NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY VS ANAND SONBHADRA

NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY VS ANAND SONBHADRA

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2222 OF 2021
NEW OKHLA INDUSTRIAL DEVELOPMENT
AUTHORITY ..APPELLANT(S)
VERSUS
ANAND SONBHADRA ..RESPONDENT(S)
WITH
CIVIL APPEAL NO. 2367-2369 OF 2021
NEW OKHLA INDUSTRIAL DEVELOPMENT
AUTHORITY ..APPELLANT(S)
VERSUS
MANISH GUPTA & Anr. Etc. ..RESPONDENT(S)
J U D G M E N T
K.M. JOSEPH, J.
1. Hardly six years old, the Insolvency and
Bankruptcy Code (hereinafter referred to as the
‘IBC”) continues to be a fertile ground to spawn
2
litigation. Born in the year 2016, the IBC this time
around has given rise to the question as to whether
the appellant would be a financial creditor and
entitled to be so treated in the Corporate Insolvency
Resolution Process (CIRP, in short) commenced against
the corporate debtor under the ‘IBC’.
THE APPEALS
CIVIL APPEAL NO.2222/2021
2. The appellant ‘NOIDA’ initially submitted Form
’B’ and claimed as an operational creditor in regard
to the dues outstanding under the lease. Subsequently
the appellant filed a claim in Form ‘C’ and claimed
as a financial creditor. There was some
correspondence which reveals that the appellant
insisted upon being treated as a financial creditor.
Finally, the matter was considered by the
adjudicating authority (NCLT) which held that there
was no financial lease in terms of the Indian
Accounting Standards and there was no financial debt.
By the impugned order, NCLAT has affirmed the view
taken by the NCLT. Hence the appeal.
3
CIVIL APPEAL NOS.2367-2369 OF 2021
3. The appellant in 2222 of 2021 is the appellant in
this case also. The appeal is filed against an
interim order passed by the NCLAT staying the order
passed by the NCLT. By the order passed by the NCLT,
the appellant herein was directed to be admitted as a
financial creditor and adjudicating authority also
directed to admit the whole of the claim of the
appellant. In view of the order passed, which is the
subject matter of C.A. No. 2222/2021, NCLAT found it
fit to pass an order staying the order passed by the
NCLT. Hence the appeals.
4. Since a common question arises namely whether the
appellant is entitled to be treated as a financial
creditor within the meaning of the IBC, we are
rendering the common judgment.
5. We have heard Shri Tushar Mehta, Learned
Solicitor General appearing for the appellant in C.A.
No.2222/2021 and Smt. Madhavi Divan, learned
Additional Solicitor General for the appellant in
C.A. No.2367-2369/2021. We have also heard Shri Ritin
4
Rai, learned Senior Counsel appearing on behalf of
the respondent in CA 2222/2021. Besides we heard
Dr. A.M. Singhvi, learned Senior Counsel who was
allowed to intervene in the matter on the basis that
there is a case involving the appellant NOIDA which
is pending consideration. We also heard Shri
Devashish Bharuka on behalf of the first respondent
in C.A. Nos. 2367-2369/2021.
THE LEASE
6. The terms of the lease are as found in C.A. No.
2222/2021. The lease was entered into on the 30th day
of July, 2010. The appellant is the lessor described
as the Authority under Section 3 of the Uttar Pradesh
Industrial Area Development Act, 1976 (hereinafter
referred to as the ‘UPIAD Act’). The lease deed
recites that the leasehold property forms part of the
land acquired under the Land Acquisition Act and
developed by the lessor for the purposes of setting
up of an ‘Urban and Industrial Township’. The purpose
of the lease is the construction of the residential
flats according to the setback and building plan
5
approved by the appellant. The lessee earned its
right as lessee under the process of two bid tender
system in favour of a consortium of which it is a
member. The lease deed provides that the shareholding
of the lessor shall remain unchanged till the
temporary occupancy/completion certificate of at
least the first phase of the project is obtained from
the lessor and the lessee is permitted to transfer
upto 49% of the shareholding subject to conditions.
Thereafter, it is recited that of the consideration
of Rs.46,14,69,996.50, 10% stood paid. The lease deed
further contemplated moratorium of 24 months from the
date of allotment. Only the interest at 7% per annum
compounded half yearly which accrued during the
moratorium period shall be payable in equal half
yearly instalments. The lease deed further
contemplated payment of the balance 90% of the amount
after expiry of the moratorium in 16 half yearly
instalments along with interest as specifically set
out. Relevant portions of the lease deed to be
noticed read as follows:
6
“And also, in consideration of the yearly
lease rent hereby reserved and the covenants
provisions· and agreement herein contained
and on the part of the Lessee. to be
respectively paid observed and performed, the
Lessor doth hereby demise on lease to the
lessee! that plot of land numbered as Group
Housing Plot No.GH-5/B, Sector-137, In the
NOIDA, Distt. Gautam Budh Nagar (U.P.)
contained by measurement 22,565.77 Sq. mtrs.
be the same a little more or less and
bounded:
On the North by : As per Site
On the South by : As per Site
On the East by : As per Site
On the West by : As per Site
And the said plot is more clearly delineated
and shown In the attached plan and therein
marked red.
TO HOLD the said plot (hereinafter referred
to as the demised premises with their
appurtenances up to the lessee for the term
of 90 (ninety) years commencing from 30,
JULY, 2010 except and always reserving to the
Lessor.
a) A right to lay water mains, drains, sewers
or electrical wires under or above the
demised premises, if deemed necessary by the
Lessor in developing the area.
b) The Lessor reserves the right to all mine
and minerals, claims, washing goods, earth
oil, quarries, over & under the allotted plot
and full right and power at the time to do
all acts and things which may be necessary or
expedient for the purpose of searching for
working and obtaining removing and enjoy the
7
same Without providing or leaving any
vertical support for the surface of the
residential plot or for any
building for the lime being standing thereon
provided always that the lessor shall make
reasonable compensation to the Lessee for all
damages directly occasioned by the exercise
of such rights. To decide the amount of
reasonable compensation the decision of the
Lessor will
be final and binding on the Lessee.
(II) AND THE LESSEE DOTH HEREBY DECLARE AND
CONVENANTS WITH THE LESSOR IN THE MANNER
FOLLOWING: .
a) Yielding and paying therefore yearly in
advance during the said term unto the lessor
In the month of MARCH for each year the
yearly lease rent indicated below: -
(i) Lessee has paid Rs. 46,14,699;96 say
Rs.46,14,700,00 as lease rent being 1% of the
plot premium for the first 1O years of lease
period.
(ii) The lease rent may be enhanced by 50%
after every 10 years i.e., 1.5 times of the
prevailing lease rent.
(ii) The lease rent shall be payable In
_advance every year. First such payment shall
fall due on the date of execution of lease
deed and thereafter, every year, on or before
the last date of previous financial year.
(iv) Delay In payment of the advance lease
rent will be subject to Interest @14% per
annum compounded half yearly on the defaulted
amount for the defaulted period.
(v) The lessee has the option to pay lease
rent equivalent to 11 years @ 1 % of the
premium of the plot per year as 'One Time
Lease Rent unless the Lessor decides to
8
withdraw this facility: On payment of One
Time Lease Rent, no further annual lease rent
would be required to be paid for the balance
lease· period. This option may be exercised
at any time during the lease period provided
the lessee has paid the earlier lease right
due and lease rent already paid will not be
considered· in One Time Lease Rent option.
b) The Lessee shall be liable to pay all
rates, taxes, charges and assessment leviable
by whatever name called for every description
in respect of the plot of land or building
constructed thereon assessed or Imposed from
time to time by the lessor or any Authority/
Government. In exceptional circumstances the
time of deposit for the payment due may be
extended by_the lessor. But in such case of
extension of time an interest@ 14% p.a.
compounded every half yearly shall be charged
for the defaulted amount for such delayed
period. In case lessee fails to pay the above
charges it would be obligatory on the part or
Its members/ sub lessee to pay proportional
charges for the allotted areas.
c) The Lessee shall use the allotted plot for
construction of Group Housing, however, the
lessee shall be entitled to a lot the
dwelling unit on sublease basis to its
allottee and also provide space for
facilities like Roads, Parks etc. as per
their requirements, convenience with the
allotted plot, fulfilling requirements or
building bye-laws and prevailing and under
mentioned terms and conditions to the lessor.
Further transfer/sub lease shall be governed
by the transfer policy of Lessor:
(i) Such allottee/sub lessee should be citizen
of India and competent to contract.
(ii) Husband/wife and their dependent
children will not be separately eligible for
9
the purpose of allotment and shall be treated
as single entity.
(iii) The permission for part transfer of
plot shall not be granted under any
circumstances. The Lessee shall not be
entitled to complete transaction for sale,
transfer, assign or otherwise part with
possession of the whole or any part of the
building constructed thereon before making
payment according to the schedule specified
in the lease deed of the plot to the Lessor.
However, after making payment of premium of
the plot to the lessor as per schedule
specified in the lease deed, permission for
transfer of built up flats or to part with
possession of the whole or any part of the
building constructed on the group housing
plot, shall be granted and subject to payment
of transfer chargers as per policy prevailing
at the time of granting such permission of
transfer. However, the Lessor, reserves the
right to reject any transfer application
without assigning any reason. The lessee will
also be required to pay transfer charges as
per the policy prevailing at the time of such
permission of transfer.
The permission to transfer the part Or the
built up space will be granted subject to
execution of tripartite sub- lease deed which
shall be executed in a form and format as
prescribed by the lessor.” On the fulfillment
of the following conditions: -
a) The Lease Deed of plot has been executed
and the Lessee has made the payment according
to the schedule specified in the lease deed
of the plot, interest and one time lease
rent. Permission of sub-lease deed shall be
granted phasewise on payment of full premium
(with interest upto the date of deposit) of
the plot of that phase.
10
b) Every sale done by the lessee shall have
to be registered before the physical
possession of the property is handed over.
c) The Lessee has obtained building occupancy
certificate from Planning Department, Greater
Noida (Lessor).
d) The Lessee shall submit list of individual
allottees of flats within 6 months form the
date of obtaining occupancy certificate.
e) The Lessee shall have to execute
tripartite sub lease in favour of the
individual allottees for the developed
flats/plots in the form and format as
prescribed by the LESSOR.
f) The Sub-Lessee undertakes to put to use
the premises for the residential use of
residential area only.
g) The Lessee shall pay an amount of Rs.
1000/- towards processing fee and
proportionate (pro-rate basis) transfer
charges and lease rent as applicable at the
time of transfer and shall also execute sub
lease deed between Lessor, Lessee and
proposed transferee (sub-Lessee). The Lessee/
Sub Lessee shall also endure adherence to the
building regulations and directions of the
Lessor. The Lessee as well as sub Lessee
shall have to follow rules and regulations
prescribed in respect of lease hold
properties and shall have to pay the charges
as per rules of the Lessor/Government of U.P.
The transfer charges shall not be payable in
case of transfer between son/daughter,
husband/wife, mother/father and vice versa or
between these six categories. A processing
fee of Rs.1000/- will be payable in such
case. The transfer of the flat in favour of
1
st sub-Lessee shall be allowed without any
transfer charges but sub lease deed will be
executed between the Lessor & Lessee and
allottee. However, a processing fee of the
Rs. 1000/- will be payable at the time of
transfer/execution of the sub-lease deed. The
physical possession of dwelling units/
11
flats/plots will be permitted to be given
after execution of sub-lease deed.
i) Every transfer done by the Lessee shall
have to be registered before the physical
possession of the flat/ plot is handed over.
J) Except otherwise without obtaining the
completion certificate, the Lessee shall have
the option to divide the allotted plot and to
sub lease the same with the prior approval of
lessor on payment of transfer charges.
However, the area of each of such sub divided
plot should not be less than 10,000 sq.
metres.
k) Rs.1000/- shall be paid as processing fee
in each case of transfer of flat in addition
to transfer charges.
7. Norms of development are specifically set out as
maximum permissible FAR, maximum ground coverage and
maximum height. The construction is to be completed
in maximum five phases within a period of seven years
from the date of execution of the lease deed. Delay
specifically entitled the appellant to cancel, as
also gave rise to power to extend time in the manner
provided therein with penalty. The period of
extension is fixed at 3 years with penalty. It
further provided that further extension will normally
be not permitted. If the lease is cancelled, the
Lessee is to lose all rights and the building
appurtenant thereto. The lessee is at total liberty
12
to design the size of the flat/plots. The FAR
earmarked for commercial/institutional use would be
admissible but the allottee/lessee may utilize the
same for their residential use as per their
convenience. The clause relating to mortgage reads as
follows:
MORTGAGE
“The lessee may with prior permission of the
Lessor, mortgage the land to any Financial
Institution(s)/ Bank(s) for raising loan for
the purpose of financing his investment in the
project on receipt of payment by allottee or on
receipt of assurance of payment by bank or
under any other suitable arrangement. In mutual
settlement amongst the LESSOR, developer and
the financial institution(s)/ Bank(s). As
regards the case of mortgaging the land to any
Financial Institution(s)/ Bank(s) to mortgage
the said land to facilitate the housing loans
of the final purchasers, N.O.C may be issued
subject to such terms and conditions as may be
decided by the LESSOR at the time of granting
the permission.
