NCLT Allahabad: Reseller Agreement with Assured Profit Margins Not Covered Under IBC's Financial Debt Definition

NCLT Allahabad: Reseller Agreement with Assured Profit Margins Not Covered Under IBC's Financial Debt Definition

The National Company Law Tribunal (NCLT) in Allahabad, consisting of Judicial Member Praveen Gupta and Technical Member Ashish Verma, dismissed a petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) by Sole Proprietor Rajesh Alfred of Anand Enterprises to initiate Corporate Insolvency Resolution Process (CIRP) against Ketsaal Retail LLP (Corporate Debtor).

The Tribunal ruled that an agreement to resell products on an e-commerce platform (Amazon) for a guaranteed profit margin does not qualify as a "financial debt" under Section 5(8) of the IBC.

The Applicant entered into a Reseller Agreement with the Corporate Debtor on December 7, 2020, investing ₹20 lakh with an assured return of 7 per cent per month. The Corporate Debtor handled all operational activities, even though the Applicant was authorised as the Reseller. The Corporate Debtor had full access to the Applicant's Amazon seller account and stored the products in its warehouse.

The investment amount was increased to ₹50 lakh in May 2021 with an increased profit margin of 9 per cent per month from August 2021. In January 2022, the investment amount was further increased to ₹1 crore with an increased profit margin of 12 per cent per month.

The Corporate Debtor defaulted on the assured profit margins on December 1, 2021, and owes the Applicant ₹2.77 crore as of March 1, 2022.

The Corporate Debtor contended that the agreement with the Applicant was not a loan, but a reseller agreement under which the Corporate Debtor provided its products to the Applicant for sale on Amazon.

Therefore, the Applicant and Corporate Debtor have no relationship, the outstanding amount is not a financial debt, and the petition is not maintainable, the Corporate Debtor argued.

The NCLT-Allahabad dismissed the petition, ruling that an agreement to resell products on an e-commerce platform (Amazon) with an assured profit margin does not qualify as a "financial debt" under Section 5(8) of the IBC.

The Tribunal found that the amount invested by the Applicant is not a debt, but a consideration to be received by the Corporate Debtor in advance for the supply of goods within 15 days. The return on the invested amount is a profit margin, not interest.

The NCLT placed reliance on the definition of "financial debt," which is defined as "a debt, along with interest, that 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).”

The Tribunal emphasised that it must be determined whether the amount paid by the applicant to the corporate debtor satisfies the other condition of disbursement against consideration of time value and money to meet the definition of "financial creditor," given that the corporate debtor raised the amount through a forward sale and purchase transaction under a reseller agreement with the commercial effect of a borrowing.

In this case, the agreement showed that the applicant and corporate debtor were a manufacturer and a reseller of products on Amazon. The applicant was entitled to a profit margin of 7 per cent and 9 per cent of the profit amount, which was to be determined and shared on the sale price of the product rather than the purchase price, as no time value of money was provided for earning this profit margin.

The nature of the transactions does not meet the definition of "financial creditor" under Section 5(8) because the "assured returns" are associated with the profit margin amount, which is unrelated to the requirement of the time value of money. Therefore, the time value of money is grossly missing in the present transaction, the Tribunal observed.

The Tribunal held that the e-commerce platform reseller agreement with assured profit margins did not confer the status of "financial debt" on the amount due to the applicant because the transaction lacked consideration for the time value of money, which is essential for meeting the requirements of the term "financial debt."

The Tribunal dismissed the petition filed under Section 7 of the IBC because the debt did not qualify as "financial debt" under Section 5(8) of the IBC.