Insolvency of Platform Businesses with Customer Wallets: Locating the Legal Character of the Digital Balance

Introduction : Digital platforms in e-commerce, online gaming, travel booking, and fintech regularly hold money in a manner that is not truly on behalf of the customer. A wallet balance resulting from a cancelled order, a refund held as "store credit," a stake deposited for an online contest, or a balance prepaid into the account of a travel aggregator are each, in effect, a sum of money that has been paid by the customer, and retained by the entity in anticipation of its own further service to the customer, or its further purchase from the customer. 

This convenience is often a two-sided sword, and the question of characterisation rears its head as soon as an insolvent platform appears on the horizon. The collapse of Go First in 2023 has left over fifteen lakh passengers with advance bookings in the region of several hundred crores of rupees, which are being refunded, on approval by the Committee of Creditors, to those who booked directly with the entity or transacted via travel agents.

 The extended suspension (and subsequent restructuring) of the cryptocurrency exchange WazirX posed the question of whether money credited to a customer's account is that of him or her alone or constitutes a common fund belonging to the platform that is owed to the customer. The Promotion and Regulation of Online Gaming Act, 2025 has effectively banned online money gaming, but the transitional issue of wallets containing stake as of the winding down of a real money operator is still a live one. In all of the above scenarios, it is the same doctrinal question that this blog post seeks to answer. 

The post will proceed in four parts. The first identifies the statutory and regulatory provisions bearing upon customer wallet balances, namely, the Insolvency and Bankruptcy Code, 2016 ("IBC"), the Reserve Bank of India's ("RBI") payment-system regulations, the Consumer Protection Act, 2019, and the new gaming law of 2025. The second step is to characterise a wallet holder's position: is he a creditor, a beneficiary under a trust, a consumer, or is he entitled to a certain set off against the platform? The third step is to review the relevant case law, at home and abroad, that addresses either directly or indirectly the question of the segregation, priority, or rights of a beneficiary over a common fund consisting of customers' money. 

The fourth and final part analyses the implications for a firm of the doctrinal position, and suggests contractual and accounting mechanisms that might mitigate the risks.

Legal Provisions

A. The Insolvency and Bankruptcy Code, 2016

The Code does not treat "wallet holder" or "customer deposit" as a separate claimant category. Consequently, a wallet holder's claim must be placed within the existing framework of a financial creditor under Section 5(7) read with Section 5(8), or an operational creditor under Section 5(20) read with Section 5(21), or be considered outside the corporate debtor's assets under Section 36(4) if the funds are held in trust for a third party. Section 14 imposes a moratorium on starting or continuing legal actions against the corporate debtor once the corporate insolvency resolution process ("CIRP") begins, which impacts a wallet holder's ability to independently sue for the return of the balance. Section 53 sets out the waterfall mechanism that determines the priority order for distributing liquidation proceeds once a claim is included in the estate, placing unsecured financial and operational creditors well behind insolvency resolution process costs, secured creditors, and workmen's dues.

A notable precedent for statutory recharacterisation is the Explanation added to Section 5(8)(f) by the Insolvency and Bankruptcy Code (Amendment) Act, 2018, which deems amounts raised from real estate allottees to have the commercial effect of a borrowing, thereby making homebuyers financial creditors with representation on the Committee of Creditors ("CoC"). Currently, there is no equivalent deeming provision for platform wallet holders.

B. RBI's Payment and Settlement Systems Framework

The Payment and Settlement Systems Act, 2007 grants the RBI authority to regulate non-bank entities that issue Prepaid Payment Instruments ("PPIs") and function as Payment Aggregators ("PAs"). According to the Master Directions on PPIs and those for Payment Aggregators, non-bank issuers and aggregators must keep customer funds in a separate escrow account with a scheduled commercial bank, cannot mix these funds with their own corporate money, must pay merchants within a set timeframe, and must provide regular auditor certifications confirming escrow compliance. The RBI's April 2026 draft Master Direction on PPIs, designed to replace the 2021 framework, further strengthens these rules by requiring quarterly escrow compliance certificates and specifying that interest on escrow balances is only payable on a defined "core portion." This regulatory framework is the nearest Indian law comes to an ex ante trust arrangement for customer money held on platforms, though as detailed later, the escrow requirement works independently of, and does not automatically determine, the IBC's own asset-classification rules.