Provided that in the event of sale or
foreclosure of the mortgaged/ charged property
the LESSOR shall be entitled to claim and
recover such percentage, as decided by the
LESSOR of the unearned increase in values of
properties in respect of the market value of
the said land as first chare, having priority
over the said mortgage charge, the decision of
the LESSOR in respect of the market value of
the said land shall be final and binding on all
the parties concerned.
13
The LESSOR’S right to the recovery of the
unearned increase and the pre-emptive right to
purchase the property as mentioned herein
before shall apply equality to involuntary sale
or transfer, be it bid or through execution of
decree of insolvency/court.”
Transfer of plot is the next provision to notice and
it reads as follows:
“TRANSFER OF PLOT
Without obtaining the completion certificate
the lessee shall have the right to sub-divide
the allotted plot into suitable smaller plots
as per planning norms and to transfer the
same to the interested parties upto
30.09.2010 with the prior approval of LESSOR
on payment of transfer charges @ 2% of
allotment rate. However, the area of each of
such sub-divided plots should not be less
than 20,000 sq. mtrs. However, individual
flat/plot will be transferable with prior
approval of the LESSOR as per the following
conditions: -
(i) The dues of LESSOR towards cost of land
shall be paid in accordance with the payment
schedule specified in the Lease Deed before
executing of sub-lease deed of the flat.
(ii) The lease deed has been executed.
(iii) Transfer of flat will be allowed only
after obtaining completion certificate for
respective phase by the Lessee.
(iv) The sub-lessee undertakes to put to
use the premises for the residential use
only.
14
(v) The lessee has obtained building occupancy
certificate from Building Cell, NOIDA.
(vi) First sale/transfer of a flat/plot to
an allottee shall be through a Sub-lease/
Lease Deed to be executed on the request of
the Lessee to the LESSOR in writing.
(vii) No transfer charges will be payable
in case of first sale, including the built-up
premises on the sub-divided plot(S) as
described above. However, on subsequent sale,
transfer charges shall be applicable on the
prevailing rats as fixed by the LESSOR.
(viii) Rs. 1000/- shall be paid as
processing fee in in each case of transfer of
flat in addition to transfer charges.”
8. Under the heading “Misuse, addition, alteration
etc.”, it is provided that the lessee shall not use
the flat for any purpose other than residential
purpose. Violation would open the doors for
cancellation. The lessee is liable to pay all rates,
taxes, charges and assessment of every description
imposed by any lessor empowered in this behalf,
whether it be imposed on the plot or the building
constructed thereon from time to time.
9. Under the heading “Overriding power over dormant
property”, it is provided as under:
15
“OVERRIDING POWER OVER DORMANT
PROPERTIES
The lessor reserves the right to all mines,
minerals, coals, washing gold earth’s olls,
quarries on or under the plot and full right
and power at any time to do all acts and
things which may be necessary or expedient
for the purpose of searching for, working and
obtaining removing and enjoying the same
without providing or leaving any vertical
support for the surface of the plot(s)/ flats
or for the structure time being standing
thereon provided always that the Lessor shall
make reasonable compensation to the Lessee
for all damages directly occasioned by
exercise of the rights hereby reserved. The
decision of the Chief Executive Office/
Lessor on the amount of such compensation
shall be final and binding on the lessee/
sub-lessee.”
10. The lessee is to maintain the premises. Under the
head ‘Maintenance’, it is, inter alia, stated as
follows:
“5. The lessee/sub lessee shall make such
arrangements as are necessary for the
maintenance of the building and common
services and · If the building Is not
maintained properly. The Chief Executive
Officer or any officer authorized by· Chief.
Executive Officer of the Lessor will have
power to get the maintenance done through the
Lessor and recover the amount so spent from
the lessee/sub lessee. The lessee/sub lessee
will be individually and severally liable for
payment of the maintenance amount. The
16
rules/regulation of UP Flat ownership act
1975 shall be applicable on the lessee/sub
lessee. No objection on the amount spent for
maintenance of the building the lessor shall
be entertained and decision of the Chief
Executive Officer of the Lessor In this
regard shall be final.”
11. Cancellation of lease deeds is separately
provided as follows:
“CANCELLATION OF LEASE DEED
“In addition to the other specific clauses
relating to cancellation, the Lessor, as the
case may be, will be free to exercise its
right of cancellation of lease in the case
of:-
1. Allotment being obtained through
misrepresentation/suppression of material
facts, misstatement and/or fraud.
2. Any violation of directions issued or
rules and regulation framed by Lessor or by
any other statutory body.
3. Default on the part of the lessee for
breach/violation of terms and conditions of
registration/allotment/lease and/or nondeposit of allotment amount.
4. If at the same time of cancellation, the
plot is occupied by the Lessee thereon the
amount equivalent to 25% of the total premium
of the plot shall be fortified and possession
of the plot will be resumed by the Lessor
with structure thereon, if any, and the
lessee will have no right to claim
compensation thereof. The balance, if any
shall be refunded without any interest. The
17
forfeited amount shall not exceed the
deposited amount with the Lessor and no
separate notice shall be given in this
regard.
5. If the allotment is cancelled on the
ground mentioned in sub clause 1 above, then
the entire amount deposited by the lessee,
till the date of cancellation shall be
forfeited by the Lessor and no claim
whatsoever shall be entertained in this
regard.”
12. We may also notice the provisions under other
clauses:
“OTHER CLAUSES
1. The Lessor reserves the right to make such
additions/ alternations or modifications in
the terms and conditions of allotment/lease
deed/sub lease deed from time to time, as may
be considered just and expedient.
2. In case of any clarification or
interpretation regarding these terms and
conditions the decision of Chief Executive
Officer or the lessor shall be final and
binding.
3. If due to any “Force Majeure” or such
circumstances beyond the lessor’s control,
the lessor is unable to make allotment or
facilitate the Lessee to undertake the
activities in pursuance of executed lease
deed, the deposits depending on the stages of
payments will be refunded along with simple
interest @ 4% p.a., if the delay in refund is
more than one year from such date.
18
4. If the Lessee commits any act of omission
on the demised premised resulting in
nuisance, it shall be lawful for the lessor
to ask the Lessee to remove the nuisance
within a reasonable period falling which the
LESSOR shall itself get the nuisance removed
at the Lessee’s cost and charge damages from
the Lessee during the period of submission of
nuisance.
5. Any dispute between the lessor and Lessee/
Sub-Lessee shall be subject to the
territorial jurisdiction of the Civil Courts
having jurisdiction over District Gautam Budh
Nagar or the Courts designated by the Hon’ble
High Court of Judicature at Allahabad.
6. The Lease Deed/ allotment will be governed
by the provisions of the U.P. Industrial Area
Development Act, 1978 (U.P. Act no. 6 of
1976) and by the rules and/ or regulations
made or directions issued, under this act.
7. The lessor will monitor the implementation
of the project. Applicants who do not have a
firm commitment to implement the project
within the time limits prescribed are advised
not to avail the allotment.
8. The lessee/ sub-lessee of the Lessee shall
be liable to pay all taxes/ charges livable
from time-to-time lessor or any other
authority duly empowered by them to levy the
tax/charges.
9. Dwelling units flats shall be used for
residential purpose only, in case of default,
render the allotment/ lease liable for
cancellation and the Allottee/Lessee/sublessee will not be paid any compensation
thereof.
19
10. Other buildings earmarked for community
facilities cannot be used for purposes other
than community requirements.
11. All arrears due to the Lessor would be
recoverable as arrears of land revenue.
12. The Lessee shall not be allowed to assign
or change his role, otherwise the lease shall
be cancelled and entire money deposited shall
be forfeited.
13. The lessor in larger public interest may
take back the possession of the
land/building/ by making payment at the
prevailing rate.
14. In case the lessor is not able to give
possession of the land in any circumstances
deposited money will be refunded to the
allottee with simple interest.
15. All terms and conditions of brochure and
its corrigendum, allotment, building bye-laws
and as amended from time to time shall be
binding on the Lessee.
For and on behalf of LESSOR”
` (Emphasis supplied)
FINDINGS OF THE NCLAT
13. FINDINGS
I. The NCLAT finds that the lease deed does not have
any clause of transfer of ownership of the underlying
asset, which is land and not flat, as harped upon by
20
the appellant. This is noted as one of the factors,
which is an important factor. The appellant has not
done any classification of the lease as a financial
lease, however observing that it would not be a
deciding factor. The NCLAT has proceeded to evaluate
the contents of the lease. It proceeds to remind
itself that to be classified as a financial lease,
what is relevant is whether there is a substantial
transfer of all the risks and rewards incidental to
ownership of an underlying asset. It proceeds to
further hold that the lease is heavily tilted in
favour of the appellant, controlling almost all the
aspects and while passing over the risks keeps the
rewards with lessor, except the liberty to sell the
flats which would be constructed. Thereafter, the
NCLAT proceeded to consider whether rewards
incidental to ownership of the underlying asset were
transferred. It is found that appellant put a
condition that the lessee will be allowed to
transfer/sell upto 49% of its shareholding, subject
to the condition that the original shareholders
indicated on the date of submission of the tender,
21
shall continue to hold at least fifty-one per cent of
the shareholding, till the temporary occupancy
completion certificate is obtained of at least one
phase.
II. There is reference to a total premium of Rs.46
crores and the down payment of ten percent. So also,
reference is made to half-yearly instalments to be
paid between 2010 and 2020. The term of the lease is
for ninety years. Reference is made to the clause
reserving rights to all mine and minerals under the
allotted plot, inter alia. Reliance is placed on ten
percent of the amount paid towards premium being
repeated, by referring to the same amount as lease
rent. Lease rent and premium are used
interchangeably. The option of paying the lease rent
is referred to. The liability to pay taxes is
adverted to. There is further reference to the
following clause:
“c) The Lessee shall use the allotted plot
for construction of Group Housing. However,
the lessee shall be entitled to allot the
dwelling units on sublease basis to its
allottee and also provide space for
facilities like Roads, Parks etc. as per
their requirements, convenience with the
22
allotted plot, fulfilling requirements or
building bye-laws and prevailing and under
mentioned terms & conditions to the lessor.
Further transfer/sub lease shall be governed
by the transfer policy of the Lessor.”
Reference is made to the clause that the
allottee/sub-lessee, should be a citizen of India and
should be competent and that husband, wife, and
dependent children would be considered single entity.
Further reference is made to the following clause:
“iii) The permission for part transfer of
plot shall not be granted under any
circumstances. The Lessee shall not be
entitled to complete transaction for sale,
transfer, assign or otherwise part with
possession of the whole or any part of the
building constructed thereon before making
payment according to the schedule specified
in the lease deed of the plot to the Lessor.
However, after making payment of premium of
the plot to the lessor as per schedule
specified in the lease deed permission of
transfer of built-up flats or to part with
possession of the whole or any part of the
building constructed on the Group Housing
Plot, shall be granted and subject to payment
of transfer charges as per policy prevailing
at the time of granting such permission of
transfer. However, the Lessor, reserves the
right to reject any transfer application
without assigning any reason. The lessee will
also be required to pay transfer charges as
per the policy prevailing at the time of such
permission of transfer.”
23
III. Reference is made to the following clause, which
reads as follows:
The lessee shall have to execute sub-lease in favour
of the individual allottees for the developed
flats/plots in the form and format, as prescribed by
the lessor. This is relied upon by the NCLAT to
conclude that rewards incidental to ownership is not
transferred.
IV. Next, it is found that the lease deed
contemplates that the number of phases within which
the work needs to be completed. The schedule of time
had to be adhered to by the lessee. The power of
cancellation loomed large in this context.
V. Next, reliance is placed on the clause relating
to mortgage, which required permission of the
appellant to mortgage the plot. The priority of
charge of the appellant was maintained. The use of
the flat was limited to residential purpose only.
Departure from the same would invite the wrath of
cancellation. The appellant reserved the right to
even remove the vertical support for the surface of
the plots/flats with only liability to pay
24
compensation and the right to determine which was
lodged with the appellant and it was to be binding on
the lessee/sub-lessee. The general power of
cancellation is maintained.
VI. Thereafter, we may notice the following:
“21. Thus, the Appellant, even after creating
the lease kept with itself all the rights to
control and monitor the project which was to
come up. The Appellant of course now has
tried to say in the Appeal that it was "only
exercising minor supervision over the land
use" (see 9.12 of the Appeal), which we do
not agree to. What we can see from the Lease
Deed which we have just referred in brief, is
that the acts which could be performed by the
lessee, were fully controlled by the
Appellant. The lessee, of course, had the
liberty to construct and transfer the flats
by way of sublease. The above discussion
shows that while risks and liabilities were
transferred to the lessee, the rewards
incidental to ownership were not transferred.
