The National Company Law Appellate Tribunal, Principal Bench, New Delhi ("NCLAT") in its decision dated July 3, 2025 in the matter of Rajesh Alfred v. Ketsaal Retail LLP, Company Appeal (AT) (Ins) No. 1563 of 2023, held that amounts advanced pursuant to a commercial arrangement providing for fixed returns or profit margin based compensation, do not qualify as a 'financial debt' under the Insolvency and Bankruptcy Code, 2016 ("Code"), if the essential ingredient of 'time value of money' is missing.
Factual Background
Messrs. Ketsaal Retail LLP ("Respondent") had entered into a reseller agreement with Mr. Rajesh Alfred (acting through his proprietorship Messrs. Anand Enterprises) ("Appellant"), whereby the Appellant initially made a capital investment of Rs. 20,00,000 (Rupees twenty lac) and the Appellant was entitled to 7% (seven percent) of the profit ("Reseller Agreement"). Thereafter, through addendums made to the Reseller Agreement, the capital investment made by the Appellant was increased to Rs. 1,00,00,000 (Rupees one crore), and the corresponding profit percentage was increased to 12% (twelve percent).
The Respondent defaulted in making payments from December 1, 2021, following which the Appellant filed an application under Section 7 of the Code on March 24, 2023, claiming default in repayment of a financial debt totaling Rs. 2,77,00,000 (Rupees two crore seventy-seven lac) in respect of the principal and accrued returns. The National Company Law Tribunal, Allahabad Bench ("Adjudicating Authority") dismissed the said application on October 6, 2023, ruling that the Appellant was not a 'financial creditor' of the Respondent and that the amounts invested by the Appellant and the returns promised did not constitute a 'financial debt' under the Code, as the Appellant was merely a 'speculative investor'. Being aggrieved by this order of the Adjudicating Authority, the Appellant filed an appeal before the NCLAT.
Contentions
Appellant's Contentions
The Appellant contended that that he was not a mere 'speculative investor' as he did not invest with the intention to acquire the property or to seek resale profits; on the contrary, he entered into a financial arrangement with the Respondent, whereby he was contractually entitled to assured returns, which qualifies as time value of money. The Appellant further contended that this fixed financial liability imposed on the Respondent, which was neither contingent nor discretionary, demonstrated that the Appellant's investment was a structured financial investment, backed by legally enforceable agreements.
Accordingly, the Appellant insisted that he should be recognized as a 'financial creditor' of the Respondent under the Code and the application made by the Appellant under Section 7 of the Code should be allowed.
Respondent's Contentions
The Respondent stated that the transaction under the Reseller Agreement was a commercial business arrangement, wherein the Appellant was engaged as a reseller of the Respondent's products on e-commerce platforms, and the 'assured returns' were mere profit margins or commissions from sale of products. Hence, the Appellant was a commercial associate of the Respondent with a share in business profits, and not a lender.
The Respondent further contended that the absence of a loan agreement, promissory note, fixed repayment schedule, or any formal acknowledgment of borrowing evidences that no financial debt was availed. Consequently, the Respondent prayed for dismissal of the appeal before NCLAT.
NCLAT's decision
Placing reliance on the decision of the Supreme Court of India in the case of Anuj Jain, IRP of Jaypee Infratech Limited v. Axis Bank Limited, (2020) 8 SCC 401, the NCLAT noted that "time value of money is one of the key ingredients for a debt to be treated as Financial debt". The NCLAT observed that the Reseller Agreement was clearly a commercial agreement for resale of products and not a financial arrangement, and the assured returns being claimed by the Appellant were nothing more than a share in profits. The NCLAT stated that the Appellant's reliance on emails and account entries acknowledging unpaid amounts was insufficient to transform the commercial transaction into a financial debt.
The NCLAT, relying on its decisions in Ambika Enclave Private Limited v. Shreesai Baba Infra Projects Private Limited, Comp. App. (AT) (Ins.) No. 1034 of 2022, and Neeraj Jain v. Cloudwalker Streaming Technologies Private Limited, 2020 SCC OnLine NCLAT 445, held that the Reseller Agreement did not evidence any lending relationship between the Appellant and the Respondent, and lacked the essential ingredients of a 'financial debt' as defined under Section 5(8) of the Code. Hence the appeal was dismissed.
Conclusion
The NCLAT, while rendering its decision, acknowledged that in certain types of commercial transactions, such as distributorships, reseller agreements or joint ventures, the parties thereto agree on a fixed return or margin-based compensation. The NCLAT however noted that such arrangements would not fall within the ambit of 'financial debt' under the Code, unless parties have specifically agreed that the advance has been made against the consideration of time value of money.
This judgement also reinforces the view that a 'one size fits all' approach cannot be followed while determining whether amounts advanced pursuant to a complex commercial transaction are in the nature of a 'financial debt'.
Please find a copy of the judgement here.
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