NCLT Allahabad: An Agreement To Resell Products On An E-Commerce Platform Where The Amount Was Invested For Assured Profit Margins Does Not Fall Under ‘Financial Debt’ U/S 5(8) Of The IBC
The National Company Law Tribunal (‘NCLT’), Allahabad Bench comprising of Praveen Gupta (Judicial Member) and Mr. Ashish Verma (Technical Member) dismissed the petition. filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The petition was seeking initiation of a Corporate Insolvency Resolution Process (‘CIRP’) against Ketsaal Retail LLP (Corporate...
The National Company Law Tribunal (‘NCLT’), Allahabad Bench comprising of Praveen Gupta (Judicial Member) and Mr. Ashish Verma (Technical Member) dismissed the petition. filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The petition was seeking initiation of a Corporate Insolvency Resolution Process (‘CIRP’) against Ketsaal Retail LLP (Corporate Debtor) by Rajesh Alfred (Applicant), Sole Proprietor of Anand Enterprises.
The Tribunal held that an agreement to resell products on an e-commerce platform (Amazon) where the Applicant paid some amount with some assured profit margins would not confer the status of a ‘Financial Debt’ under Section 5(8) of the IBC.
Background Facts:
The Parties entered into a “Reseller Agreement” dated 07.12.2020 as per which the Applicant invested Rs. 20 Lakhs for an assured return margin of 7% per month on the invested amount.
All operational activities relating to the sale of products on Amazon were done by the Corporate Debtor itself, even though the Applicant’s Proprietorship was granted authorization to act as the Reseller for the Corporate Debtor. The Corporate Debtor had complete access to the ‘Amazon’ seller account of the Applicant and stored the products intended for sale on Amazon in its own warehouse and ensured the safety of these products.
The investment amount was increased from Rs. 20 Lakhs to Rs. 50 Lakhs as per the First Addendum dated 17.05.2021 with an increased profit margin of 9% per month from August 2021. Further, the investment amount was increased from Rs. 50 Lakhs to Rs. 1 crore with an increased profit margin of 12% per month from January 2022 with the second addendum.
The Corporate Debtor defaulted in payment of assured profit margins on the invested amount on 01.12.2021 which is even continuing till date. It is liable to pay Rs. 2.77 crores (Rs. 1 crore of Investment Amount and Rs. 1.77 Crores of Assured Profit Margins) as of 01.03.2022 as per Part-IV of the Petition.
Contentions of Corporate Debtor:
The Corporate Debtor argued that the Agreement with the Applicant was made not for taking any loan from it but to enter into a Reseller Agreement in which the products of the Corporate Debtor were provided by the Corporate Debtor to be sold by it on the Amazon Site.
Thus, there is no relation between the Applicant and Corporate Debtor and the amount outstanding is not a financial debt, and hence the Petition is not maintainable.
NCLT Verdict:
The NCLT Allahabad dismissed the Petition and held that an agreement to resell products on an e-commerce platform (Amazon) where the Applicant paid some amount with some assured profit margins would not confer the status of a ‘Financial Debt’ under Section 5(8) of the IBC.
The Tribunal observed that the amount invested by the Applicant does not fall within the meaning of ‘debt’ and is a consideration that shall be received in advance by the Corporate Debtor from time to time for the supply of goods within 15 days period from the date of receipt in advance. Even the return on the invested amount is in the form of the profit margin and not for paying any interest on the amount deposited.
The NCLT placed reliance on the definition of ‘Financial Debt’:
Section 5(8) of IBC: Financial Debt
a debt along with interest which is disbursed against the consideration for the time value of money and may include any of the events enumerated in the sub-clause (a) to (i).
It emphasized that it is to be seen whether the amount paid by the applicant to the Corporate Debtor, fulfills the other condition of “disbursement against consideration of time value and money”, to come within the definition of “Financial Creditor” having satisfied that the Corporate Debtor raised the amount through a transaction of forward sale and purchase under a Reseller Agreement having the commercial effect of a borrowing.
In the present case, the Agreement shows that the Applicant and Corporate Debtor are in the capacity of manufacturer and reseller for reselling the products on Amazon. The Applicant is entitled to receive the profit margin of 7% and 9% out of the profit amount and hence, for earning such profit margin, no time value of money on the amount paid is provided, the profit margin would be determined and shared on the sale price of the product as against the purchase price.
The nature of transactions does not come within the meaning of ‘Financial Creditor’, as in the case in hand “Assured Returns” are associated with the profit margin amount and this has nothing to do with the requirement of Section 5(8), the time value of money therefore, is grossly missing in the transaction in hand.
The Tribunal pointed out that the Reseller Agreement on the e-commerce platform with some assured profit margins as promised in the Agreement would not confer the status of a ‘financial debt’ to the amount due to the Applicant as the transaction does not have a consideration for the time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of the expression ‘Financial Debt’.
In conclusion, the Tribunal held that the petition filed under Section 7 of the IBC is not maintainable since the debt does not fall within the meaning of “financial debt” under Section 5(8) of the IBC.
Case Title: Rajesh Alfred vs. Ketsaal Retails LLP
Case No.: CP (IB) No.33/ALD/2023
Counsel for Financial Creditor: Sushant Singhal, Ajit Singh Joher, Anshita Agarwal, and Mani Bhadra Jain, Advocates.
Counsel for Respondent: Divyanshu Sarswat with Ajay Mishra, Advocates.