There is no Clause of transfer of ownership
at the end of lease term. There is no option
given to the lessor to purchase the asset at
a price that is accepted to be sufficiently
lower than the fair value. The lease is for a
term of 90 years. For life of a land, 90
years cannot be said to be major part of
economic life of the asset. There are no
calculations available, and the Lease Deed
does not state that the present value of the
lease payments amounts to at least
substantially all of the fair value of the
asset i.e. the land. The right to cancel the
lease by the lessor are specified at various
places in the lease deed, however, there is
no option to the lessee to step out. There is
25
no option available in the lease deed for the
lessee to continue lease for secondary
period. This is, leave apart, the indicator
which requires that said secondary period
should be at a rent that is substantially
lower than market rent.
22. Thus, when we have gone through the Lease
Deed keeping the classification of leases and
the indicators mentioned above, we do not
find that the lease deed in question can be
said to be a finance lease.
23. Keeping in view the Indian Accounting
Standards, what appears broadly is that when
lease involves real estate (like land in
present matter) with a fair value different
from its carrying amount, the lease can be
classified as a finance lease if the lease
transfers ownership of the property to the
lessee by the end of the lease term or there
is bargain purchase option. The lease must
transfer substantially all the risks and also
rewards incidental to ownership of the asset.
24. The argument of the Appellant trying to
mix up transfer of ownership of the asset
which is land with right to transfer flats to
be constructed has no substance. Merely,
because the lessee was given right to fix the
price of the dwelling units to be
constructed, that by itself is not sufficient
to say that the lease of the land is a
finance lease. The argument of the Appellant
that lessee has an option to pay onetime
lease rent and that if such right was
exercised lessee would not be required to pay
further rent and that this shows that present
value of the lease payment amounts to at
least substantially all of the fair value of
the asset, is also baseless. No material is
brought to show as to what is and would be
the fair value. With regard to right to
cancel lease, it is reserved with the lessor
26
but not the lessee. The Appellant argues that
the question of cancellation of lease deed by
lessee would not arise as lessee would build
and transfer dwelling units. This is
speculative and cannot be helpful in
construing the document. Again, it is not
that the right to land would get transferred
to the flat purchasers (who are referred
rather as sub-lessees). We do not find
substance in the arguments being raised by
the Appellant to bring the Lease Deed within
the requirements of Indian Accounting
Standards. We rather find substance in the
submissions of the Respondent as recorded in
the Chart reproduced supra.”
VII. Finally, we may further also notice paragraphs-29
and 30 at page 41 and 42 of impugned Order in C.A.
No. 2222 of 2021.
“29. In the present matter, there is no sale
of land. It is lease, for premium /rent with
almost all rights controlled by the Lessor.
We have gone through the provisions of
Section 5(8)(f) and also when we keep the
above observations of the Hon’ble Supreme
Court of India, we are unable to persuade
ourselves to accept the submission that when
land is leased out, if premium is fixed and
instalments are given, it should be treated
as a financial lease. We do not find
substance in this argument.
30. We may record that we are not finding
fault with the various terms and conditions
in the Lease Deed. It is a Lease Deed from a
development authority which has the object of
developing the township and thus wants to
control the manner in which the constructions
of housing come up. That purpose is alright.
However, such lease does not fit in with the
27
requirements of Indian Accounting Standards
which we have referred. Just to be part of
COC, the lease of land between developing
authority and the builders cannot be
considered or treated as a financial lease.”
RELEVANT PROVISIONS OF THE IBC
14. Section 5(8), which is at the centre of the
controversy, defines ‘financial debt’ as: -
“5(8) “financial debt” means a debt alongwith
interest, if any, which is disbursed against
the consideration for the time value of money
and includes–
(a) money borrowed against the payment of
interest;
(b) any amount raised by acceptance under any
acceptance credit facility or its
dematerialised equivalent;
(c) any amount raised pursuant to any note
purchase facility or the issue of bonds,
notes, debentures, loan stock or any similar
instrument;
(d) the amount of any liability in respect of
any lease or hire purchase contract which is
deemed as a finance or capital lease under
the Indian Accounting Standards or such other
accounting standards as may be prescribed;
(e) receivables sold or discounted other than
any receivables sold on non-recourse basis;
(f) any amount raised under any other
transaction, including any forward sale or
purchase agreement, having the commercial
effect of a borrowing; 1 [Explanation. -For
the purposes of this sub-clause, - (i) any
amount raised from an allottee under a real
estate project shall be deemed to be an
amount having the commercial effect of a
borrowing; and (ii) the expressions,
“allottee” and “real estate project” shall
have the meanings respectively assigned to
28
them in clauses (d) and (zn) of section 2 of
the Real Estate (Regulation and Development)
Act, 2016 (16 of 2016);]
(g) any derivative transaction entered into
in connection with protection against or
benefit from fluctuation in any rate or price
and for calculating the value of any
derivative transaction, only the market value
of such transaction shall be taken into
account;
(h) any counter-indemnity obligation in
respect of a guarantee, indemnity, bond,
documentary letter of credit or any other
instrument issued by a bank or financial
institution;
(i) the amount of any liability in respect of
any of the guarantee or indemnity for any of
the items referred to in sub-clause (a) to
(h) of this clause;”
15. Section 3(11) defines the word ‘debt’. It
reads as: -
“(11) "debt" means a liability or obligation
in respect of a claim which is due from any
person and includes a financial debt and
operational debt;”
16. Section 3(6) defines the word ‘claim’. It
reads as: -
“(6) "claim" means—
(a) a right to payment, whether or not such
right is reduced to judgment, fixed,
disputed, undisputed, legal, equitable,
secured or unsecured;
(b) right to remedy for breach of contract
under any law for the time being in force, if
such breach gives rise to a right to payment,
whether or not such right is reduced to
29
judgment, fixed, matured, unmatured,
disputed, undisputed, secured or unsecured;”
17. Section 5(21) defines the word ‘operational
debt’. It reads as: -
“(21) "operational debt" means a claim in
respect of the provision of goods or services
including employment or a debt in respect of
the repayment of dues arising under any law
for the time being in force and payable to
the Central Government, any State Government
or any local authority;”
18. Section 5(20) defines the word ‘operational
creditor’. It reads as: -
“(20) "operational creditor" means a person
to whom an operational debt is owed and
includes any person to whom such debt has
been legally assigned or transferred;”
19. Section 3(33) defines the word ‘transaction’.
It reads as: -
“(33) "transaction" includes a agreement or
arrangement in writing for the transfer of
assets, or funds, goods or services, from or
to the corporate debtor;”
THE UTTAR PRADESH INDUSTRIAL AREA
DEVELOPMENT ACT, 1976 UNDER WHICH
APPELLANT WAS CREATED (‘UPIAD’, FOR SHORT)
20. The Act defines the word ‘transferee’ in Section
2(f) as follows: -
30
“2(f) ‘Transferee’ means a person (including
a firm or other body of individuals whether
incorporated or not to whom any land or
building is transferred in any manner
whatsoever, under this act and includes his
successors and assigns,”
21. Section 3 deals with the Constitution of the
authority and reads as follows: -
“3. (1) The State Government may, by
notification, constitute for the purposes of
this Act, An authority to be called (Name of
the area) Industrial Development Authority,
for any industrial development area.
(2) The Authority shall be a body corporate.
(3) The Authority shall consist of the
following: –
(a) The Secretary to the Government, Uttar
Pradesh, Member Industries Department or his
Nominee not below Chairman the rank of Joint
Secretary-ex-official.
(b) The Secretary to the Government, Uttar
Pradesh, Member Public works Department or
his nominee not below the rank of Joint
Secretary ex-official.
(c) The Secretary to the Government, Uttar
Pradesh, Local Member Self-Government or his
nominee not below the rank of joint
Secretary-ex official.
(d) The Secretary to the Government, Uttar
Pradesh, Finance Member Department or his
nominee not below the rank of Joint
Secretary-ex official.
(e) The Managing Director, U.P. State
Industrial Development Member Corporation-ex
official.
(f) Five members to be nominated by the State
Government Member by notification.
(g) Chief Executive Officer. Member Secretary
(4) The headquarters of the Authority shall
31
be at such place as may be notified by the
State Government.
(5) The procedure for the conduct of the
meetings for the Authority shall be such as
may be prescribed.
(6) No act or proceedings of the Authority
shall be invalid by reason of the existence
of any vacancy in or defect in the
constitution of the Authority.”
22. Section 6 of the UPIAD deals with the functions
of the Authority, which in this case is the
appellant. Section 6 reads as follows:
“FUNCTION OF THE AUTHORITY
6. (1) The object of the Authority shall
be to secure the planned development of the
industrial development area.
(2) Without prejudice to the generality of the
objects of the Authority, the Authority shall
perform the following functions :–
(b) to prepare a plan for the development of
the industrial development area;
(c) to demarcate and develop sites for
industrial, commercial and residential
purpose according to the plan;
(d) to provide infrastructure for industrial,
commercial and residential purposes;
(e) to provide amenities;
(f) to allocate and transfer either by way of
sale or lease or otherwise plots of land for
industrial, commercial or residential
purposes;
(g) to regulate the erection of buildings and
setting up of industries: and
(h) to lay down the purpose for which a
particular site or plot of land shall be
32
used, namely for industrial or commercial or
residential purpose or any other specified
purpose in such area.”
23. Section 7 deals with the power to transfer. It
reads as follows: -
“7. The authority may sell, lease or
otherwise transfer whether by auction,
allotment or otherwise any land or building
belonging to the Authority in the industrial
development area on such terms and conditions
as it may, subject to any rules that may be
made under this Act think fit to impose.”
The proviso deals with consequences of not
utilising it for the purpose for which it was
allowed.
24. Section 8 provides that for the proper planning
and development of the industrial development area,
the authority may issue such direction as it
considered necessary regarding various aspects. They
include architectural features of the elevation or
frontage of any building, the alignment of building
on any site, the number of residential buildings that
may be erected on any site, the restrictions in
regard to open spaces and height to be maintained,
maintenance of amenities, restrictions of use of any
33
site for a purpose other than that for which it has
been allocated.
25. Section 10 deals with power to require proper
maintenance of site and buildings. Section 11 deals
with power to levy taxes. It, inter alia, reads as
follows: -
“11. Levy such Taxes. — [(1) For the purposes
of providing, maintaining or continuing any
amenities in the industrial development area,
the Authority may with the previous approval
of the State Government, levy such taxes as
it may consider necessary in respect of any
site or building on the transferee or
occupier thereof, provided that the total
incidence of such tax shall not exceed one
per cent of the market value of such site,
including the site of the building.
Explanation—For the purpose of this subsection, the expression “market value” means,
the amount of—
(a) consideration, in the case of sale; or
(b) premium, in the case of lease; or
c) the minimum value determined in accordance
with the rules made under the Indian Stamp
Act, 1899, whichever is more]
2) If the State Government considers it
necessary or expedient in the public
interest, it may, by a general or special
order, exempt wholly or partly-any such
transferee or occupier or any class thereof
from the taxes levied under sub-section (1).”
34
26. Section 11A inserted with effect from 21.03.2016
empowers collection of tolls. Section 11B inserted
likewise provides for levy of additional stamp duty.
27. Section 12 reads as follows: -
“12. Applications of certain provisions of
President's Act XI of 1973.—The provisions of
Chapter VII and Sections 30, 32, 40, 41, 42,
43, 44, 45, 46, 47, 49, 50, 51, 53, and 58 of
the Uttar Pradesh Urban Planning and
Development Act, 1973, as re-enacted and
modified by the Uttar Pradesh President's Act
(Re-enactment with Modifications) Act, 1974,
shall mutatis mutandis apply to the Authority
with adaptation that— (a) any reference to
the aforesaid Act shall be deemed to be a
reference to this Act; (b) any reference to
the Authority constituted under the aforesaid
Act shall be deemed to be a reference to the
Authority constituted under this Act; and (c)
any reference to the Vice-Chairman of the
Authority shall be deemed to be a reference
to the Chief Executive Officer of the
Authority.”
28. Section 13 reads as follows: -
“(13) Where any transferee makes any default
in the payment of any consideration and money
or instalment thereof or any other amount due
--- account of the transfer of any site or
building by the Authority or any rent due to
the Authority in respect of any lease, or
where any transferee or occupier makes any
default in the payment of any fee or tax
levied under this Act, the Chief Executive
officer may direct that in addition to the
amount of arrears, further sum not exceeding
that amount shall be recovered from the
35
transferee or occupier, as the case may be,
by way of penalty.”
