NOIDA is not a Financial Creditor hold Hon’ble NCLAT

Background: The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) vide its Judgment dated 16.04.2021 in the matter of “New Okhla Industrial Development Authority v. Anand Sonbhadra” rejected the contentions of New Okhla Industrial Development Authority (“NOIDA”) claiming to be Financial Creditor (“FC”) basis the lease deed entered into with the Developer Company namely Shubhkamna Buildtech Private Limited (“Corporate Debtor/ CD”).

1.What are the facts of this case?
NOIDA (“Appellant”) had granted a lease of plot in favour of the Corporate Debtor on 30.07.2010 for a period of 90 years. Thereafter, Corporate Insolvency Resolution Process (“CIR Process”) of the Corporate Debtor was initiated wherein NOIDA initially filed its claim in Form-B as an Operational Creditor (“OC”) and also attended meetings of the Committee of Creditors (“CoC”) as an OC.

Subsequently, NOIDA filed another claim in Form-C claiming to be a Financial Creditor (“FC”) and sought voting share in the CoC on the basis of the Lease Deed entered into between NOIDA and the CD while contending that the same is a Financial Lease. The Hon’ble Adjudicating Authority being the Hon’ble National Company Law Tribunal, New Delhi Bench (“AA”) held that the lease deed in question was not a financial lease according to the Indian Accounting Standards (“IndAS”) and thus, the Appellant cannot be said to be a FC. The said Order of the AA challenged by way of the said Appeal before the NCLAT.

2. What were the issues before the NCLAT and the contentions of NOIDA?
The issue before the NCLAT was whether the Lease Deed was a financial lease basis which NOIDA can be termed as a FC?

The contentions of NOIDA were as follows:

i) The lease deed was a finance lease as per the IndAS, thereby, the outstanding dues constituted a financial debt under Section 5(8)(d) of Insolvency and Bankruptcy Code, 2016 (“IB Code”).
ii) The lease deed involved “deemed disbursement” as by virtue of a financing facility, CD was allowed to pay the upfront lease premium in instalments along with interest. Thus, the dues constituted a financial debt under Section 5(8) of the IB Code.
iii) Under Section 5(8)(f) of the IB Code, disbursement of money was not necessary. Further, the payment of premium in instalments by the CD will be said to have “commercial effect of a borrowing”.

3.What were the observations and findings of the NCLAT?
The NCLAT referred to the guidelines under the IndAS and made the following key observations:

i) The lease deed did not transfer “substantially all the risks and rewards incidental to ownership” to the CD, which is required under paragraph 62 of IndAS. NOIDA substantially controlled the transaction under the lease and while the risks were passed to the CD, NOIDA withheld the rewards, apart from the right to sell the newly built flats. NCLAT also noted various terms under the lease deed which gave a controlling power to NOIDA.
ii) Further, the NCLAT observed that NOIDA confused transfer of ownership of the land with the right given to CD to merely transfer the newly built flats. Also, the right of CD to decide the price of the flats did not make it a finance lease. Thus, NCLAT held that the lease deed was not a finance lease in terms of the IndAS.
iii) The NCLAT rejected the contention regarding the “deemed disbursement” and observed that the lease cannot be said to be a financial debt.
iv) The NCLAT also rejected the contention that the lease deed had a “commercial effect of a borrowing”. It referred to the judgment of the Hon’ble Supreme Court in Pioneer Urban Land v. Union of India in which it was held that a sale agreement between the builder and an allottee has such “commercial effect”. The NCLAT held there was no sale of land by NOIDA and thus, merely by payment of fixed premium in instalments, the lease deed cannot be said to be a finance lease.
v) The NCLAT finally held that a lease of land between a developing authority and a builder cannot be considered or treated as a financial lease merely to enable the said authority to be a part of the CoC as a FC.

 

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