E-Commerce Seller Insolvency and Payment Gateway Risk for Platforms

Whether funds sitting in a payment aggregator's escrow account form part of an insolvent marketplace seller's estate has not been settled by any Indian court or tribunal, though the escrow is structured under the Reserve Bank of India's Guidelines on Regulation of Payment Aggregators and Payment Gateways. Section 36(4) of the Insolvency and Bankruptcy Code, 2016 excludes assets held in trust or as bailment from the liquidation estate, an argument that favours the platform where the buyer's order has not been fulfilled, though a completed sale gives the seller an accrued receivable that a resolution professional will contest. This article maps escrow, refunds, stock and platform claims across the insolvency.

Where the Money Actually Sits When a Marketplace Seller Fails

A buyer pays by card, unified payments interface or net banking. The money travels through the acquiring bank into the escrow account of a payment aggregator, and is settled to the seller only after a settlement cycle has run. At any given moment an active marketplace is holding several days of gross transaction value in transit for each seller, alongside a rolling reserve, a security deposit and unpaid commission. On the day an admission order is passed under section 7 or section 9 of the Insolvency and Bankruptcy Code, 2016 (the Code), every rupee of that becomes contested, and the resolution professional's first letter usually asks for the gross balance.

The Escrow Architecture Under the 2020 Payment Aggregator Guidelines

The architecture comes from the Reserve Bank of India's Guidelines on Regulation of Payment Aggregators and Payment Gateways dated 17 March 2020, effective from 1 April 2020 and amended since. A non-bank payment aggregator must be authorised under the Payment and Settlement Systems Act, 2007 (the PSS Act), and amounts it collects must be held in an escrow account with a scheduled commercial bank, with only one such bank used at any one time. The end of day balance in the escrow cannot fall below the amounts collected from customers and due to merchants. Credits and debits to the account are prescribed rather than open, and settlement to merchants must be completed within short cycles measured from the transaction date or from intimation of shipment or delivery, depending on where the delivery obligation sits.

One feature of the framework deserves attention because it is frequently missed. For the purpose of maintaining that escrow, a payment aggregator is treated as operating a designated payment system under section 23A of the PSS Act. That is the statutory device which permits a non-bank to hold other people's money at all, and it puts the pooled balance inside a regulated settlement architecture rather than in an ordinary commercial account. What it does not do is answer the proprietary question. The Guidelines ring-fence funds in transit; they do not say whose funds they are when one merchant collapses.

Does Escrow Money Belong to the Insolvent Seller?

This is the question that decides how much is at stake, and it has no clean answer in India yet.

What Do the Trust and Bailment Exclusions Under Section 36(4) Cover?

Section 36 of the Code builds the liquidation estate out of assets over which the corporate debtor has ownership rights, and section 36(4) then carves out what does not go in. The first carve-out is assets owned by a third party which are in the possession of the corporate debtor, expressly including assets held in trust for any third party. The Code applies the same logic during the resolution process: the explanation to section 18 excludes from the assets the resolution professional may take control of any asset owned by a third party and held by the corporate debtor under trust or under contractual arrangements including bailment. Ownership, not custody, is the test at both stages.

These exclusions have real force. In Sunil Kumar Jain v. Sundaresh Bhatt [2022 INSC 437, decided on 19 April 2022] the Supreme Court held that because section 36(4) keeps provident fund, pension fund and gratuity fund monies out of the liquidation estate, the liquidator has no claim over them at all and the workmen must be paid from those funds outside the distribution waterfall. The decision matters here not for its subject but for its method: where the Code says an identified fund is not estate property, the liquidator's demand simply fails. It is also the limit of the available authority, because the Court was applying a specific statutory exclusion for named funds, not deciding the character of commercial money sitting in a payment escrow.

Why Is It Unsettled Whether Escrow Funds Belong to the Estate?

The case for inclusion is straightforward. Once a buyer has paid and the order has completed, the seller has an accrued right to be paid the transaction value less agreed deductions. That receivable is an asset of the seller, and the escrow is only the plumbing through which it reaches the seller's account. Segregating money for regulatory reasons protects buyers from the aggregator's own creditors; it does not by itself create a trust for or against the merchant.