29. It is necessary to notice Section 12A and 12B
inserted with effect from 12.03.2016. They read as
follows: -
“12-A. No Panchayat for industrial township.—
Notwithstanding anything contained to the
contrary in any Uttar Pradesh Act, where an
industrial development area or any part
thereof is specified to be an industrial
township under the proviso to clause (1) of
Article 243-Q of the Constitution, such
industrial development area or part thereof,
if included in a Panchayat area, shall, with
effect from the date of notification made
under the said proviso, stand excluded from
such Panchayat area and no Panchayat shall be
constituted for such industrial development
area or part thereof under the United
Provinces Panchayat Raj Act, 1947 or the
Uttar Pradesh Kshettra Panchayats and Zila
Panchayats Adhiniyam, 1961, as the case may
be, and any Panchayat constituted for such
industrial development area or part thereof
before die date of such notification shall
cease to exist,
Explanation:—The expression “Panchayat and
Panchayat area” shall have the meanings
respectively assigned to them in part IX of
the Constitution.]
12-B.—(1) The Governor may, by notification,
specify under Article 243-Q of the
Constitution of India, the whole of Special
Investment Region or the Industrial
Development Area or any part thereof to be an
Industrial Township.
36
(2) Notwithstanding anything to the contrary
contained in any Uttar Pradesh Act, where an
special investment region or industrial
development area or any part thereof is
specified to be an Industrial Township under
the proviso to clause (1) of Article 243- Q
of the Constitution of India, such industrial
development area or part thereof, falling in
a Municipality shall from the date of
notification stand excluded from that
Municipality area and all powers and
functions performed with respect to such area
shall be exercised or performed by the
Authority.
Explanation: —The expression “Municipality”
shall have the meaning assigned to it in Part
IX or Part IX-A of the Constitution of
India.]”
30. Section 14 reads as follows: -
“14. For feature for breach of conditions of
transfer. —(1) In the case of non-payment of
consideration money or any installment
thereof on account of the transfer by the
Authority of any site or building or in case
of breach of any condition of such transfer
or breach of any rules or regulations made
under this Act, the Chief Executive Officer
may resume the site or building so
transferred and may further forfeit the whole
or any part of the money, if any, paid in
respect thereof.
(2) Where the Chief Executive Officer orders
resumption of any site or building under subsection (1) the Collector may, on his
requisition, cause possession thereof to be
delivered to him and may for that purpose use
or cause to be used such force as may be
necessary.”
31. We may further notice Section 17:
37
“(17) Upon any area being declared on
industrial development area under the
provision of this act, such area, if included
in the master plan or the zonal development
plan under the Uttar Pradesh Urban planning
and Development Act, 1973, or any development
plan under any other Uttar Pradesh Act, shall
with effect from the date of such declaration
be deemed to be excluded from any such plan.”
THE PROVISIONS OF THE UTTAR PRADESH
URBAN PLANNING AND DEVELOPMENT ACT, 1973
MADE APPLICABLE TO THE AUTHORITY VIDE
SECTION 12 OF THE UPIAD ACT [For short, ‘the
1973 Act’]
32. Chapter VII dealing with Finance, Accounts and
Audit begins with Section 20. Section 20 provides for
fund of the authorities. It reads as follows:
“20. (1) The authority shall have and
maintain its own fund to which shall be
credited–
(a) all moneys received by the Authority from
the State Government by way to grants, loans
advances or otherwise;
(b) all moneys borrowed by the Authority from
sources other than the State Government by
way of loans or debentures;
(c) all fees, tolls and charges received by
the Authority under this Act;
(d) all moneys received by the Authority from
the disposal of lands, buildings and other
properties movable and immovable; and
(e) all moneys received by the Authority by
way of rents and profits or in any other
manner or from any other sources.
(2) The fund shall be applied towards meeting
the expenses incurred by the Authority in the
38
administration of this Act for no other
purposes.
(3) Subject to any directions of the State
Government, the Authority may keep in current
account of any Scheduled Bank such sum of
money out of its funds as it may think
necessary for meeting its expected current
requirements and invest any surplus money in
such manner as it thinks fit.
(4) The state Government may, after due
appropriation made by Legislature by law in
that behalf, make such grants, advances and
loans to the Authority as that Government may
deem necessary for the performance of the
functions of the authority under this Act,
and all grants, loans and advances, made
shall be on such terms and conditions as the
State Government may determine.
(5) The Authority shall maintain a sinking
fund for the repayment of moneys borrowed
under sub-section (5), and shall pay every
year into the sinking fund such sum as may be
sufficient for repayment within the period
fixed of all moneys so borrowed.
(7) The sinking fund or any part thereof
shall be applied in, or towards, the
discharge of the loan for which such fund was
created, and until such loan is wholly
discharged it shall not be applied for any
other purpose.”
33. Section 21 provides that the authority shall
prepare a budget in the form and at such time as the
State Government may specify.
34. Section 22 provides that the authority is to
maintain proper accounts. The accounts of the
39
authority shall be subject to audit annually by the
Examiner Local Fund Accounts.
35. Section 23 mandates that the authority shall
prepare a report and submit it to the State
Government in such form and on or before such date as
specified by the State Government and the report is
to be laid before both Houses of the Legislature.
36. Section 24 deals with Pension and Provident Fund.
It reads as follows: -
“24. (1) The Authority may constitute for the
benefit of its whole-time paid members and of
its officers and other employers in such
manner and subject to such conditions, as the
State Government may specify, such pension or
provident funds as it may deem fit.
(2) Where any such pension or provident fund
has been constituted, the State Government
may declare that the provisions of the
Provident Funds Act, 1925, shall apply to
such fund as if it were a Government
Provident Fund.”
37. We must notice Section 40:
“40. Recovery of moneys due to Authority—Any
money due to an Authority on account of any
fee; or charges, or from disposal of land,
building or any other property, movable or
immovable, by way of rent, premium, profit or
hire purchase instalment, may, without
prejudice to the right of recovery by any
other mode of recovery provided by or under
this Act or any other law for the time being
in force, be realised—
40
(a) either, as arrears of land revenue upon a
certificate of the amount due sent by the
Authority to the collector, or (b) by
attachment and sale of property in the manner
provided in Sections 504, 505, 506, 507, 508,
509, 510, 512, 513 and 514 of the [Uttar
Pradesh Municipal Corporation, 1959) (2 of
1959)]; and such provisions of the said [Act]
shall mutatis mutandis apply to recovery of
dues of an Authority as they apply to
recovery of a tax due to a [Municipal
Corporation], so however, that references in
the aforesaid section of the said Adhiniyam
to ‘Mukhya Nagar Adhikari’, [Corporation] and
Executive Committee shall be constructed as
references to ‘Vice Chairman, ‘Development
Authority’ and ‘Chairman respectively:
Provided that no two or more modes of
recovery shall be commenced or continued
simultaneously.]
the old Section 40, U.P. Urban Planning and
Development Act, 1973 prior to Amendment Act
21 of 1985 is given below:
“40, Mode of recovery of money due to
Authority any money certified by the
Authority as due to it on account of fees or
charges, or from the disposal of lands,
buildings or other properties, movable or
immovable, or by way of rents and profits
may, if the recovery thereof is not expressly
provided for in any other provision of this
Act, be recovered by the Authority as arrears
of land revenue, and no suit shall lie in the
Civil Court for recovery of such money.”
38. Section 41 provides for directions being issued
by the State Government for the administration of the
Act being binding on the Authority. Under Section 42
41
of the UP 1973 Act, the Authority is to furnish
return and other information to the Government.
Section 43 deals with manner of service of notices,
orders, and other documents. Section 44 deals with
how public notices are to be made known. Section 45
mandates fixing of reasonable time in any notice,
order, or document, unless time is otherwise fixed by
the Act or Regulation. Section 47 proclaims that
every member and every officer and other employee of
the Authority shall be deemed to be a public servant
within the meaning of Section 21 of the Indian Penal
Code. Without sanction of the Chief Executive Officer
of the Authority or any other officer authorised by
him, there cannot be prosecution for any offence
under the Act. Section 51 deals with power of
delegation, both of the State Government and of the
Authority and the Chief Executive Officer. Section 53
empowers the State Government to exempt, by
notification, any land or building from the
provisions of the 1976 Act or Rules or Regulations
made thereunder. Section 58 of the UP 1973 Act, as
made applicable to the 1976 Act, provides for the
42
dissolution of the Authority, on the State Government
forming the opinion, that the purpose for which the
Authority was established, has been substantively
achieved, rendering the continued existence of the
Authority unnecessary.
CONTENTIONS OF THE APPELLANTS
39. The learned Solicitor General would rely on
Section 5(8)(d) and Section 5(8)(f) of the IBC in
attempting to persuade the Court that the appellant
is actually a financial creditor. He would point out
with reference to Section 5(8)(d) that a careful
analysis of the lease deed would show that the lease
in question is a financial lease. In his endeavour,
in this regard, he emphasised the part of the
provision, which brings in the concept of a deeming
provision. In other words, he contended that the
Court is bidden to treat a certain position as
deemed. The NCLAT has proceeded as if what is
involved is classification of a financial lease he
complained. He took us through the statutory rules,
which have come to embody the Indian Accounting
Standards (IAS) within the meaning of Section
43
5(8)(d), which have been enacted under the Companies
Act, 2013.
40. He would first and foremost point out that the
most prominent and indispensable element to make a
lease a financial lease is that there should be a
substantial transfer of the risks and rewards
incidental to ownership from the lessor to the
lessee. What is contained in later rules are
essentially by way of examples or illustrations. The
mere fact that with reference to each one of them,
the appellant may not answer the description of a
financial lessor, may not suffice to deprive the
appellant of the status of a financial creditor, as
the vital question to be posed and answered is
whether substantially there is a transfer of risks
and rewards incidental to ownership. He does not
dispute that in the case in question, appellant has
not classified the lease as a financial lease in the
balance sheet. He would however point out that the
NCLAT has erred in finding that reward incidental to
ownership has not been transferred to the lessee. In
this regard, he would point out that the lessee is
44
free to fix the amount of consideration it can charge
from the buyers from the lessee. The appellant cannot
demand any share in the consideration received by the
lessee. In other words, the lessee is free to
appropriate the entire profits. This is crucial in
appreciating whether the rewards incidental to
ownership has been transferred to the lessee. He
highlights the fact the appellant is an Authority
constituted under a statute, namely the UPIAD. He
took us through the provisions of Section 6 and 7 of
the Act. He would contend that as the Authority is
charged with the statutory duty to carry out planned
development of the area and group housing being
residential in nature and since the construction had
to be carried out in accordance with the laws in
force and the appellant was also charged with the
duty to regulate the activity, all that has happened
is that the lease deed contains provisions for the
regulatory regime. This cannot detract from the
transfer of rewards substantially to the lessee. he
contends.
45
41. As far as Section 5(8)(f) of the IBC is concerned
it is pointed out that the said provision is a catchall section and acts as a residuary reservoir, and
what remains after what has been provided in the
preceding provisions, are captured within its scope.
He would contend that the Court must not overlook the
object and scheme of the IBC. The financial creditors
occupy a position of dominance whereby they call the
shots when it comes to ruling on the destiny of the
corporate debtor. Under the IBC, true power vests
with the Committee of Creditors. It is the financial
creditors, who are at the helm of affairs of the
Committee. It is the Committee which will vote and
finally decide, on the Resolution Plan, which binds
all. A financial creditor would be in a position to
sway the views of others on the Committee. He would,
in the context of the facts point out that as things
stand, the Committee is virtually filled with
homebuyers. It would be unjust to deny the appellant
its say in the proceedings of the Committee. Huge
sums of public money are at stake. As the custodian
of public interest, the appellant must be vouch-safed
46
its legitimate position in the Committee of
Creditors. It is this important perspective, which
has been overlooked by the NCLAT, it is complained.
The appellant cannot be treated as an operational
creditor, whose interest is no more than the mere
realisation of the money due to it. The appellant is
more comparable with a bank. In other words, the
lease in question provides the lessee with the
mechanism, by which on payment of a mere ten percent
of the total premium upfront, the lessee gets
possession of the land. A moratorium follows.
Thereafter, under the lease, the lessee is no doubt
obliged to pay the balance ninety per cent of the
premium and that too in 16 half-yearly instalments.
If the lessee had wanted to purchase the property and
required finance from any other source, including a
bank, it would have had to receive financial
accommodation in some form or the other, under which,
the respondent would become obliged to pay back the
loan to the bank in terms of the arrangement. In this
case, on the other hand, under the lease, a lessee,
instead of approaching a bank, must be treated as
47
raising funds in the manner provided in the lease and
that too on very easy and reasonable terms. The
lessee pays ten percent only in the beginning. The
lessee is, in fact, given the benefit of a reprieve
and thereafter, he is enabled to pay the lessor
directly the balance amount. Therefore, this is a
transaction, as defined in Section 2(33) of the IBC.
He would submit that the amounts are to be paid back
with interest. Therefore, on the whole, it must be
treated as a case where, there is raising of funds by
the lessee, which, has a commercial underpinning, as
required under Section 5(8)(f) of the IBC. He would
point out that the main provision, i.e., as contained
in Section 5(8) contemplates a debt, which is
disbursed. Various clauses, which are enumerated
thereafter, need not contain the aspect of
disbursement. Therefore, raising of funds, within the
meaning of Section 5(8)(f), can be contemplated
without actual disbursement. He would rely on the
Judgement of this Court in Pioneer Urban Land and
48
Infrastructure Limited and Another vs. Union of India
(UOI) and Others1
42. Smt. Madhavi Divan, learned Additional Solicitor
General, appears for NOIDA in the connected matter.
