NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY VS. ANAND SONBHADRA : CASE SUMMARY
The Supreme Court in New Okhla Industrial Development Authority Vs Anand Sonabhadra (2023 ) 1 SCC 724 held that New Okhla Industrial Development Authority (NOIDA) is not a Financial Creditor and claim of the authority falls under category of Operational Debt.
FACTS OF THE CASE
NOIDA (Appellant) acquired land for setting up of an “urban and industrial township”. The Appellant entered into lease deed for construction of the residential flats with Shubhkamna Buildtech Pvt. Ltd. (Corporate Debtor) on 30th July, 2010. The Lease Deed provided that the shareholding of lessor will remain unchanged till temporary occupancy/completion of the first phase. Consideration (10% of total amount) of Rs. 46,14, 69,996.40/- stood paid. The lease deed further contemplated moratorium of 24 months from date of allotment. Only interest of 7% per annum compounded half yearly which accrued during the moratorium period shall be payable in equal half yearly instalments. The Lease Deed provided for payment of balance 90% of amount after expiry of moratorium in 16 half yearly instalments alongwith interest as specifically set out.
CIRP was initiated against the Corporate Debtor. The Appellant initially filed claim in Form B as Operational Creditor. Subsequently the Appellant filed claim in Form C as Financial Creditor. The Resolution Professional rejected the claim in category of Financial Creditor. The Appellant approached NCLT which also held that Appellant is not Financial Creditor. The Appellant preferred appeal before NCLAT which also dismissed the appeal.
FINDINGS OF THE SUPREME COURT
Whether lease is covered under definition of “Financial Debt” under Section 5 (8) of IBC ?
The Supreme Court observed that essential requirement to attract Section 5 (8) is that there must be a debt alongwith interest, if any, which is disbursed against consideration for time value of money. In this matter there is no doubt that debt is in existence. Interest is also payable but as held in Orator Marketing Pvt. Ltd. Vs. Samtex Desinz Pvt. Ltd. (2021) SCC Online SC 513 interest is not essential feature of Financial Debt.
Disbursement is essential requirement of Financial Debt under Section 5 (8) and such disbursement must be from Creditor to Debtor. The Supreme Court observed that there has not been any disbursement of any debt or any sums by the appellant to the lessee, therefor Appellant cannot be Financial Creditor.
Whether debt is Financial Debt under Section 5 (8) (d) of IBC ?
Under Section 5 (8) (d), Financial Debt includes the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under Indian Accounting Standards. The Supreme Court noted that under Rule 61 of Indian Accounting Standard , the lessor is obliged to classify each of its leases as operating lease or financial lease. It is not case of Appellant that it has classified lease as Financial Lease.
Rule 62 of Indian Accounting Standards provides that a lease is classified as a financial lease if it transfers, substantially all the risks and rewards incidental to ownership of an underlying asset. The Supreme Court noted that there is no right with the lessee to purchase the leased asset i.e. land. Ownership of land remains with the Appellant.
Rule 63 of Indian Accounting Standards provides that the lease term is for the major part of economic life even if title is not transferred. The Court observed that economic life of land is not limited. Land does not depreciate with passage of time. Ordinarily the price of land will increase with time.
The Supreme Court concluded that the lease does not fall in category of capital lease.
Whether debt is financial debt under Section 5 (8) (f) ?
Section 5 (8) (f) provides that a financial debt includes any amount raised under any transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. The Supreme Court relied on Pioneer Urban Land and observed that the presence of profit motive is essential for the commercial effect of borrowing. The Appellant has not raised any amount from the Corporate Debtor as such the question whether it has commercial effect does not arise. Obligation incurred by lessee to pay the rental and the premium cannot be treated as an amount raised by lessee from the appellant.
The Supreme Court observed that concept of disbursement as present in the main provision appears to be mandatory in Section 5 (8) (f).
Whether Appellant is an Operational Creditor ?
The Court noted that in several legislations the Appellant has been treated as Local Authority. The Appellant also provides civil amenities to the local residents as such it is indeed a local authority. There have been concurrent findings of NCLT and NCLAT that the Appellant is an Operational Creditor. The Supreme Court held that Appellant is an Operational Creditor.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.