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2025 (12) TMI 109
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....eeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Respondent- M/s Ketsaal Retails LLP (Corporate Debtor) due to default in repayment of a financial debt of Rs. 2,77,00,000/-, comprising capital investment and assured returns. However, the Adjudicating Authority dismissed the petition on the ground that the Appellant did not qualify as a 'Financial Creditor' and the transaction in question did not amount to a 'Financial Debt' as defined under Section 5(8) of the Code. Aggrieved by these findings, the Appellant has approached this Appellate Tribunal. Brief facts: 2. The brief facts of the case are as follows: (i) M/s Ketsaal Retails LLP/ Respondent, was incorporated on 16.08.2017 under the Limited Liability Partnership Act, 2008, and is engaged in the business of retail trade and related services. (ii) On 07.12.2020, the Appellant, acting through 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....
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....as obligated to refund the total capital invested within 90 days via direct deposit, which the Respondent failed to comply with. (xi) On 20.08.2022, the Corporate Debtor admitted its liabilities towards the Financial Creditor under Notice Dated 20.08.2022 addressed to the Financial Creditor. (xii) On 05.11.2022, the Respondent issued another notice, admitting its responsibility and liability towards the Appellant, stating that operational failures had caused delays but confirming its intention to fulfil its commitments and avoid evasion of liabilities. (xiii) On 25.11.2022, the Corporate Debtor, vide letter dated 25.11.2022 addressed to the Financial Creditor, acknowledged the capital investment and the liability to return amounts with returns. (xiv) Despite the Appellant's clear request for dissolution of agreement and multiple acknowledgments from the Respondent, no repayment of capital or accrued returns was made. (xv) The Appellant thereafter, filed a petition under Section 7 of the Code before the Adjudicating Authority on 24.03.2023, seeking initiation of CIRP on account of default in repayment of a total financial debt amounting t....
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....yer. By treating the Appellant as a "speculative investor," the Hon'ble NCLT mixed distinct legal categories and ignored the commercial nature of the transaction. The Appellant is, therefore, not a speculative investor, but a financial creditor under Section 5(7) of the Code, having disbursed funds for a time-bound return as defined under Section 5(8) of the Code. 5. Ld. Counsel for the Appellant submitted that the disbursement of Rs. 1,00,00,000/- by the Appellant was a capital investment, not an advance or deposit for goods or services. The contractual documents-the main Agreement dated 07.12.2020 and the Addenda dated 17.05.2021 and 07.10.2021-provide for monthly Profit Margins/Assured Returns, which qualify as time value of money. Specifically, Clause 7 of the Agreement dated 07.12.2020 lays down the guaranteed monthly "Profit Margin" on the invested capital, while Clause 4 of the Addendum dated 17.05.2021 and Clause 5 of the Addendum dated 07.10.2021 reconfigure the return timelines, but reaffirm the assured nature of the payments. The said clauses fix financial liability on the Respondent and are neither contingent nor discretionary. 6. Ld. Counsel further submitted tha....
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.... Code. There is no factual or documentary basis for the NCLT's finding that the transaction was in the nature of goods sale. 9. Ld. Counsel for the Appellant argued that the impugned order fails to apply the binding ratio of the Hon'ble NCLAT in 'Nikhil Mehta & Sons (HUF) v. AMR Infrastructure Ltd.' [Company Appeal (AT)(Insolvency) No. 07 of 2017], where it was held that a transaction involving disbursement of funds for assured returns constitutes a financial debt under Section 5(8) of the Code. In that case, like in the present one, the investor had no intention to occupy or trade property, but had merely invested funds in the corporate entity for fixed returns, and default thereof was held sufficient to invoke Section 7 of the Code. 10. The counsel further relied on M/s Nikhil Mehta and Sons Vs. AMR Infrastructure Ltd. (supra), where the Hon'ble Appellate Tribunal held that structured returns on capital disbursed constitute a financial arrangement and, in the event of default, confer a right to file a petition under Section 7. The Appellant's case here stands on even stronger ground, given the explicit documentation of the returns, bank statements, and undisputed notices. B....
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.... was no sale of goods, no invoice, no GST component, and no linkage to any commodity or service. The investment was made purely for financial return, and the Respondent defaulted, thereby giving rise to a valid claim under Section 7 Code. The Appellant is a financial creditor and entitled to full protection under the Code. He prayed for setting aside the impugned order dated 06.10.2023 and allow the Section 7 application. Submissions of the Respondent 15. Per contra, Ld. Counsel for the Respondent stated that the impugned order dated 06.10.2023, passed by the Hon'ble National Company Law Tribunal, Allahabad Bench, is fully justified in law and does not suffer from any infirmity. The Ld. Adjudicating Authority rightly held that the Appellant is not a "Financial Creditor" under Section 5(7) of the Code, and the sum of Rs. 2,77,00,000/- claimed by the Appellant does not constitute a "Financial Debt" under Section 5(8) of the Code. 16. Counsel for the Respondent submits that for a debt to qualify as a "financial debt", it must involve a disbursement against the "consideration for time value of money", as held in the landmark judgment of the Hon'ble Supreme Court in Anuj ....