She adopts the contentions of the learned Solicitor
General appearing for the same party. However, the
learned Additional Solicitor General, would make
three-pronged submissions with regard to the
appellant qualifying as a financial creditor. She
would contend that the appellant would fall in the
main provisions of Section 5(8). There is a debt.
There is a time value of money. Interest is
predicated on the strength of the same. As far as the
requirement of disbursement is concerned, she draws
our attention to Section 2(33) of the IBC, which
defines the word ‘transaction’. It is her contention
that the disbursement need not be unidimensional. In
the modern world, with the sophistication and
development of the financial market, the disbursement
can be from the creditor to the debtor or from the
debtor to the creditor. Therefore, even without the
1 (2019) 8 SCC 416
49
aid of the provisions, which appear by way of
inclusion, the appellant fits the bill as a financial
creditor. She also highlighted the true role of the
appellant under the Statute of which it is an
offspring. She would point out that there are longterm stakes, as far as the appellant is concerned.
The appellant is charged with the sublime function of
ensuring planned development. The lease operates as a
tool of financing. Whatever be the form, of which the
Court must not be a prisoner, the substance cries out
for labelling the appellant as a financial creditor.
Borrowing must not be viewed from the prism of
convention. The lease contemplates an upfront
payment, a moratorium and staggered payments of
installments. She also draws considerable inspiration
from Pioneer (supra). She would contend that in
Pioneer (supra), which involved a challenge to
including homebuyers as financial creditors on the
strength of the Explanation, which was included in
Section 5(8)(f) of the IBC, this Court recognised
that a homebuyer is not a borrower in the traditional
sense and yet the Court found that homebuyer was a
50
financial creditor and builder was being financed by
the payment of advances and staggered payment of
installments and, at the end of which, the equivalent
in terms of the flat, was promised. It would involve
a manifest absurdity, if the appellant, who would be
in a better position, in fact, than the homebuyers,
is yet excluded from the Committee of Creditors on
the score that it is to be treated as an operational
creditor.
43. With reference to the expression ‘raising of
funds’, contemplated in Section 5(8)(f), she would
persuade the Court to hold that the lessee, by
entering into the lease, comes to enjoy the property
and also have other rights, including the right to
entirely appropriate the profit from the transfer of
the flats constructed thereon. By the staggered
payments, after the initial payments of advance of
ten percent and a moratorium freeing the funds of the
corporate debtor clearly takes place. There is
generation of funds by the mechanism provided in the
lease and it plainly has the effect of borrowing and
bringing into play the statutory mantra also, of
51
commercial effect of borrowing. It works extremely
well for the lessee, in fact, in comparison to how it
would have fared, had it approached the bank or a
financial institution. With regard to Section
5(8)(d), the learned Additional Solicitor General
also emphasised upon the word ‘deemed’ to be
financial lease with reference to the Indian
Accounting Standards. It is her case that, in fact,
in the accounts of the appellant, the transaction is
reflected as a sale. This assumes significance as,
under the Indian Accounting Standards, the dominant
test is, whether, substantially, the risks and
rewards incidental to ownership has been transferred.
There cannot be a more eloquent fulfilment of this
requirement than the very action of the appellant in
treating the transaction as a sale in the balancesheet, and what is more, for the years, much prior to
the enactment of the IBC. It is submitted that Court
may not be oblivious that the premium under the
lease, is, indeed, linked to the market value,
indicating, unerringly, in the direction of a sale.
She would make a thinly veiled threat that if the
52
appellant is to be excluded in the manner from the
Committee of Creditors, there can be possible
cancellation of leases being resorted to by the
appellant, which may not augur well for the real
estate world. She relied upon Swiss Ribbons Private
Limited and Another v. Union of India and Others2.
SUBMISSIONS OF SHRI RITIN RAI
44. The respondent in Civil Appeal No. 2222/2021
namely the resolution professional who appears
through Shri Ritin Rai, learned Senior Counsel would
make the following submission.
The case of the appellant that the disbursal can
flow in either direction ignores that what is
disbursed is a debt and not its repayment. The
appellant has not parted with any money that is now
with the corporate debtor. Section 5(8) does not
use the word ‘transaction’ and any other
interpretation other than a flow of funds from
creditor to the debtor should not be accepted, and
it will lead to absurdity. As far as the case under
Section 5(8)(d) is concerned, it is submitted that
2 (2019) 4 SCC 17
53
the appellant has not classified in its books of
accounts classifying the lease as financial lease.
The classification as operating lease or financial
lease is to be made from the inception date. Neither
at the time of entering into the lease deed nor
subsequently has any classification been made.
Under the Indian Accounting Standards, a Lessee
under a capital lease transaction recognises the
lease as an asset in his Balance Sheet and it is
presented as Receivable at an amount equal to net
investment. The objective of IAS 116 is that both
the Lessor and Lessee provides relevant information.
In the case of financial lease, a lessor is required
to disclose in its financial statement selling
profits or loss, finance income on the net
investment in the lease, income relatable to
variable lease, payment, not included in the
measurement of the net investment of the lease. A
pattern is expected. Lease payment under an
operating lease are on the other hand on straight
line basis or another systematic basis. There is
difference of substance between the two cases. The
54
absence of classification amounts to non-compliance
with mandatory requirement as to standards required
under Section 133 of the Companies Act for which a
penalty is provided. The lease in question does not
countenance substantially the transfer of all the
rewards. The Lessee in terms of clause 12 of other
clauses is not permitted to assign leasehold
interest. Restrictions are put even on the lessee’s
shareholding. The clause relating to mortgage would
inter alia indicate apart from restriction otherwise
that any unearned increase in the value of the lease
premises will be at the disposal of the appellant.
Therefore, the gains would enure to the appellant.
There is no renewal of the lease. Support is drawn
otherwise from the order of NCLAT. Reliance is
placed on the following judgment of this Court in
Mohd. Noor and Others v. Mohd. Ibrahim and Others3 :
“..The ownership concept does not accord with
the status of a person who is paying the
rent. A tenant under various legislations
either urban or rural property, agricultural
or otherwise, enjoys right of heritability
and transferability. At the same time, he
does not become owner of the property.
3 (1994) 5 SCC 562
55
Transfer of ownership is distinct and
different from transfer of interest in the
property. A licensee or even a tenant may be
entitled by law to transfer his interest in
the property but that is not a transfer of
ownership.”
A lessee’s right to sub-lease comes with certain
restrictions. The appellant continues to be the
owner. The reward incidental to ownership is not to
be read as profit from the commercial practice. The
reward has to be considered as purely emanating from
the rights of ownership. Towards the development,
selling and promotion, the appellant has no role.
The word ‘reward’ bears the meaning that which is
offered or given for some service or attainment.
Therefore, the rewards cannot be said to mean the
profit generated from the commercial activities of
selling the units by the Lessee. Land has no economic
life. As regards Section 5(8)(f) goes, it is
contended that the claim of the appellant in view of
the terms of the lease under which after the initial
payment there is a moratorium and the Lessee is
permitted to pay the balance premium in easy
instalments overlooks the fact that a claim under any
56
lease would then be termed as financial debt. Leases
are already covered under Section 5(8)(d). There is
no amount raised pursuant to any other transaction in
the present case. The situation in Pioneer (supra) is
distinguishable as no amount is raised from the
appellant.
SUBMISSIONS OF DR. ABHISHEK MANU SINGHVI
45. There are concurrent findings of two courts
against the appellants. Findings have been rendered
which should dissuade this court from interfering in
the matter. The appellants have understood itself to
be an operational creditor. This is sought to be
substantiated with reference to the submission of the
claim initially in form B meant for operational
creditors except workmen and employee. Subsequently
that it was belatedly an amended claim in form C was
found. The appellant has improved its case at each
stage.
46. Before the NCLT it contended it must be treated
as a financial creditor in view of Section 5(8)(d).
Finding they will be unable to meet the requirements
57
under the Indian Accounting Standards set out in
Section 5(8)(d), for the first time in its written
submission before the NCLAT the contention was raised
under Section 5(8)(f). The appellant cannot
concurrently claim that the lease deed is covered by
a specific provision relating to financial leases
contained in Section 5(8)(d) and also under Section
5(8)(f) which is a general provision. The dues to the
appellant qualify as statutory dues. Reliance is
placed on Section 12 of the UPIAD which makes Section
40 of the U.P. Act. 1973 applicable.
47. Appellant under UPIAD is not permitted to carry
out any activity which is of a financial nature and
consequently any dues arising from disposal of land
which are in the discharge of statutory duties, must
be considered as statutory dues. In fact, NOIDA has
been treated in a better manner than a financial
creditor, having been given 41% share of its admitted
claim.
48. It is contended that the risks and rewards
incidental to ownership have not been transferred the
leases not a finance lease. There has been no
58
disbursement under the lease deed within the meaning
of Section 5(8). The repercussions of NOIDA being
declared as a financial creditor would be to
frustrate the CIRP of the real estate corporate
debtor. Having regard to its position as a public
authority and the nature and transactions commercial
wisdom of NOIDA would in fact compel the appellant to
vote against all resolution plans proposed. The home
buyers will be most adversely affected. Shri
Devashish Bharuka, appearing for the flat owners
contended that the flat owners have a heritable and
transferable right under Section 5 and 7 of the U.P.
Apartments Flat Owners Act, 2010.
THE IMPORTANCE OF BEING A FINANCIAL
CREDITOR UNDER THE IBC
49. In this context, it is undoubtedly true that in
the scheme of the IBC, Section 21 of the IBC
contemplates the constitution of the Committee of
Creditors. The Committee of Creditors is to consist
of all financial creditors of the corporate debtor.
It is the Committee of Creditors, which has power to
appoint and replace the Interim Resolution
59
Professional as the Resolution Professional. Under
Section 27 of the IBC, the Committee of Creditors,
which would consist of only the financial creditors,
would have the right to replace a Resolution
Professional. Under Section 28, the approval of the
Committee of Creditors is mandatory in respect of
various powers which need to be exercised by the
Resolution Professional. Central to the IBC, and what
would, in fact, constitute its very soul, is the idea
of resurrecting an ailing corporate debtor. The
means, contemplated, is the submission, consideration
and approval of Resolution Plans to be given by
Resolution Applicants. Here again, Section 30
contemplates that the Resolution Plan is to be
initially scrutinised by the Resolution Professional,
who is to present the Resolution Plan, which conforms
to Section 30(2), to the Committee of Creditors. The
Committee of Creditors may approve the Resolution
Plan in the manner provided in Section 30(4).
Regulation 38 of the Insolvency Bankruptcy Board of
India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016, no doubt, provides for
60
the mandatory contents of the Resolution Plan, which
may be approved. The Plan must include the submission
as to how the interests of stakeholders, including
financial creditors and operational creditors, are to
be dealt with. Regulation 38(1), inter alia in fact,
contemplates that the Resolution Plan must provide
that the amount payable to the operational creditors
shall be paid in priority over the financial
creditors.
50. It is true that, in a given case, it may appear
that the interests of operational creditors have been
best looked after in the circumstances under a
particular approved Resolution Plan. In fact, this is
also one of the contentions of the respondents, who
would point out that the appellants interests have
been adequately and fairly addressed in the
Resolution Plan. However, what is pointed out is
that, as a matter of principle, it is vital, both
from the point of view of the interest and rights of
the appellant and also the object of the IBC itself,
that the appellant must be treated as a financial
creditor. By being a Member of the Committee of
61
Creditors, the appellant would have the right to
place its perspective. It would have the opportunity
to persuade the other Members of the Committee of
Creditors to either accept or reject or modify a
Resolution Plan. The corporate debtor slipping into
liquidation, is a matter, which would, undoubtedly,
impact the appellant in a considerable manner. None
of these aspects have been borne in mind by the
NCLAT, it is complained of.
CERTAIN MISCELLANEOUS OBJECTIONS
51. The argument of the respondent/intervenor that if
the appellant is recognised as a financial creditor,
since it claims itself to be a public authority and
it holds the property as a trustee, it will not agree
to any hair cut proposed by any resolution applicant
does not appeal to us. The provisions in question
cannot be construed on the basis of a prophecy of how
a financial creditor will behave in its capacity as
financial creditor. If the appellant falls within the
ambit of the financial creditor as defined in Section
5(8), then as to how it will conduct itself being a
public authority cannot be a relevant factor.
