NCLAT holds Investment Under Reseller Agreement Lacks ‘Financial Debt’ Ingredients and Dismisses S. 7 Plea as Abuse of CIRP Process [Read Order]

The Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) held that the investment under the reseller agreement lacks ‘financial debt’ ingredients under the Insolvency and Bankruptcy Code and dismissed the application filed under Section 7 of the IBC by noting it as an abuse of the Corporate InsolvencyResolution Process (CIRP).

In this case, the appeal was filed by Rajesh Alfred under Section 61 of the Insolvency and Bankruptcy Code, 2016, National Company Law Tribunal, Allahabad Bench.

Coming to the brief facts of the case, the respondent, M/s Ketsaal Retails LLP, is engaged in the business of retail trade and related services. The appellant, on behalf of his proprietorship concern, M/s Anand Enterprises, entered into a Reseller Agreement with the respondent, whereby the appellant made a capital investment of Rs. 20,00,000 with a clear stipulation under Clause 4(m) of the Agreement that the respondent would pay an assured return of 7% per month on the said investment after an initial lock-in period of three months, during which no return was to be paid.

The Appellant initially invested Rs. 20 lakhs with the Respondent, which was later increased to Rs. 1 crore through two Addendum Agreements dated 17.05.2021 and 07.10.2021. In return, the Respondent assured monthly returns, starting at 7%, then 9%, and finally 12% (with 9% monthly and 3% annually).

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Although payments were made till November 2021, the respondent defaulted thereafter. No refund or additional payments were made in spite of the appellant's multiple admissions of liability and formal exit notice under Clause 5 of the Second Addendum.

On March 24, 2023, the appellant filed a petition under Section 7 of the IBC, alleging a financial debt of Rs. 2.77 crores. The NCLT heard oral arguments without a formal application after first setting the respondent ex parte. The NCLT ruled that the appellant was not a "financial creditor" and that the investment did not amount to a "financial debt," dismissing the petition on October 6, 2023.

It was contended by the assessee’s counsel that the order passed by NCLT, which dismissed the Section 7 Application filed by the Appellant on the ground that he is a "speculative investor," was factually misconceived and legally untenable.

The tribunal, after going through the records, noted that the appellant did not did not disburse funds to the respondent as a loan or borrowing.

The bench observed that the Reseller Agreement, which outlines the nature of the transaction, does not include any stipulations about time value of money. The purchase followed the Reseller Agreement, which emphasised profit margins over interest. Correspondence between parties does not convert commercial transactions into financial debts.

The tribunal also noted that the arbitration clause supported the idea that the disagreement should have been resolved through arbitration rather than the CIRP process under the Code.

The NCLAT, comprising Justice Rajesh Kumar Jain (Judicial Member), Naresh Salecha (Technical Member), and Indevar Pandey (Technical Member), held that the debt in question was not a financial debt as defined under the Code, due to which the appellant does not qualify as a ‘Financial Creditor’ under the Code and hence cannot invoke insolvency proceedings.