition” of specified floors of a Delhi property “for common objective to earn and share profits or gain”. Capital contribution was in the ratio 75:25; construction cost, statutory fees, provident fund, employees’ state insurance and other expenses were to be shared in the same ratio; the investor was to bear fifteen per cent of the working profit towards administration and indirect expenses; profits were to be shared 75:25; and interest at fifteen per cent per annum was payable by either side on delayed payment. A miscellaneous clause said that nothing in the agreement should be construed as creating a partnership or joint venture.

The Adjudicating Authority dismissed the Section 7 application, and the NCLAT affirmed. Its reasoning turned on four points.

The label does not decide the character. The appellant relied on the expression “profit-sharing loan” and on the disclaimer clause. The Appellate Tribunal read the agreement “in a composite and holistic manner”, finding “unmistakable signs of reciprocal rights and obligations… besides evidence of common participation as well as sharing of profits and losses”. A clause denying a joint venture does not convert a risk-sharing arrangement into a loan.

Sharing losses is the tell. A lender is repaid whether or not the venture profits. A party that bears twenty-five per cent of the losses, of the construction cost and of the statutory levies is exposed to the business, not to a borrower’s credit. The Tribunal held that money so provided “tantamount to financing the operations of the joint venture and not a disbursal of loan for the purposes of exclusive utilization by the Respondent”.

Interest on late payment is not consideration for the time value of money. The fifteen per cent rate was payable by either party on delayed settlement of amounts due between them. It compensated for delay in a reciprocal arrangement; it was not the return on a disbursal.

A contractual breach is not a default under the Code. The Tribunal added that a Section 7 application is not maintainable for an alleged breach of the terms of a contract, and that questions of breach fall outside the summary nature of proceedings under the Code. It expressly left the investor free to pursue other remedies, including the specific performance clause in the agreement.

The Tribunal distinguished Mack Soft Tech Pvt. Ltd. v. Quinn Logistics India Ltd., where the disburser had acquired the majority shareholding of the corporate debtor, and that context supported the finding of disbursal for the time value of money.

How to Tell the Two Apart?

No single factor is conclusive. The Supreme Court in Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. (25 April 2024) directed attention to the real nature of the transaction as it appears from the documents read as a whole, and held that a transaction may be a financial debt under the IBC even where the documents do not use that language, if the substance is a disbursal against consideration for the time value of money.

The Changes from 26 May 2026

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (Act 6 of 2026), in force in the relevant respects from 26 May 2026, did not alter the core of Section 5(8), but three changes matter to an investor considering a Section 7 petition:

• Section 7(5), as substituted, requires the Adjudicating Authority to admit the application within fourteen days where default, completeness and the absence of disciplinary proceedings against the proposed resolution professional are established, with Explanation I stating that where the Authority is so satisfied there is no other ground on which the application may be rejected. This displaces the discretion recognised in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022). It makes the threshold question — is this a financial debt at all — the decisive battleground.
• Explanation II to Section 7(5) treats a record of default with an information utility, where the debt is owed to a financial institution and the application is filed by it, as sufficient to ascertain default.
• Section 64A introduces a penalty of not less than ₹1 lakh and up to ₹2 crore for initiating frivolous or vexatious proceedings under Part II, which raises the cost of using the Code as a substitute for a civil suit.

The long-standing bar in Section 65 on initiating proceedings fraudulently or with malicious intent for a purpose other than resolution or liquidation continues to apply.

Practical Implications

For investors. If insolvency remedies matter, the arrangement must be documented as a loan: a stated principal, a repayment schedule, a return not contingent on project profit, and accounting treatment as borrowing in both parties’ books. Calling a contribution a “loan” while agreeing to share losses achieves the opposite of what is intended.

For developers and promoters. Revenue-sharing and collaboration structures carry a corresponding advantage: the counterparty cannot ordinarily trigger a corporate insolvency resolution process on a disputed profit entitlement. That advantage depends on the documents reflecting genuine risk-sharing, not on a label.

For both. Disputes about shares of profit, cost and account are contractual, and the forum for them is a civil court or the agreed arbitral tribunal. The Code is a collective proceeding for resolving insolvency, and it is not designed to decide who owes what under a collaboration agreement.

Frequently Asked Questions

Can a profit-sharing investment qualify as financial debt under the IBC?
Not necessarily. Where the investor shares project losses, costs and profits, the arrangement may be a joint venture or investment rather than financial debt.

Can an investor file a Section 7 application for a profit-sharing dispute?
Not where the underlying transaction does not constitute financial debt. A contractual dispute may need to be pursued through civil or agreed arbitral remedies.

Does calling an investment a “loan” make it financial debt?
No. The substance of the transaction matters. The agreement must be read as a whole to determine whether there was a disbursal against the consideration for the time value of money.

Is interest enough to establish financial debt under the IBC?
No. Interest payable for delayed payments in a reciprocal arrangement does not, by itself, establish consideration for the time value of money.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. M/s Realpro Realty Solutions Pvt. Ltd. v. Sanskar Projects and Housing Ltd., Company Appeal (AT) (Insolvency) No. 374 of 2023, NCLAT, Principal Bench, New Delhi, 13 December 2023 — Indian Kanoon
2. Insolvency and Bankruptcy Code, 2016 — Sections 3(11), 3(12), 5(7), 5(8), 7, 64A, 65 (as amended) — IBBI – Legal Framework
3. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
4. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, Supreme Court of India
5. Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, Supreme Court of India
6. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, Supreme Court of India
7. Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd., Supreme Court of India, 25 April 2024

Authorized by Prapti Bhatt