C. The Consumer Protection Act, 2019 and E-Commerce Rules, 2020

The Consumer Protection Act, 2019 and the Consumer Protection (E-Commerce) Rules, 2020 place duties on e-commerce entities regarding refund timelines, grievance redressal, and liability for service deficiencies or unfair trade practices, which can be enforced before consumer forums and the Central Consumer Protection Authority. This framework operates on a completely different path from the IBC: a consumer forum may order a solvent platform to refund a wallet balance or pay for deficient service, but once the platform enters CIRP or liquidation, the Section 14 moratorium and the Section 238 non-obstante clause of the IBC generally override independent consumer proceedings related to the underlying debt, leaving the wallet holder to file a claim with the resolution professional or liquidator instead.

D. The Promotion and Regulation of Online Gaming Act, 2025

The 2025 Act forbids the offering of "online money games" which are games where a user pays a fee, deposits money, or stakes value expecting a monetary return, regardless of whether skill or chance is dominant and prohibits banks and payment intermediaries from facilitating transactions that support such games. Licensed categories that remain, specifically e-sports and online social games, must keep user funds in segregated accounts and ensure they can be refunded. In practice, the wallet-insolvency issue in the gaming sector is now mostly transitional, limited to unused stakes held by real-money operators shutting down under the new ban, although the segregation rule for the remaining licensed categories reflects the RBI's escrow framework for PPIs.

Legal Analysis

A. Creditor, Beneficiary, Consumer, or Counterparty?

A wallet holder's claim can be viewed through four competing characterizations, and none fits the facts without some strain. The operational creditor characterization sees the wallet balance as an advance under a contract for supplying goods or services, a natural fit for e-commerce store credit or a travel deposit, bringing the claim under Section 5(21) but exposing it to the relatively weak protections for operational creditors, who lack voting rights on the CoC and sit below financial creditors in the Section 53 waterfall. The financial creditor characterization, drawn from the homebuyer analogy, would require treating the wallet deposit as having the commercial effect of a borrowing; this is a tougher argument for a wallet than for a real estate allottee's payment, since the wallet holder typically earns no return and expects near-immediate access to funds rather than a future asset, though platforms offering cashback or interest-like incentives on wallet balances considerably reduce this gap.

When RBI's escrow mandate is actually followed, the trust-beneficiary characterization is greatly strengthened: the money never became the platform's own property but remained the customer's asset merely held in custody, since segregation and non-commingling are classic signs of a trust rather than a debtor-creditor relationship. The consumer characterization, finally, operates on a separate statutory track altogether and addresses a different question, deficiency of service, without settling priority in insolvency.

None of these categories is mutually exclusive of the others as a matter of pure logic, but the IBC forces a binary outcome: either the wallet balance is included in the liquidation estate under Section 36(3) and subject to the Section 53 waterfall as an ordinary creditor claim, or it is excluded under Section 36(4) as third-party trust property and returned to the customer in full, ahead of and outside the waterfall entirely. Consequently, the classification carries very high stakes.

B. Segregation, Traceability, and the Limits of the Trust Argument

Section 36(4) keeps out of the liquidation estate assets that belong to a third party but are in the corporate debtor's possession, including trust-held assets. The National Company Law Appellate Tribunal has used this exclusion to keep provident fund, gratuity fund, and pension fund dues outside the liquidation estate, reasoning that such sums are trust property set aside for a specific purpose and not meant for general distribution. That reasoning can, in principle, be applied to wallet balances held by a PPI issuer or payment aggregator in a required escrow account: if the funds are truly segregated, identifiable, and traceable, the argument for treating them as trust property outside the estate is compelling, paralleling the statutory logic that already shields employee retirement dues.

The challenge is that the trust characterization hinges entirely on actual segregation, not merely on regulatory requirements that segregation occur. Where an escrow account exists only on paper but funds have in practice been mixed with the platform's working capital, or where the platform has used customer balances to cover operating costs before insolvency, the trust fails for lack of a traceable res, and the customer is left with an unsecured claim regardless of what the terms of service promised. This is exactly the problem that affected certain crypto platforms internationally, where claims that customer assets were "your property, always accessible" did not withstand bankruptcy court scrutiny once commingling and poor record-keeping were proven.

C. Sectoral Variation

The four sectors identified in this inquiry do not pose a uniform issue. E-commerce wallet credits are usually small in amount and result from cancelled or returned orders; they are most similar to an ordinary operational debt for future supply of goods, moderated by the refund-timeline obligations under the Consumer Protection (E-Commerce) Rules while the platform remains solvent. Gaming wallets, now significantly restricted by the 2025 ban on money games, present a narrowing but still relevant transitional issue for stakes deposited before an operator's shutdown, and the segregated-account requirement extended to licensed e-sports and social-game operators indicates that Parliament itself considers segregation to be the appropriate default for user funds.