The case for exclusion is transaction specific and often stronger on the facts. Where the seller has taken the buyer's money and has not shipped, the person entitled to that sum is the buyer and not the seller, and no amount has become payable to the seller under the marketplace agreement. The escrow can only be credited and debited in prescribed ways, so it is not a general pool available to the seller's creditors. The platform's commission, its fulfilment charges and its obligation to fund refunds all bite before anything becomes due down the chain. On a live book of orders, the honest answer is that some of the balance is almost certainly the corporate debtor's and some of it is almost certainly not, and the split depends on where each order had reached on the commencement date.

It should be said plainly that no Indian court or tribunal has yet decided whether funds in a payment aggregator escrow attributable to an insolvent merchant fall inside the insolvency estate. In-house counsel should treat a resolution professional's demand for the gross escrow balance as an opening position rather than an entitlement, and should equally avoid advising that the platform can safely withhold everything. The defensible course is a transaction-level reconciliation as at the insolvency commencement date, distinguishing delivered and dispute-free orders from undelivered orders and orders inside the return window, and a proposal to the resolution professional built on that reconciliation.

Refunds, Chargebacks and Who Absorbs Them

When a seller stops shipping, buyers cancel and raise chargebacks, and the chargeback travels back down the same chain the payment came up. The card network debits the acquirer, the acquirer recovers from the aggregator, and the aggregator recovers from the merchant's settlement stream or reserve. If the stream has dried up and the reserve is thin, the loss stops with whoever is nearest the buyer, which in practice means the platform, either as a commercial decision to protect the brand or because it is the entity the buyer can actually reach.

The consumer overlay comes from the Consumer Protection (E-Commerce) Rules, 2020, notified on 23 July 2020 under the Consumer Protection Act, 2019. Rule 4 imposes duties on every e-commerce entity, including a grievance officer and the effecting of accepted refunds within a reasonable period. Rule 5 addresses marketplace entities, requiring undertakings from sellers about the accuracy of listings, disclosure of seller details to buyers, and a working grievance mechanism. Rule 6 places duties on sellers, including the obligation not to refuse to take back defective or non-conforming goods. One point is worth stating because commentary regularly gets it wrong: the fall-back liability of a marketplace entity for a seller's failure to deliver appeared in draft amendments circulated for comment in June 2021 and has not been notified. Under the Rules as they stand, a marketplace entity's exposure to buyers is framed around its own conduct and its duties as an intermediary, not around a statutory guarantee of seller performance.

That does not make the risk theoretical, because the commercial pressure to refund is close to irresistible and the money has usually gone. The only reliable protection is built before the failure: a rolling reserve sized to the individual seller's historical return and chargeback rate, held for a period longer than the return window, funded by withholding at settlement rather than invoiced afterwards. A platform that carries no reserve on a high-return category is an unpaid insurer of that seller's solvency.

Stock in Fulfilment Centres and What the Moratorium Actually Prohibits

Inventory lying in a fulfilment centre belongs to the seller, and the platform holds it as bailee. Section 14(1)(b) of the Code prohibits transferring, encumbering, alienating or disposing of any asset of the corporate debtor, so selling the stock to recover unpaid fees, or exercising a general lien by disposing of it, is not available once the moratorium is running, whatever the storage terms say. The resolution professional will call for the inventory under sections 18 and 25, and the platform should release it against a signed inventory and receipt rather than negotiate with goods it cannot lawfully sell.

Section 14(1)(d) is often cited in this situation and is usually cited the wrong way round. It bars the recovery of property by an owner or lessor where that property is occupied by or is in the possession of the corporate debtor. A platform holding the seller's goods is not within it, because possession runs in the opposite direction. The provision bites where the platform's own property, returnable crates, scanners, branded packaging systems and similar equipment, is sitting at the seller's premises. There, self-help is barred even though the platform holds title, and the route is a written notice to the resolution professional with proof of ownership, a consented release, and an application under section 60(5) of the Code if consent is withheld.

Storage after the commencement date needs separate handling. Continuing to warehouse a corporate debtor's goods is a service supplied during the resolution process, and it should be invoiced as such and pressed as an insolvency resolution process cost rather than folded into the pre-commencement claim. Agree it with the resolution professional in writing before the storage continues. A cost incurred silently and claimed later is far harder to recover than one recorded in advance.

Fund by Fund: Likely Treatment and Contractual Protection

The table takes each pot of money or asset in a typical marketplace relationship, states the likely treatment if the seller becomes a corporate debtor, identifies the governing provision and sets out the drafting response.