62
Equally unimpressive is the argument that the
appellant would have the largest claim in most real
estate resolutions where it is a lessor and would
therefore have the largest vote share in the
committee of creditors and consequently have a
domineering role in deciding on the fate of any
resolution plan. If the appellant falls within the
scope of the financial creditor, then none of these
aspects can weigh with the court. Apparently, the
respondent/intervenor represent the interests of flat
owners. It is undoubtedly true that being financial
creditor who perhaps fall under a particular class,
they have their own interests to espouse. But if the
appellant is actually a financial creditor, then the
mere fact that the interest of the appellant clashes
with that of the rest of the body of financial
creditors cannot detract from the court holding the
appellant a financial creditor if otherwise it
establishes the case that it is a financial creditor.
We cannot overlook the fact that large sums of money
form the subject matter of the debt claimed by the
appellant as due to it. There can be no objection to
63
the appellant setting up the claim to be a financial
debt and succeeding on the strength of the provisions
entitling it to be so treated and therefore, the
court should not hesitate to recognize the appellant
as financial creditor if it is one. The contention
also that the appellant would be more interested in
realizing the greater value of its assets and would
allow the corporate debtor to descend into
liquidation and would not allow any resolution plan
to pass muster are all arguments which we must only
mention before it is rejected as it seeks to deflect
us from proper understanding of the relevant
provisions with the aid of the lease and other
apposite inputs.
SECTION 5 (8) OF THE IBC: WHETHER SECTION
5(8) OF IBC ITSELF SUFFICES TO EMBRACE THE
LEASE IN QUESTION?
52. Out of deference to submissions addressed by
Smt. Madhavi Diwan, learned Additional Solicitor
General, appearing on behalf of appellant-NOIDA, that
appellant would be a financial creditor, even with
reference to Section 5(8), though such a line was not
64
taken by the learned Solicitor General, who purported
to appear for NOIDA in the main matter, we shall deal
with the said submission.
53. The essential requirements to attract Section
5(8) are that there must be a debt along with
interest, if any, which is disbursed against
consideration for the time value of money. There can
be no dispute that there is a debt in this case. Even
the respondents would contend that it is actually a
debt but an operational debt under Section 5(21).
That interest is payable in connection with the debt,
cannot be disputed, having regard to the terms of the
lease deed. It is another matter that liability to
pay interest is not an essential feature to attract
Section 5(8), as held by this Court in Orator
Marketing Private Limited v. Samtex Desinz Private
Limited4. The next requirement is that there be
disbursement. Disbursement is an indispensable
requirement to constitute a debt, a financial debt,
within the meaning of Section 5(8) and that
disbursement must be from the creditor to debtor. Or
4 2021 SCC Online SC 513
65
is it that, our understanding is mistaken? Our
understanding, in this regard, is sought to be shaken
by the learned Additional Solicitor General by
raising the following argument. It is her case that
the requirement of disbursement is fulfilled by the
payment of ten per cent down payment, which takes
place upfront in the facts of the case before us.
Further, it is her case that disbursal can flow both
from the debtor to the creditor and the other way
also. Myriad methods of availing financial facilities
can render the flow of funds in either direction. It
need not be unidirectional. It is, in this regard,
that the meaning of the word ‘transaction’, as
defined in Section 3(33), is invoked. Section 3(33)
of the IBC reads as follows:
“3(33) "transaction" includes a agreement or
arrangement in writing for the transfer of
assets, or funds, goods or services, from or
to the corporate debtor;
54. What is contemplated in the principal provisions
of Section 5(8) is a transaction, she contends. This
is as Section 5(8)(f) refers to ‘any other
transaction’, and therefrom, the provisions which
66
precede Section 5(8)(f) would also involve
transactions. The Legislature has not chosen to use a
suffix ‘from creditor to debtor’ before the word
‘disbursed’. So long as there is a disbursal against
consideration for the time value of money, which is
present in the case, and from which, the debt arises,
viz., a liability or an obligation, Section 5(8)
stands attracted. A default, by way of breach by the
lessee, gives rise to a cause of action for breach of
contract where the appellant can seek to recover
damages for the lost opportunity in developing the
land. The word ‘claim’ includes a right to remedy for
breach of contract, it is pointed out.
55. The word ‘transaction’, as such, is not used in
Section 5(8), as pointed out by the respondents.
Unless there is disbursement of the debt, Section
5(8) will not apply. We do bear in mind the following
exposition of law in regard to the interplay between
the words ‘debt’ and ‘claim’ in Pioneer (supra):
“69. It is precisely to do away with
judgments such as Raman Iron Foundry [Union
of India v. Raman Iron Foundry, (1974) 2 SCC
231] that “claim” is defined to mean a right
67
to payment or a right to remedy for breach of
contract whether or not such right is reduced
to judgment. What is clear, therefore, is
that a debt is a liability or obligation in
respect of a right to payment, even if it
arises out of breach of contract, which is
due from any person, notwithstanding that
there is no adjudication of the said breach,
followed by a judgment or decree or order.
The expression “payment” is again an
expression which is elastic enough to include
“recompense”, and includes repayment. For
this purpose, see H.P. Housing & Urban
Development Authority v. Ranjit Singh
Rana [H.P. Housing & Urban Development
Authority v. Ranjit Singh Rana, (2012) 4 SCC
505 : (2012) 2 SCC (Civ) 639] (at paras 13
and 14 therein), where Webster's
Comprehensive Dictionary (International
Edn.), Vol. 2 and Law Lexicon by P. Ramanatha
Aiyar (2nd Edn., Reprint) are quoted.”
56. Thus, a debt is a liability or an obligation in
respect of a right to payment. Irrespective of
whether there is adjudication of the breach, if there
is a breach of contract, it may give rise to a debt.
In the context of Section 5(8), in Pioneer (supra),
disbursement has been understood as money, which has
been paid. In the context of the transaction involved
in the said case, the homebuyers advanced sums to the
builder, who would then utilise the amount towards
the construction in the real estate project. That
68
there must be a disbursement, was clearly present in
the mind of the Court, is clear from the fact that it
has expressly proceeded on the basis that when the
money was paid by the homebuyer to the builder, the
amount disbursed was no longer with the homebuyer.
The homebuyer was paying lesser sums by way of
installments than he would have to pay for the
ultimate price of the flat/apartment. The Court went
on to hold that the expression ‘borrow’ was wide
enough to include the advance by the homebuyer to the
real estate developer for the temporary use. Both
parties had commercial interests, which was further
found. But what is relevant is to attract Section
5(8), on its plain terms, is disbursement. While, it
may be true that the word ‘transaction’ includes
transfer of assets, funds or goods and services from
or to the corporate debtor, in the context of the
principal provisions of Section 5(8) of the IBC, we
are of the view that to import the definition of
‘transaction’ in Section 2(33), involving the need to
expand the word ‘disbursement’, to include a promise
to pay money by a debtor to the creditor, will be
69
uncalled for straining of the provisions.
‘Disbursement’, within the meaning of Section 5(8),
is the payment of money, which flows to the debtor.
In the word ‘claim’, as defined in Section 3(6),
right to payment is one of the components. The golden
thread that runs through the word ‘claim’, is the
right to payment. The right to payment may arise from
a Judgement. It may or may not be fixed. It may be
disputed or undisputed. It may be legal or equitable.
It may be secured or unsecured, but what is
indispensable is, there must be a right to payment.
Similarly, in cases of breach of contract, under any
law in force, if it gives rise to a right to payment,
irrespective of whether it is reduced to a Judgment
or fixed or matured or unmatured, disputed or
undisputed, secured or unsecured, as long as there is
a right to payment, a claim arises. When there is a
claim and, in regard to such a claim, there is a
liability or obligation, which is due from any
person, it gives rise to a debt. A debt includes a
financial debt and an operational debt. It is after
defining the word ‘debt’ with reference to the
70
existence of a right to payment in the broadest
terms, as defined in the term ‘claim’ and including
the word ‘financial debt’ within the expression
‘debt’, the word financial debt, in turn, is
elaborately defined in Section 5(8). What is relevant
for the purpose of Section 5(8), has been clearly
articulated and can be understood with reference to
what is expressly provided. It is unnecessary to
bring in the concept of transaction, as defined in
Section 2(33), for appreciating its scope. A perusal
of definition of the word ‘debt’, no doubt, reveals
that it is closely intertwined with the definition of
the word ‘claim’ in Section 3(6). The word
‘transaction’ is conspicuous by its absence in the
definition of both the word ‘claim’ and the word
‘debt’. We do hold that ‘debt’ means a liability or
obligation, which relates to a claim. The claim or
right to payment or remedy for breach of contract
occasioning a right to payment must be due from any
person. Now, if it is due from any person, it must be
due to someone who would then be the creditor.
Section 5(7) defines ‘financial creditor’ as person
71
to whom a financial debt is due besides an assignee
or transferee from such person. While it may be true
that there would be the brooding omnipresence of a
transaction, as defined, underlying a debt and claim
as defined, it would be unnecessary and unreasonable
to import in the concept of transfer of funds, from
or to a corporate debtor, to glean the meaning of
disbursement in Section 5(8), at least, in the facts
of the instant case. In other words, while the word
‘transaction’ does contemplate a transfer of fund,
inter alia, to a corporate debtor, it is unnecessary
to explore the converse situation projected by the
learned Additional Solicitor General, for
understanding the scope of the word ‘financial debt’,
as contained in Section 5(8), viz., the principal
provision. As to the employment of the word
‘transaction’ in the various clauses of Section 5(8)
and the true scope of Section 5(8)(f), it is a
matter, which will be discussed separately. We are of
the view that, in the lease in question, there has
been no disbursement of any debt (loan) or any sums
by the appellant to the lessee. The appellant would,
72
therefore, not be a financial creditor within the
ambit of Section 5(8).
SECTION 5(8)(D): WHETHER THE APPELLANT IS A
FINANCIAL LESSOR
57. The IBC was enacted in the year 2016. It is
interesting to note that the word ‘financial lease’
has been defined in the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 by
insertion of Section 2 (ha). This insertion was
effected by Act 44 of 2016. It reads as follows:
“2(ha) “financial lease” means a lease under
a lease agreement of tangible asset, other
than negotiable instrument or negotiable
document, for transfer of lessor's right
therein to the lessee for a certain time in
consideration of payment of agreed amount
periodically and where lessee becomes the
owner of the such assets at the expiry of the
term of lease or on payment of the agreed
residual amount, as the case may be.”
Section 2 (ma) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 which is also inserted by
Act 44 of 2016 w.e.f. 1.9.2016 defines the word
‘financial lease’ identically to Section 2(ha) in the
Recovery of Debts Due to Banks and financial
73
Institutions Act, 1993. We notice this for the reason
that the same law giver has enacted Section 5(8)
defining financial debt in the IBC including a lease
which is a financial lease in a manner which is
different in scope from the words ‘financial lease’
as defined in the aforesaid two enactments. In the
definition of ‘financial lease’ in the two Acts which
we have adverted to, the conventional concept of a
‘financial lease’ inevitably and indispensably
involving the transformation of a lessee into the
owner of the assets when the lease ends, is
essentially captured whereas for purpose of IBC,
Parliament has set out the definition which we will
recapitulate here
Section 5(8)(d)- “the amount of any liability
in respect of any lease or hire purchase
contract which is deemed as a finance or
capital lease under the Indian Accounting
Standards or such other accounting standards
as may be prescribed;”
58. The concept of a financial lease has engaged the
attention of this court in a decision which has been
applied by the NCLAT.
74
In Asea Brown Boveri Ltd. v. Industrial Finance
Corporation of India and Others5 the appellant entered
into a lease and finance agreement with the third
respondent therein under which the subject matter of
the lease was 57 cars. The third respondent became a
notified party under a law under which the special
court found that the transaction was only a lease and
not a finance lease. In this context this court went
on to hold as follows:
“13. What is a lease finance? According
to Dictionary of Accounting & Finance by R.
Brockington (Pitman Publishing, Universal Book Traders,
1996 at p. 136):
“A finance lease is one where the lessee uses
the asset for substantially the whole of its
useful life and the lease payments are
calculated to cover the full cost together
with interest charges. It is thus a disguised
way of purchasing the asset with the help of
a loan. SSAP 23 required that assets held
under a finance lease be treated on the
balance sheet in the same way, as if they had
been purchased and a loan had been taken out
to enable this.”
(emphasis supplied)
5 (2004) 12 SCC 570
75
14. In Lease Financing & Hire Purchase by Dr.
J.C. Verma (4th Edn., 1999 at p. 33),
financial lease has been so defined:
“Financial lease is a long-term lease on
fixed assets, it may not be cancelled by
either party. It is a source of long-term
funds and serves as an alternative of longterm debt financing. In financial lease, the
leasing company buys the equipment and leases
it out to the use of a person known as the
lessee. It is a full payout lease involving
obligatory payment by the lessee to the
lessor that exceeds the purchase price of the
leased property and finance cost.
Financial lease has been defined by
International Accounting Standards Committee
as ‘a lease that transfers substantially all
the risks and rewards incident to ownership of
an asset. Title may or may not eventually be
transferred’. Lessor is only a financier and
is not interested in the assets. This is the
reason that financial lease is known as full
payout lease where contract is irrevocable
for the primary lease period and the rentals
payable during which period are supposed to
be adequate to recover the total investment
in the asset made by the lessor.”