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....ounts to misuse of the Code as a tool for debt recovery, which has been strongly deprecated by the Hon'ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416. 22. The Respondent's counsel further stated that the cancellation of the Respondent's GST registration, which the Appellant is relying upon, was duly informed to the Appellant in writing. Despite this, the Appellant chose to initiate insolvency proceedings, indicating a malicious intent and commercial pressure tactic rather than a genuine case of financial default. 23. He further submitted that the Appellant has failed to prove any contractual relationship establishing him as a financial creditor. There is no evidence on record to show that the funds were disbursed as a loan with a repayment obligation. There is also no mention of such a liability in the books of accounts or balance sheet of the Respondent. 24. Ld. Counsel for the Respondent relies on the decision of this Tribunal in 'Neeraj Jain v. Cloudwalker Streaming Technologies' [Comp. App. (AT) (Ins.) No. 1354 of 2019 decided on 24.02.2020], wherein it was held that if the claimant fails to establish a financial deb....
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....Resolution Process under Section 7 of the Code. If the transaction does not meet the legal threshold of a financial debt then the appellant would not have locus to maintain proceedings under Section 7 of the Code and the petition is liable to be dismissed at the threshold. 31. The appellant relies on Section 5 (8) of the Code which defines the 'Financial debt' and types of transactions which are classified as Financial debt. The appellant in particular relies on Section 5 (8) (f) of the Code and states that his transaction is covered by the aforesaid Section. The relevant Section and sub-Sections are reproduced below: 5 (8) 'Financial debt' means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing 32. The Hon'ble Supreme Court in Anuj Jain, IRP of Jaypee Infratech Ltd. v. Axis Bank Ltd. (supra) has explained the ingredients of Financial debt in detail. The relevant paras of the Judgment are extracted below: "The essentials for financial d....
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....principal creditor to whom the financial debt is owed or he may be an assignee in terms of extended meaning of this definition but, and nevertheless, the requirement of existence of a debt being owed is not forsaken. 45. It is also evident that what is being dealt with and described in E Section 5(7) and in Section 5(8) is the transaction vis-à-vis the corporate debtor. Therefore, for a person to be designated as a financial creditor of the corporate debtor, it has to be shown that the corporate debtor owes a financial debt to such person. Understood this way, it becomes clear that a third party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of Part II of the Code. 47. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), leaves nothing to doubt that in the scheme of the Code, what is intended by the expression financial creditor' is a person who has direct engagement in the functioning of the corporate debtor, who is involved right from the beginning while assessing the viability of the corporate debtor, who would engage in restructuri....
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.... RECITALS A. Our parent company has developed a brand name "Ketsaal" as a seller on Amazon. B. Many of the products are best seller on Amazon and holds Top ranking in their Category. C. Our parent company KETSAAL RETAILS LLP owns the Trademark "Ketsaal" and other trademarks used in connection with the operation of KETSAAL Retails LLP as a seller on Amazon & Mall. D. Our parent company has granted you the right to sublicense the right to sell just some of the products under the brand name KETSAAL on Amazon. Apart from the products mentioned in this agreement, you are not authorized to sell any other products by name of Ketsaal E. You desire to sell products and operate under the brand name KETSAAL and we, in reliance on your representations, have approved your application In consideration of the foregoing and the mutual covenants and consideration below, you and we agree as follows: 1. DEFINITIONS For purposes of this Agreement, the terms below have the following definitions: E "Reseller" is the second party who is purchasing products from Ketsaal with only purpose to resell them on Amazon ....
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....'s an agreement between Ketsaal Retails LLP (Corporate Debtor) and M/s Anand Enterprises through its authorised person Mr. Rajesh Alfred (Appellant); (ii) The appellant is a Reseller of products of Corporate Debtor; (iii) Corporate Debtor has a brand name 'Ketsaal' as a seller on Amazon; (iv) Corporate Debtor has granted the right to sell to the appellant, some of the products of under brand name Ketsaal on Amazon; (v) The Appellant who is reseller is defined as the second party who is purchasing products from Ketsaal with only purpose to resell them on Amazon. (vi) The relationship between the parties shall be that of seller and buyer and not that of principle and agent; (vii) The reseller agrees to pay the consideration amount of Rs. 20 lakhs at the time of signing the agreement; (viii) The sale of the goods by Ketsaal shall be on advance payment by RTGS/Demand Draft/cheque/NEFT/IMPS against supplies made as may be required by Ketsaal from time to time; (ix) The reseller has to agree to re-invest the amount for first six months which he gets from the Amazon subject to amazon payment cycle, with Ketsaal ....
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....lear that the aforesaid profit margin under the reseller agreement lacks the essential ingredients of financial debt as claimed by the appellant under Section 5 (8) (f) of the Code. 39. In many commercial transactions, particularly in distributorship, reseller agreement or joint ventures the parties agree to fixed return or margin based compensation. However, such arrangements do not fall under the scope of financial debt under the Code unless they are predicated on disbursement of money that carries the 'time value of money' as an essential ingredient. This Appellate Tribunal in Ambica Enclave Pvt. Ltd. v. Ashrae Baba Infra Projects Pvt. Ltd. (supra) has held that and advanced payment made for commercial purposes, even if it includes clauses relating to fixed returns, will not constitute a financial debt unless it was clearly structured as a loan or borrowing. 40. Similarly, this Appellate Tribunal in Neeraj Jain v. Cloudwalker Streaming Technologies (supra) held that contributions made by individuals or entities as part of business partnership or collaborations without the clear intention of re-payment with interest, do not qualify as Financial debt. In the present case als....