What the Marketplace Agreement Should Say

Almost every protection available here is drafted, not litigated. The agreement should make settlement conditional rather than automatic, so that no sum becomes payable to the seller until delivery is confirmed and the return window has closed, and should describe funds held before that point as held pending fulfilment rather than as amounts due. It should give an express right of appropriation over the security deposit and reserve on defined triggers, an express set-off right recorded as part of a pre-existing arrangement rather than asserted after commencement, a right to withhold settlement while a buyer dispute is open with a defined resolution timeline, a right to suspend listings, a documented right to require removal of inventory at the seller's cost, and an obligation on the seller to notify any insolvency filing against it within a short fixed period.

There is a drafting trap worth avoiding. A clause that fires only on the seller's insolvency invites the argument that it is an ipso facto provision that should be read down to keep the corporate debtor running. Triggers tied to fulfilment failure, chargeback ratios, unremedied buyer complaints and non-payment do the same commercial work and rest on facts that exist independently of the admission order. Insolvency should appear as one trigger among several, not as the operative one.

Can a Platform File as an Operational Creditor for Unpaid Commissions?

Unpaid commission, fulfilment and storage charges, advertising spend and refunds the platform has funded are operational debts, and the platform is an operational creditor for them. The claim is filed in Form B with the interim resolution professional or resolution professional, supported by the agreement, the settlement statements and a reconciliation, and it should be lodged within the window stated in the public announcement rather than left until the position on escrow is resolved. The recovery, though, will be a fraction of face value, because operational creditors rank behind financial creditors in the distribution waterfall in section 53 of the Code. Everything of value in this situation is decided by what was withheld before commencement, not by what is claimed after it.

Frequently Asked Questions

Do funds sitting in a payment aggregator escrow belong to an insolvent marketplace seller?

Partly, and the question is untested in India. Money referable to delivered, dispute-free orders is most likely an accrued receivable of the seller and therefore estate property. Money collected for orders that were never shipped is better characterised as held for the buyer. Section 36(4)(a) of the Code and the explanation to section 18 exclude assets owned by third parties and held in trust from the estate, but no Indian decision has applied them to a payment escrow. Reconcile transaction by transaction as at the commencement date before responding to the resolution professional.

Can the platform stop settling to a seller once insolvency proceedings are on foot?

You can withhold amounts that have not become payable under the agreement, which is why conditional settlement language matters. Withholding sums that are already due, purely because of the insolvency, is a different act and is likely to draw an application under section 60(5) of the Code. Base any suspension on fulfilment failure or an unresolved buyer dispute, document the reason at the time, and record it in the settlement statement.

Who bears buyer refunds when the seller cannot fulfil?

Commercially, the platform almost always does, because the buyer deals with the platform and the seller has no money. Legally, the notified Consumer Protection (E-Commerce) Rules, 2020 impose duties on a marketplace entity relating to grievance handling, disclosure and refunds it has accepted, but they do not make it a guarantor of seller performance. The fall-back liability proposal from June 2021 was never notified. Your real protection is the reserve you were holding when the seller failed.

Can the platform sell the seller's stock in its warehouse to recover unpaid fees?

No. Section 14(1)(b) prohibits disposing of or encumbering assets of the corporate debtor during the moratorium, and the stock is the seller's asset regardless of who holds it. Release it to the resolution professional against a signed inventory, and invoice storage supplied after the commencement date separately, with the resolution professional's written agreement, so that it can be pressed as an insolvency resolution process cost.

Does section 14(1)(d) help the platform recover its own equipment from the seller?

It works against you rather than for you. The provision prohibits recovery of property by an owner or lessor while that property is in the possession of the corporate debtor, so equipment, crates and packaging systems left at the seller's premises cannot simply be collected. Serve written notice on the resolution professional with proof of title, ask for release by consent, and apply under section 60(5) if consent is refused. Keeping a per-seller asset register makes that application straightforward.

Can unpaid commissions be set off against amounts payable to the seller?

Only within narrow limits once the resolution process has begun, which is why deduction at source in each settlement cycle is worth more than any set-off argument. Where the agreement already provided for netting before commencement, the position is stronger. Where the platform simply asserts a set-off after admission against a sum the resolution professional treats as due, expect resistance.

What single change to the seller agreement reduces the most exposure?