(emphasis supplied)
16. In our opinion, financial lease is a
transaction current in the commercial world,
the primary purpose whereof is the financing
of the purchase by the financier. The
purchase of assets or equipments or machinery
is by the borrower. For all practical
purposes, the borrower becomes the owner of
the property inasmuch as it is the borrower
76
who chooses the property to be purchased,
takes delivery, enjoys the use and occupation
of the property, bears the wear and tear,
maintains and operates the machinery/
equipment, undertakes indemnity and agrees to
bear the risk of loss or damage, if any. He
is the one who gets the property insured. He
remains liable for payment of taxes and other
charges and indemnity. He cannot recover from
the lessor, any of the abovementioned
expenses. The period of lease extends over
and covers the entire life of the property
for which it may remain useful divided either
into one term or divided into two terms with
clause for renewal. In either case, the lease
is non-cancellable.”
59. We shall take up Section 5(8)(d) of the IBC. The
subject matter of Section 5(8)(d) is a lease or a
hire-purchase contract. The matter does not end
there. In other words, it is not any lease or a hirepurchase contract, which would entitle the lessor to
be treated as the financial creditor. There must be a
lease or hire-purchase contract, which is deemed as a
finance or capital lease. The Law Giver has not left
the courts free to place, its interpretation on the
words ‘finance or capital lease’. The Legislature has
contemplated the finance or a capital lease, which is
deemed as such a lease under the Indian Accounting
77
Standards. It could also be deemed as a financial or
a capital lease under any other accounting standards
as may be prescribed. The word ‘prescribed’ has been
defined in Section 3(26) as meaning prescribed under
Rules made by the Central Government. There is no
case for the appellant that Central Government has
made any Rules providing for other accounting
standards under Section 5(8)(d) of the IBC. In
Section 5(8)(d), it is necessary to notice the
opening words of the provision, viz., ‘the amount of
any liability in respect of’. The Law Giver, in other
words, has contemplated that should there be any
liability arising out of a lease or hire-purchase,
which is deemed as a finance or a capital lease in
terms of the Indian Accounting Standards, then, the
person, who has incurred the liability, would become
the debtor and the person, in respect of whom, the
liability has been incurred, would become the
financial creditor.
60. Much emphasis was laid by the appellant on the
word ‘deemed’ in Section 5(8)(d). One would have
expected that on turning to the Indian Accounting
78
Standards, there would be a provision providing for a
deemed finance or capital lease. The inquiry in this
direction, however, did leave us with failure and
even disillusionment. We found that there is no
provision, which articulates a deeming provision, as
such, providing for a lease or a hire-purchase
contract, which is deemed as a finance or capital
lease. The word ‘deemed’ is used as a verb. It is a
legislative devise by way of a fiction. In other
words, the provision requires the Court to imagine a
state of affairs as true. The province of a deeming
provision is the subject matter of a large body of
case law. Suffice it to notice the following
paragraphs from Aneeta Hada v. Godfather Travels and
Tours Private Limited6:
“34. Lord Asquith, in East End Dwellings Co.
Ltd. v. Finsbury Borough Council [1952 AC 109
: (1951) 2 All ER 587 (HL)] , had expressed
his opinion as follows : (AC pp. 132-33)
“If you are bidden to treat an imaginary
state of affairs as real, you must surely,
unless prohibited from doing so, also imagine
as real the consequences and incidents which,
if the putative state of affairs had in fact
6 2012 (5) SCC 661
79
existed, must inevitably have flowed from or
accompanied it. … The statute says that you
must imagine a certain state of affairs; it
does not say that having done so, you must
cause or permit your imagination to boggle
when it comes to the inevitable corollaries
of that state of affairs.”
38. From the aforesaid pronouncements, the
principle that can be culled out is that it
is the bounden duty of the court to ascertain
for what purpose the legal fiction has been
created. It is also the duty of the court to
imagine the fiction with all real
consequences and instances unless prohibited
from doing so. That apart, the use of the
term “deemed” has to be read in its context
and further, the fullest logical purpose and
import are to be understood. It is because in
modern legislation, the term “deemed” has
been used for manifold purposes. The object
of the legislature has to be kept in mind.”
61. It is apposite, at this juncture, to advert to
the Indian Accounting Standards relevant to our
inquiry.
62. The Rules, which are relevant in regard to the
specification of a lease as a financial lease are set
down as Rules 61 to 67 of Indian Accounting Standards
[for short “IAS”]. They have been made under Section
133 of the Companies Act, 2018.
80
“Classification of leases (paragraphs B53–
B58)
61 A lessor shall classify each of its leases
as either an operating lease or a finance
lease.
62 A lease is classified as a finance lease
if it transfers substantially all the risks
and rewards incidental to ownership of an
underlying asset. A lease is classified as an
operating lease if it does not transfer
substantially all the risks and rewards
incidental to ownership of an underlying
asset.
63 Whether a lease is a finance lease or an
operating lease depends on the substance of
the transaction rather than the form of the
contract. Examples of situations that
individually or in combination would normally
lead to a lease being classified as a finance
lease are:
(a) the lease transfers ownership of the
underlying asset to the lessee by the end of
the lease term;
(b) the lessee has the option to purchase the
underlying asset at a price that is expected
to be sufficiently lower than the fair value
at the date the option becomes exercisable
for it to be reasonably certain, at the
inception date, that the option will be
exercised;
(c) the lease term is for the major part of
the economic life of the underlying asset
even if title is not transferred;
(d) at the inception date, the present value
of the lease payments amounts to at least
substantially all of the fair value of the
underlying asset; and
(e) the underlying asset is of such a
specialised nature that only the lessee can
use it without major modifications.
81
64 Indicators of situations that individually
or in combination could also lead to a lease
being classified as a finance lease are:
(a) if the lessee can cancel the lease, the
lessor’s losses associated with the
cancellation are borne by the lessee;
(b) gains or losses from the fluctuation in
the fair value of the residual accrue to the
lessee (for example, in the form of a rent
rebate equaling most of the sales proceeds at
the end of the lease); and
(c) the lessee has the ability to continue the
lease for a secondary period at a rent that
is substantially lower than market rent.
65 The examples and indicators in paragraphs
63–64 are not always conclusive. If it is
clear from other features that the lease does
not transfer substantially all the risks and
rewards incidental to ownership of an
underlying asset, the lease is classified as
an operating lease. For example, this may be
the case if ownership of the underlying asset
transfers at the end of the lease for a
variable payment equal to its then fair
value, or if there are variable lease
payments, as a result of which the lessor
does not transfer substantially all such
risks and rewards.
66 Lease classification is made at the
inception date and is reassessed only if
there is a lease modification. Changes in
estimates (for example, changes in estimates
of the economic life or of the residual value
of the underlying asset), or changes in
circumstances (for example, default by the
lessee), do not give rise to a new
classification of a lease for accounting
purposes.
Finance leases
Recognition and measurement
82
67 At the commencement date, a lessor shall
recognise assets held under a finance lease
in its balance sheet and present them as a
receivable at an amount equal to the net
investment in the lease.”
63. The analysis of the said criteria in the context
of the lease in question, would yield the following
results. Under Rule 61, the lessor is obliged to
classify each of its leases as an operating lease or
a finance lease. In Civil Appeal No. 2222 of 2021,
there is no case for the appellant-NOIDA, that it has
been classified as finance lease. As far as the other
Civil Appeal filed by the very same Authority, i.e.,
NOIDA is concerned, Smt. Madhavi Diwan, sought to
contend that, while it is not shown as a finance
lease as such, the transaction is characterised as a
sale in the balance sheet.
64. Rule 62, the sheet anchor of the appellant,
declares 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. Moving on to Rule 63, it undoubtedly, declares
that what matters is not the form but the substance.
83
Thereafter, under the examples of situations, either
individually or in combination, which would lead to a
lease being classified as a finance lease, certain
situations have been depicted. As far as the first
situation is concerned, it would involve a lease,
where, there is a transfer of ownership of an
underlying asset to the lessee by the end of the
lease term. There is no case for the appellants that
the lease contemplates transfer of ownership of the
underlying asset. The underlying asset is the land. In
fact, the case of the appellant would appear to be
also that there is no transfer of ownership because
by the end of lease term third party rights would
have been created over the dwelling unit/ built up
space/ plot constructed by the Lessee. It is also the
further case set up that the Lessee alone brings
third parties on to the property and gets paid by
such parties.
It will be relevant to notice that the so called
third parties do not get ownership rights as such.
The rights are transferred in favour of the allotees
of dwelling units /built up space/ plot only by way
84
of a sub-lease. Therefore, there is no transfer of
the ownership of the underlying asset by the end of
the lease term. Under the next situation considered
relevant under the Indian Accounting Standards, is
the granting of an option to the lessee to purchase
the underlying asset at a price, which is expected to
be sufficiently lower than the fair value at the date
of option becoming exercisable for it to be
reasonably certain at the inception date, that the
option will be exercised. The underlying asset is the
plot.
65. From the Table presented before the NCLAT by the
appellant, we find that appellant appears to have
taken the stand that the lease rent is paid for the
leasing of the land and the premium is paid for the
rights to develop and construct the buildings on the
lease land. Therefore, the underlying asset is not
just a land but the right to develop or construct a
building.
66. A lease of immovable property is defined in
Section 105 of the Transfer of Property Act, inter
alia, as a transfer of a right to enjoy such
85
property. The property, which is leased, under the
lease is the plot of land. Section 105 speaks about
the terms on which the lease takes place. The right
to enjoy the leased property and the terms, on which
it is to be enjoyed, must be distinguished from the
property, which is the subject matter of lease. The
subject matter of the lease is such property. It is
such property, viz., immovable property, in the case
of a lease of an immovable property, which can be
treated as the underlying asset, for the purpose of
the Rules made under Section 133 of the Companies
Act, 2013. The contention of the appellant that the
underlying asset is also the right to develop or
construct a building on the leased land, does not
appear to be tenable. The very contention contains an
irreconcilable contradiction. On the one hand, the
land is correctly described as the leased land. The
right to develop or construct a building on the
leased land, cannot be treated as the underlying
asset. In fact, there is no case that the buildings
that are put up on the leased land, would also
constitute part of the underlying asset. We may
86
firstly notice that there is no option to purchase
‘the right to develop or construct the building’.
This itself suffices to expose the fallacy that the
right to develop or construct the building is also
part of the underlying asset.
67. At any rate there is no right within the meaning
of criteria with the Lessee to purchase the asset.
This criterion is also not fulfilled as there is no
option to purchase at all that is vested with the
lessee.
68. The third criteria in Rule 63 is, where the lease
term is for the major part of the economic life of
the underlying asset, even if the title is not
transferred. The definition of ‘economic life’, as
provided in Indian Accounting Standards (hereinafter
referred to as ‘the IAS’, for short) 17, reads as
under:
“Economic life is either:
(a) the period over which an asset is expected
to be economically usable by one or more
users; or
(b) the number of production or similar units
expected to be obtained from the asset by one
or more users.”
(Emphasis supplied)
87
The lease in question is for a period of ninety
years. In regard to land, the underlying asset, ‘the
principle of economic life of underlying asset’, is
inapposite. The economic life of land is not limited.
The principle in the said situation is predicated
with reference to measuring the economic life of an
asset. More importantly, it speaks of the major part
of the economic life of the asset. Both these
concepts are inapposite and even inapplicable with
regard to land. Land does not depreciate with the
passage of time. Ordinarily, the price of land would
only increase, unlike other assets.
69. The argument of the appellant is that on the
construction being completed the lease land shall be
of no value to the lessor and the third party right
being created, results in the economic life and the
value of the asset being exhausted. We find no merit
in this argument having regard to the fact that the
underlying asset is the land. There is another
important reason which we must set out here. A sublease has been produced before this Court in
C.A.No.2369 of 2021. Originally it was referred to in
88
the course of argument by Shri Devashish Bharuka.
However, it has subsequently been filed under an
affidavit on behalf of Respondent No..1 in
C.A.No.2367-2369 of 2021. The sub-lease, no doubt, is
entered into between the appellant as Lessor and one
M/s. Cloud 9 Projects Pvt. Ltd., the Lessee in the
said lease and the sub-lessee. The sub-lease dated
12.11.2018 would show that the land admeasuring 40087
sq.mtr. bearing Plot NO.GH-02 was the subject matter
of the lease. The lease was, as in the facts of this
case, for a period of 90 years. The lease was entered
into with the lessee in the said case on 17.06.2009.
70. It is indicated in the sub-lease that the lessee
has the right to allot to its applicants, the
dwelling units including the undivided proportionate
share in the land, inter-alia. It is further provided
that the sub-lessee will observe the covenants, terms
and conditions, laid down in the original lease.
