Summary
NOIDA leased a group-housing plot to a developer for 90 years, 10% of the premium paid upfront and the balance payable after a two-year moratorium in 16 half-yearly instalments with interest, the developer to build and sub-lease flats. In the developer's insolvency NOIDA claimed to be a financial creditor, contending that the lease was a finance lease under Section 5(8)(d) of the Insolvency and Bankruptcy Code, 2016 or that the instalment facility was an amount raised with the commercial effect of a borrowing under Section 5(8)(f). The NCLT and NCLAT rejected it. The Supreme Court dismissed the appeals: NOIDA disbursed nothing to the lessee; the lease transfers neither ownership nor substantially all the risks and rewards incidental to ownership of the land, so it is not a finance lease; the lessee raised no amount from NOIDA under Section 5(8)(f); NOIDA is an operational creditor.
Issues
- Whether a lessor under a 90-year lease of a group-housing plot, whose premium is payable in staggered instalments with interest after a moratorium, is a financial creditor under the main part of Section 5(8) of the Insolvency and Bankruptcy Code, 2016, when it has disbursed no money to the lessee.
- Whether such a lease is a 'finance or capital lease' deemed as such under the Indian Accounting Standards within Section 5(8)(d), having regard to the tests of transfer of ownership, purchase option, economic life, present value of lease payments and the transfer of substantially all risks and rewards incidental to ownership.
- Whether the facility of paying the premium in instalments is an 'amount raised under any other transaction having the commercial effect of a borrowing' under Section 5(8)(f), and whether disbursement is an essential element of that residuary clause.
- Whether NOIDA's dues are an operational debt.
Provisions considered
- Sections 3(6), 3(11), 3(33), 5(7), 5(8) (main part and clauses (d) and (f)), 5(20), 5(21), 21, 27, 28 and 30, Insolvency and Bankruptcy Code, 2016Financial creditors alone constitute the committee of creditors and control the resolution process, so the status matters in principle regardless of how NOIDA might vote. 'Debt' is a liability in respect of a 'claim', i.e. a right to payment; 'disbursement' under Section 5(8) means payment of money flowing to the debtor and cannot be stretched through the definition of 'transaction' to a promise by the debtor to pay. Clause (d) covers only leases deemed finance or capital leases under the Indian Accounting Standards; clause (f) is a residuary catch-all but still requires an amount actually raised by the debtor under the transaction. None applied, and NOIDA's dues are operational debt. (¶¶ 49, 50, 51, 53, 55, 56, 59, 60, 85, 121, 122, 132, 133, 134, 135, 138, 140, 141, 144)
- Ind AS 116 paras 61–67 and B53; Ind AS 17 paras 15A–17; definitions of economic life, fair value, residual value, Indian Accounting Standards (Rules under Section 133 of the Companies Act, 2013) — Ind AS 116 / Ind AS 17A lease is a finance lease only if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset. The underlying asset here is the plot of land, not the right to build or the flats; there is no transfer of ownership at the end of the term, no purchase option, the concept of 'economic life' is inapposite to land which does not depreciate, 10% of the premium is not substantially all of the land's fair value, the lessee cannot cancel, there is no secondary period, NOIDA never classified the lease as a finance lease or recognised a receivable, and the 'land element' guidance in Ind AS 17 concerns composite leases of land and buildings. (¶¶ 62, 63, 64, 66, 67, 68, 72, 73, 74, 77, 78, 79, 80, 81, 82, 83, 84, 103, 104, 105)
- Sections 105 and 108(j), Transfer of Property Act, 1882The subject matter of a lease of immovable property is the property itself, so the land is the underlying asset. A lessee may ordinarily assign, mortgage or sub-lease his interest, but clause 12 of the lease prohibiting assignment, the requirement of NOIDA's prior permission to mortgage, the restriction to residential use, the bar on part transfer and NOIDA's power to take back possession in the public interest are contracts to the contrary that deny the lessee the rewards incidental to ownership. (¶¶ 66, 108, 109, 110, 111, 113, 114, 115, 116, 121)
- Sections 3, 6, 7, 11-14 and 17 of the 1976 Act; Sections 20, 40, 58 of the 1973 Act; Sections 5, 7, 9 of the 2010 Act, Uttar Pradesh Industrial Area Development Act, 1976 and Uttar Pradesh Apartment (Promotion of Construction, Ownership and Maintenance) Act, 2010NOIDA is a statutory authority charged with planned development and empowered to lease land, levy taxes, recover dues as arrears of land revenue and resume sites on default; Section 9 of the 2010 Act obliges the lessee to sub-lease the land to each apartment owner on the same terms, so apartment owners acquire only heritable and transferable sub-lease rights, not freehold, and NOIDA's treatment of the transaction as a 'sale' in its balance sheet was rejected. (¶¶ 20, 21, 22, 23, 28, 30, 37, 117, 118, 119, 120)
Held
- Whether NOIDA is a financial creditor must be decided on the provisions of the Code and the lease alone; prophecies that a public authority would refuse any haircut, that its large claim would give it a domineering vote share, or that its interests clash with homebuyers' are irrelevant. The statutory scheme makes membership of the committee of creditors and the power to approve or reject a resolution plan the exclusive province of financial creditors, so the question is one of principle even if the resolution plan treated NOIDA fairly. (¶¶ 49, 50, 51)
