‘NOIDA’ is not a financial creditor: SC rules

[2022] 138 taxmann.com 393 (Article)

1. The Supreme Court recently passed a detailed authoritative judgment on interpretation of “Financial Lease” under Insolvency and Bankruptcy Code, 2016 (IBC) in New Okhla Industrial Development Authority v. Anand Sonbhadra1. The issue is of seminal importance as determination of lease as “Financial Lease” confers a status of “Financial Creditor” to the lessor in the Insolvency proceedings against its lessee. A financial creditor has superior rights under the IB Code including being part of COC or priority of disbursal of debt under Section 53 of the Code. The issue is particularly important to the various industrial and other local authorities across the country providing leasehold right to the lessee.

Factual matrix

2. The present disputes involves a question as to whether the subject lease executed by NOIDA- lessor in favour of lessee is a financial lease under Section 5 (8)(d) and 5(8)(f) of IB Code. The judgment authoritatively deals with various provisions, issues and ingredients of a Financial lease under IB Code.

NCLAT Judgment

3. The present petition before the Supreme Court was filed by NOIDA (Lessor) against the judgment of NCLAT holding the subject lease in the matter as not a financial lease and hence relegating NOIDA as an operational creditor in the insolvency proceedings against its lessee. The NCLAT decided against NOIDA after observing following clauses of the lease that falls short of being categorised as financial lease as per Section 5(8)(d), 5(8)(f) read with Indian Accounting Standards (IAS):

(a) There is no clause in the lease deed allowing transfer of underlying asset that is land to the lessee at the end of the deed. The lease expires in 90 years.

(b) No substantial transfer of all the risks and rewards incidental to the ownership of the underlying asset i.e., land. for example – right to mine and minerals remained with lessor.

(c) There exists substantial control of the lessor in all aspects where in all the risks are passed over and rewards being kept with the lessor. Only reward granted to lessee is that it can sell the flats being constructed on the land by way of a sub-lease that to as per the format provided by the lessor.

(d) The lease does not provide that the value of lease rent amounts to fair value of the land.

(e) No provision for secondary lease period after the expiry of the lease period at a rent substantially lower than the market rent.

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