Travel-sector deposits are complicated by intermediation: as Go First demonstrated, a large share of passenger money is routed through travel agents and online aggregators rather than paid directly to the airline, creating a layered chain of claims—passenger against agent, agent against airline, in which the ultimate wallet holder may have no direct legal relationship with the insolvent platform at all. Fintech PPI and payment-aggregator wallets operate under the most developed regulatory framework, given RBI's escrow mandate, quarterly audit certification, and its supervisory power to act directly against a non-bank issuer without necessarily channeling the matter through the IBC, although the interaction between RBI's regulatory action and a parallel CIRP is not without difficulty when the issuer is itself the corporate debtor.

D. Priority Consequences Where the Trust Argument Fails

If a court or resolution professional determines that the segregation was only superficial or that the funds have been hopelessly mixed together, the wallet balances are treated as unsecured claims within the liquidation estate. According to the Section 53 waterfall, these claims are subordinate to CIRP costs, secured creditors who have either realized or given up their security, and workmen's dues, which means wallet holders, whether their claim is categorized as financial or operational debt are quite low on the list for recovery. The Go First case demonstrates the real-world outcome even outside of formal liquidation: passenger refunds needed CoC approval as part of a plan to resume operations rather than being issued automatically, and the ability to recover funds depended on the broader commercial direction of the CIRP rather than any special priority given to the passenger's advance payment.

E. Comparative Perspective

The Madras High Court's 2025 ruling on WazirX is useful, even though it came from an arbitration-related interim application rather than a liquidation case. The Court decided that a customer's cryptocurrency holdings were property that could be owned and possessed, that the exchange had a fiduciary duty to keep client assets separate and safe, and that a "socialisation of losses" plan could not be forced on a customer whose specific holdings were not affected by the platform's hack, unless a contract allowed such pooling. The logic that custody creates a fiduciary relationship independent of the platform's solvency provides a model for how Indian courts might handle a formal liquidation dispute over wallet balances, though it hasn't been tested in an actual CIRP or liquidation yet.

International bankruptcy practice warns against assuming the trust characterization too quickly. In the Celsius Network bankruptcy, the U.S. Bankruptcy Court clearly distinguished between "Earn" program accounts, where the platform's terms of service explicitly transferred ownership of deposited assets to the company, and "Custody" program accounts, where customers kept title with only the latter allowed to recover assets directly rather than as unsecured claimants. In the FTX bankruptcy, even though terms of service said customer assets remained customer property, the court treated mixed and untraceable holdings as part of the estate, leaving customers with unsecured, though ultimately largely recovered claims. The takeaway for Indian platforms and their lawyers is that the actual terms of service and real accounting practices, not marketing about fund safety, will decide the outcome if the issue is ever fully litigated.

Relevant Case Laws

1. Sunil Kumar Jain and Ors. v. Sundaresh Bhatt and Ors., (2022) SCC OnLine SC 456 (India): The Supreme Court held that provident fund, pension fund, and gratuity fund dues fall outside the liquidation estate under Section 36(4) and must be paid to workmen in full, independent of the Section 53 waterfall. The reasoning was that funds impressed with a specific trust purpose are never truly the corporate debtor's own property, supplies the closest available domestic analogy for excluding genuinely segregated customer wallet balances from a platform's liquidation estate.

2. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 (India): The Supreme Court upheld the constitutional validity of the Explanation to Section 5(8)(f), which deems amounts raised from real estate allottees to have the commercial effect of a borrowing, thereby classifying homebuyers as financial creditors. The judgment establishes that Parliament may, by deeming fiction, recharacterise a consumer-facing advance payment as financial debt where the scale and vulnerability of the affected class warrants CoC representation which is precedent of direct relevance to any future legislative proposal to similarly ‘re-characterise’ platform wallet deposits.

3. IndeGo Airlines (India) Ltd. (Go First), CP (IB) No. 264/2023, NCLT Delhi Bench: Following the airline's voluntary admission into CIRP in May 2023, the Resolution Professional acknowledged liability to refund over Rupees five hundred ninety-seven crore to more than fifteen lakh passengers, but the NCLT required the Committee of Creditors' express approval before refunds could be processed as part of the resumption plan. The episode demonstrates that even sympathetic consumer-facing claims are not self-executing during CIRP and remain contingent on the broader resolution process.