Making settlement conditional on confirmed delivery and the expiry of the return window, and saying expressly that funds held before then are held pending fulfilment rather than for the seller's account. That one change moves a large slice of money out of the argument about the estate and into a category the platform controls, and it costs nothing to implement at the next contract refresh.

Does the payment aggregator itself have any exposure if a marketplace seller using its escrow enters insolvency?

The payment aggregator's own position is generally protected because the escrow it operates under the Reserve Bank of India's Guidelines on Regulation of Payment Aggregators and Payment Gateways is structured as a nodal or escrow account holding funds due to merchants, not an asset of the aggregator itself, so the aggregator is not ordinarily treated as a creditor or debtor of the insolvent seller merely for operating the account. The aggregator's operational exposure arises instead from its own contractual obligations to buyers and card networks for chargebacks and refunds, which it typically manages by withholding pending settlements rather than by asserting a claim in the seller's insolvency process.

Can a marketplace platform terminate a seller's account immediately on learning of an insolvency filing?

A termination clause that triggers automatically and solely on the seller's insolvency filing is vulnerable to challenge as an ipso facto clause, since a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 is intended to keep the corporate debtor's business running rather than let counterparties walk away the moment insolvency is filed. The safer drafting response is to tie suspension or termination to actual defaults, such as non-payment of commission or failure to fulfil orders, rather than to the insolvency filing as such, and to build in a right to withhold future settlements pending resolution of disputed amounts rather than an automatic account closure.

What priority does a platform's claim for unpaid commission and advertising spend receive in the seller's insolvency?

An unpaid commission, fulfilment charge or advertising spend owed by the seller is an operational debt, and the platform ranks as an operational creditor under the waterfall in Section 53 of the Insolvency and Bankruptcy Code, 2016, behind insolvency resolution process costs, workmen's dues for the relevant period, and secured financial creditors who have relinquished security. The claim must be filed in the prescribed form, ordinarily Form B for an operational creditor, within the timeline fixed by the resolution professional, and recovery in practice depends heavily on how much value remains after the classes ranking ahead of operational creditors are paid.

How does the position change if the marketplace itself, rather than the seller, becomes insolvent?

Buyer funds sitting in the escrow structured under the Reserve Bank of India's payment aggregator framework are generally treated as held for identified beneficiaries rather than as the platform's own property, which supports an argument that they sit outside the platform's insolvency estate under the same trust and bailment reasoning that protects seller funds, though this too remains untested by an Indian court on a payment aggregator's own insolvency. Sellers awaiting settlement in that scenario face a comparable uncertainty, and the practical protection is the same: robust escrow segregation and prompt settlement cycles that minimise the balance exposed at any given time.

Is a marketplace seller's insolvency itself a disclosable event for a listed platform operator?

It depends on materiality rather than any deemed entry in Schedule III of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, because Schedule III has no specific entry for the insolvency of a counterparty such as a marketplace seller. A listed platform operator assesses the exposure, typically the aggregate unpaid commission, refund liability and inventory value tied to that seller, against the quantitative thresholds in regulation 30(4)(i)(c) and the qualitative tests in regulation 30(4), and discloses only where the assessment crosses those thresholds or otherwise carries a reasonable likelihood of affecting an investor's decision.

Can a buyer recover a refund directly from the payment aggregator if the marketplace seller cannot pay and the platform refuses?

A buyer's primary recourse for a refund is against the seller and, through the marketplace's own grievance mechanism, against the platform as an e-commerce entity under the Consumer Protection (E-Commerce) Rules, 2020, framed under the Consumer Protection Act, 2019, rather than a direct claim against the payment aggregator, whose role is limited to processing the payment rather than guaranteeing the underlying transaction. Where the platform has collected a rolling reserve or holdback from the seller's settlements for this purpose, buyers benefit indirectly because that reserve funds the refund, which is why platforms build such reserves into the seller agreement rather than leaving refund risk to be resolved case by case after a failure.

Related reading

Related reading: Business Continuity Clauses for a Key IT or BPO Vendor Insolvency.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice and the Corporate and Commercial Law Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors which advises Indian and international clients on commercial contracts, platform and payments arrangements, and regulatory compliance, and represents financial creditors, operational creditors and corporate debtors before the National Company Law Tribunal (NCLT), Mumbai Bench, and the Bombay High Court.

Related reading: Legal and Practical Difficulties Faced by Insolvency Professionals in India.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.