- Under the main part of Section 5(8) a financial debt must be disbursed against consideration for the time value of money; interest is not essential (Orator Marketing) but disbursement is, and it means money paid which flows to the debtor. 'Debt' is a liability in respect of a 'claim', whose golden thread is a right to payment; the word 'transaction' in Section 3(33) does not appear in those definitions and cannot be imported to treat the lessee's promise to pay NOIDA as a disbursement by NOIDA. NOIDA disbursed nothing to the lessee and is not a financial creditor under Section 5(8) simpliciter. (¶¶ 53, 54, 55, 56)
- Section 5(8)(d) does not cover every lease but only one 'deemed' a finance or capital lease under the Indian Accounting Standards (no other standards having been prescribed); the Standards contain no deeming provision as such, so the lease must be tested against paragraphs 61–67. The underlying asset is the plot of land, not the right to develop it or the flats, which are the subject of the sub-leases; the lease transfers no ownership at the end of 90 years (the sub-lessee must hand back the land after removing the superstructure), confers no purchase option, 'economic life' and 'residual value' are inapposite to land which does not depreciate, 10% of the premium is not substantially all of the land's fair value and the premium has no shown relation to fair value, only the lessor can cancel, there is no secondary period, and NOIDA never classified the lease as a finance lease at inception or recognised a receivable. None of the examples or indicators is present. (¶¶ 59, 60, 63, 64, 65, 66, 67, 68, 69, 72, 73, 74, 77, 78, 79, 80, 81, 82, 83, 84)
- Ownership comprises the rights to possess, use and manage, take the income, alienate, and an indeterminate and residual character; a finance lease requires that substantially (largely and in substance) all the risks and rewards incidental to — arising out of — ownership pass to the lessee, 'incidental' not meaning subordinate. Here the lessee's possession is confined to a stipulated use with penalty for non-use, assignment of the leasehold is prohibited, mortgage requires NOIDA's prior permission with NOIDA entitled to a share of unearned increase, transfer of flats is only by tripartite sub-lease in NOIDA's form to Indian citizens for residential use with NOIDA free to reject any transfer, NOIDA may unilaterally alter the lease terms and cancel on several grounds, and clause 13 lets NOIDA take back possession in the larger public interest on paying the prevailing rate — a shadow incompatible with ownership rewards. Though NOIDA shares none of the flat consideration, the lease as a whole does not transfer substantially all the rewards, and NOIDA is not a financial lessor under Section 5(8)(d). (¶¶ 86, 87, 88, 89, 90, 91, 92, 95, 101, 102, 108, 110, 111, 113, 114, 115, 116, 121)
- Sections 5 and 7 of the U.P. Apartment Act, 2010, making apartments with their undivided interest heritable and transferable, do not enlarge the sub-lessee's rights under the Section 9 sub-lease into freehold ownership of the land; the 'land element' guidance in paragraphs 15A–17 of Ind AS 17 applies to composite leases of land and buildings, not to a lease of land alone, and the question whether a composite lease would be treated differently is left open. (¶¶ 103, 104, 105, 117, 118, 119, 120)
- Clause (f) is a residuary catch-all and the inclusionary clauses need not replicate every element of the main definition (Pioneer Urban), but an amount must actually be 'raised' by the debtor under the transaction having the commercial effect of a borrowing; disbursement in that sense is mandatory under clause (f). In Pioneer the homebuyers' advances flowed to the developer; here no funds flowed from NOIDA to the lessee, who must fund the premium, rent and interest from its own sources or third-party lenders — who would be the financial creditors, there cannot be two financial creditors for the same amount. A moratorium followed by staggered instalments is not a raising of funds from the lessor, and the 'tool of raising finance' theory would carry dangerous implications. A lease outside Section 5(8)(d) may still create a financial debt under clause (f) if on its terms an amount is raised with the commercial effect of a borrowing, but this lease does not. (¶¶ 122, 123, 124, 125, 132, 133, 134, 135, 137, 138, 139, 140, 141)
- The NCLT and NCLAT having proceeded on the footing that NOIDA is an operational creditor, and NOIDA accepting that status in the alternative, it is unnecessary to decide whether NOIDA is a 'local authority' (NOIDA v. Chief Commissioner of Income Tax having held it is not, for income-tax purposes) or whether its dues 'arise under' a law; NOIDA, while not a financial creditor, is an operational creditor. (¶¶ 142, 143, 144)
Result
Appeals dismissed; the NCLAT's orders (affirming the NCLT's rejection of NOIDA's claim to be a financial creditor in the corporate insolvency resolution of its lessee-developer, and staying a contrary NCLT order in the connected matter) upheld; NOIDA held not a financial creditor under Section 5(8), 5(8)(d) or 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 but an operational creditor. Parties to bear their own costs.