Practical Implications

Across e-commerce, gaming, travel, and fintech platforms, the unresolved classification of wallet balances translates into genuine commercial and reputational exposure. Businesses that promote wallet features as a convenience faster checkout, instant refunds, loyalty credit seldom inform users that, without effective segregation, the balance may effectively be an unsecured loan to the platform, repayable only after CIRP costs and secured debt are settled. Regulators face a similar challenge in overseeing compliance with segregation mandates in real time, as auditor certification is typically periodic rather than continuous, leaving a gap in which commingling can go unnoticed until a liquidity crisis forces disclosure. For legal practitioners, the lack of a settled rule raises the cost and unpredictability of advising both platforms structuring their wallet products and creditors' committees assessing claims during a CIRP.

Suggested Contractual and Accounting Safeguards

A mix of contractual drafting and accounting discipline can reduce, though not eliminate, this uncertainty. Platforms should consider: 

(i) an explicit trust declaration in the terms of service stating that wallet balances are held for the customer's benefit in a segregated account and do not form part of the platform's general assets, modeled on the Quistclose-type purpose trust recognized in English and Indian trust jurisprudence 

(ii) keeping customer funds in a nodal or escrow account with a scheduled commercial bank that is functionally and operationally separate from the platform's working-capital accounts, in line with RBI's PPI and payment-aggregator directions, with daily rather than periodic reconciliation

(iii) independent, real-time or near-real-time verification of escrow balances against outstanding customer liabilities, going beyond the quarterly auditor certification currently required, so that any shortfall is detected before insolvency rather than after

 (iv) clear disclosure in the terms of service of what happens to wallet balances in the event of the platform's insolvency, including whether the customer will be treated as a trust beneficiary or an unsecured creditor, so that the representation made to users matches the accounting reality and 

(v) for platforms operating at sufficient scale, consideration of an industry-level guarantee or contingency fund, similar to deposit insurance for bank depositors, funded by a small levy on wallet balances, to provide a partial backstop independent of the vagaries of the CIRP waterfall. 

At a policy level, an explanation analogous to that inserted into Section 5(8)(f) for homebuyers, extending financial creditor status (or a bespoke priority tier) to identifiable platform wallet holders, together with authorized-representative participation on the CoC modeled on Section 21(6A), would bring clarity that case-by-case litigation is unlikely to deliver quickly.

Conclusion

The failure of a platform business that holds customer wallets reveals a disconnect between the commercial reality of modern digital payments and a legal framework designed around a clear-cut separation between the corporate debtor's own assets and third-party trust property. RBI's requirements for escrow and segregation for PPI issuers and payment aggregators, along with the similar segregation requirement now placed on licensed gaming operators, suggest that wallet balances should be seen as customer property held in trust,  but this characterization only holds up under scrutiny when segregation is genuinely and traceably implemented in practice, not just promised in the terms of service. When segregation fails, wallet holders are left as unsecured creditors at the bottom of the Section 53 waterfall, a result illustrated by both the Go First proceedings and comparable crypto-platform bankruptcies.

The homebuyer precedent shows that Parliament is ready to use deeming fictions to give a vulnerable class of consumer-creditors a place at the CoC table when the problem's scale justifies it platform wallet holders across e-commerce, gaming, travel, and fintech may be nearing a similar turning point. Until legislative or regulatory clarity arrives, platforms would be wise to align their contractual promises with their actual accounting practices, and users would be wise to view a wallet balance not as cash in hand, but as a claim whose security depends entirely on how faithfully the platform has honored that promise.

Author: Resham Jha in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

References

1. Insolvency and Bankruptcy Code, 2016, ss. 3(31), 5(7), 5(8), 5(20), 5(21), 14, 36, 53 (India).

2. Insolvency and Bankruptcy Code (Amendment) Act, 2018, inserting Explanation to s. 5(8)(f), Insolvency and Bankruptcy Code, 2016 (India).

3. Payment and Settlement Systems Act, 2007 (India).

4. Reserve Bank of India, Master Directions on Prepaid Payment Instruments, 2021 (as amended); Draft Master Direction on Prepaid Payment Instruments, 2026 (India).

5. Reserve Bank of India, Master Directions for Payment Aggregators, 2026 (India).

6. Consumer Protection Act, 2019, s. 2(47) (India).

7. Consumer Protection (E-Commerce) Rules, 2020 (India).

8. The Promotion and Regulation of Online Gaming Act, 2025, ss. 2(1)(g), 5, 7 (India).

9. Sunil Kumar Jain and Ors. v. Sundaresh Bhatt and Ors., (2022) SCC OnLine SC 456 (India).

10. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 (India).

11. In re Go Airlines (India) Ltd., CP (IB) No. 264/2023, National Company Law Tribunal, Delhi Bench (India).