Thereafter, it is provided that in consideration of
the amount paid, which included the cost of super
structure and the undivided proportionate share in
the land underneath the building paid by the sub-
89
lessee to the lessee the lessee sells, transfers, and
conveys to the sub-lessee the dwelling unit with
proportionate right, inter-alia, in the land
underneath the building. It is next provided that the
lessee simultaneously sub-leases to the sub-lessee
for the unexpired period of ninety years lease, the
undivided unidentified title to the land
proportionate to the area allotted to the sub-lessee
in relation to the total area subject to various
terms and conditions. In Condition 6, it is mentioned
inter-alia that the sub-lessee shall get exclusive
possession of the built-up covered area of the
dwelling unit, and is being transferred the title of
the same along with the right over the land, through
the sub-lease. The lessee and the sub-lessee are to
perform the covenants and conditions in the lease
deed between the lessee and the lessor as applicable
in relation to the land and the unit being leased
under these present. The sub-lessee cannot mortgage
the dwelling unit to secure ‘any loan’ at any stage
except with the prior permission of the lessor. Sub
lessee is to also obtain an appropriate NOC from the
90
lessee/lessor, in this regard. The sub-lessee can use
the dwelling unit only for residential purposes and
for no other purpose. The right of the sub-lessee is
made subject to the provisions of the UP Act of 2010.
It is thereafter that condition 21 deals with what is
to happen on the expiry of the lease of the land. It
reads as follows:
“21. That the Lessee /Sub-Lessee shall on
the expiry of the lease of the land,
peacefully hand over the said land unto
the Lessor after removing the
superstructure, within the stipulated
period. The share in the undivided
proportionate land hereby sub-leased,
shall always remain un-divisible and
unidentified. Similarly, the Sub-Lessee
shall have the right of usage of common
areas and will not have any independent
right of possession of the same.
It is further provided in condition 24 that the terms
and conditions of the parent lease deed, inter-alia,
shall be binding on the parties after execution of
the sub-lease. Condition 27 provides that in case of
any breach of the terms and conditions of the sublease by the lessee/sub-lessee, the lessor will have
the right to re-enter the demised dwelling unit,
after determining the sub lease. It is further
91
provided that at the time of re-entry of demised
dwelling unit, the lessor may re-allot the same to
any other person. All the clauses of the parent lease
deed are made applicable and they are to prevail in
case of any repugnancy between them and the sublease.
71. A perusal of the same would reveal that in
keeping with the lease deed and the provisions of
Section 9 of the U.P. Apartment Owners Act, it is
that the sub-lease deed is executed. The sub-lessee
or the allottee pays the cost of the structure and
the undivided proportionate interest in the land. The
transfer to him is described as a sale and
conveyance. There is simultaneous sub-lease also in
regard to the unidentified title to the proportionate
land. The sub-lease appears to effect a sale of the
dwelling unit. However, certain conditions appear to
militate against an absolute transfer. They include
the condition that the sub-lessee cannot mortgage the
dwelling unit for securing any loan at any stage
except with prior written permission of the lessor.
The use of the dwelling unit being limited to
92
residential purpose is perhaps another feature which
is unique. The power of the lessor to re-enter the
dwelling unit, which is described in condition 27 as
the ‘demised' dwelling unit, after determining the
sub-lease and also the power to re-allot the same to
any person are clearly inconsistent with a completed
sale. This is apart from condition 21 which we had
extracted which obliges the sub-lessee on the expiry
of the lease of the land to deliver to the lessor the
land, after removing the super structure within the
stipulated time. It will be noticed further, that the
rent and the premium which is the amount claimed by
the appellant has no relation with what the lessee
would get from the sub-lessee. There is no such case
that the amount which is claimed relates to any
default by the sub-lessee.
72. The underlying asset in the lease is no doubt the
plot of land. The terms contemplate construction of
residential flats over the plot by the lessee. The
lessee can subject to the lease transfer the built-up
flats. The transfer is secured through a sub- lease.
The transferor in the sub-lease of the dwelling unit
93
is the lessee in regard to which the sub-lease
appears to evidence the sale. We have noticed the
features in terms of the conditions. If the built-up
area/flats is to be treated as part of the underlying
asset then the appellant would be the lessor of the
flat. However, going by the terms of the lease and
the sub-lease, the flat is entirely constructed by
the lessee and it is the lessee who transfers the
same to the sub-lessee, and gets the entire
consideration. The title flows from the lessee to the
sub-lessee. The subject matter of the sub-lease is
the dwelling unit as also the undivided right in the
land. The question is whether on the basis of Section
5(8)(d), under the lease, what is the underlying
asset as between the appellant and the corporate
debtor? Though the flats to be constructed are
contemplated in the lease, it is not the same as
understanding them as the subject matter of the
lease. The flats would be the subject matter of the
sub-lease. No doubt, from the lease and the sub-lease
the right of the lessee or rather its obligation
under the lease is to put up the residential flats
94
which he can transfer in terms of the lease. It may
be true that the terms of the lease are made binding
on the sub- lessee. However, as between the lessor
and the lessee, the underlying asset would be the
plot of land. From the terms of the sub lease which
is as per the decision of the Lessor (appellant) goes
to show the extent of the control by the Lessor and
consequent intrusion into the power of the lessee
namely, despite power to effect an apparent sale of
the flat the term includes barring the purchaser from
mortgaging the dwelling unit for any loan except with
the prior consent of the lessor, the power of reentry of the lessor and to re-allot the “sold
dwelling unit” to any other person and the obligation
of the lessee/sub lessee to surrender the land after
demolishing the super structure on the expiry of the
period of lease.
73. The lease before us is stated to be for a period
of 90 years. The lease is intended and structured to
attain the objective of putting up residential
structures as part of the planned development of the
area. The constructed area or the flats can be
95
transferred to the allottees by the Lessee on the
strength of tripartite sub-leases. This is borne out
by the terms of the sub-lease produced before this
court. This is also clear from the provisions of the
clause before us which contemplate the execution of a
sub-lease. There is no provision for renewal. The
parties have clearly contemplated that the terms of
the sub-lease will be in the form and format as
provided by the Lessor (appellant). It is accordingly
that the clause in the lease actually contemplates
inter alia that the construction be completed within
7 years from the date of execution of the lease deed
with a maximum extension of another 3 years with
penalty. Ordinarily, there would be no further
extension. Therefore, the construction can be used
till the expiry of the 90 years period by the sublessee and the terms of the lease and sub-lease would
clearly indicate that at the end of 90 years, far
from any enlargement of the rights of the sub-lessee,
the sub-lessee is to deliver back the land directly
to the Lessor after removing the superstructure. It
is another matter that with the passage of a long
96
period of time, the superstructure itself may be in a
state of disrepair. However, what is relevant is that
the concept of economic life is ill-suited to the
facts as the lease is in respect of land which is to
be taken as the underlying asset. It may not be
possible to hold that the lease is for the major part
of the economic life of land. It cannot be said that
at the expiry of 90 years the land will cease to be
economically usable. Therefore, we cannot accept the
argument of the appellant that after 90 years
appellant would not get the empty parcel of land and
the land would not be of any commercial use to the
appellant after the expiry of the lease. The argument
that the land will be of no value to the lessor, has
no force, having regard to the nature of underlying
asset, namely, land which indeed ordinarily would
have perennial value. In clause 12 under other
clauses, it is provided that lessee shall not be
allowed to assign or change his role. Any breach
would lead to cancellation and entire money deposited
will be forfeited. Though the words used are the
lessee cannot assign or change his ‘role’, it would
97
in substance mean that it is a contract to the
contrary within the meaning of Section 108 of the
Transfer of Property Act. The position would indeed
be that the lessee cannot assign his right. We must
at this juncture notice under the heading ‘Transfer
of Plot” that the lease does contemplate that upto
30.09.2010, the lessee has a right to sub-divide the
allotted plot into suitable smaller plots as per the
planning norms and to transfer the same to the
interested parties with prior approval of the lessor
on payment of transfer charges. However, the area of
the sub-divided plot cannot be less than 20,000 sq.
meters. We would notice that the leasehold plot in
the case is only 22565.77 sq.meters. We would
understand the scope of the said provision as right
given to the lessee, no doubt, to transfer the
allotted plot after sub-division into smaller plots
and to transfer the plots so sub-divided. This is
subject to two conditions. This is permitted only for
a period of two months from the date of execution of
the agreement namely till 30.09.2010. This can be
only done if the lessor permits it by prior approval.
98
More importantly, the sub-plots which can be so
transferred, cannot be less than 20000 sq. meters. As
we have noticed this will appear to be a standard
clause and we have noticed that the lease in the case
of M/s Cloud 9 which we have adverted to, consisted
of about 40000 square meters. We do note that the
lease deed in civil appeal no. 2367-69 of 2021 is for
a plot of 69998.73 square metres. Also, therein the
minimum size of the sub divided plot is not less than
10,000 square metres. But the other conditions
including prior approval remains the same. Further
provisions under the heading ‘transfer of plot’ deal
with only cases of individual flat/plot being
transferrable subject to the various conditions, the
most pertinent being that it contemplates essentially
a sub-lease. We do not think that we can permit the
matter to be appreciated on the basis of the
situation contemplated in a case where under the
lease within 2 months on a sub-division of the plot
assignment takes place of the plot without the
construction and without obtaining the completion
certificate. In fact, no argument was advanced based
99
on the said provision. The claim relates to rental
and premium on the basis that the lease continued and
the lessee (corporate debtor) persevered in the
lease.
74. The underlying principle appears to be that even
if it is by way of a lease, the rights are vested
with the lessee, for the lion’s share of the economic
life or the value of the underlying asset, then,
substantially, the lessee is enjoying the rights as
an owner it is in this context that the principle is
laid down that the transfer of title is not
necessary. In other words, sans transfer of title,
the lessee enjoys the asset for the fruitful period
of the life of the asset. At the end of the major
part of the economic life of an underlying asset, the
life of which is limited by time, the asset would be
mostly depreciated, if not, without any value. Such a
situation can never apply, in the case of land.
75. The fourth example of the situation, whereunder a
lease is to be classified as a financial lease, is,
if at the inception date, the present value of the
lease payments, amounts to at least substantially all
100
of the fair value of the underlying asset. ‘Fair
Value’ is defined in the IAS, as follows:
“Fair value is the amount for which an asset
could be exchanged, or a liability settled,
between knowledgeable, willing parties in an
arm’s length transaction.”
76. Inception date is different from the commencement
of lease as ordinarily understood under the IAS.
Inception date has been defined in the IAS, as
follows:
“The inception of the lease is the earlier of
the date of the lease agreement and the date
of commitment by the parties to the principal
provisions of the lease. As at this date: (a)
a lease is classified as either an operating
or a finance lease; and (b) in the case of a
finance lease, the amounts to be recognised
at the commencement of the lease term are
determined.”
77. In fact, there is no such classification done by
the appellant. Even as on the commencement day, what
is paid by the lessee, is only ten percent of the
total premium. There is neither a transfer of
ownership, at the end of the lease term. There is
also no option to purchase with the lessee. The
payment of ten percent of the premium, in the first
place, does not represent substantially all of the
101
fair value of the underlying asset. The lease is for
a period of ninety years. At the end of ninety years,
there is, in fact, no provision for renewal of the
lease. The amount of the premium paid cannot be
linked with the fair value of the land. The
relationship between the appellant and the lessee,
was to remain throughout as lessor and lessee. It may
not be possible to even find that the total premium
and the rent would represent substantially all of
fair value of the underlying asset.
78. The fifth example in Rule 63 is clearly
inapplicable as it is not the appellant’s case that
the underlying asset is of such a specialised nature
that the lessee could only use it without major
modification. Therefore, as far as Rule 63 is
concerned, to sum-up, none of the situations
mentioned in Rule 63 are present in the instant
lease.
79. Rule 64 continues with situations, which,
individually or in combination, would also lead to a
lease being classified as a finance lease. The first
situation is power reserved with the lessee to cancel
102
the lease and the lessor’s losses associated with the
cancellation being borne by the lessee. This example
also does not apply for the simple reason that lease
does not confer even the power to cancel the lease on
the lessee. On the other hand, by stark contrast, the
lessor is abundantly clothed in various contexts to
cancel the lease.
80. The second situation in Rule 64 is, when the
gains or losses from the fluctuation in the fair
value of the residual accrue to the lessee. The
specific example, which is given in the said
situation is a case of a rent rebate, equalling most
of the sale proceeds at the end of the lease. The
example clearly has the underpinning of an ultimate
sale at the end of the lease. In other words, a
finance lease posits ordinarily a lease to begin with
and a sale, when the curtains are finally wrung down.
We have already noticed that no sale of the
underlying asset is contemplated. The lease is for a
period of ninety years. The expression ‘residual
value’ is also defined. It reads as follows:
103
“The residual value of an asset is the
estimated amount that an entity would
currently obtain from disposal of the asset,
after deducting the estimated costs of
disposal, if the asset were already of the
age and in the condition expected at the end
of its useful life.”
Residual value is predicated with reference to
the end of the useful life of an asset. Useful life
is, inter alia, the period over which an asset is
expected to be available for use by an entity. The
‘end’ of useful life is hard to conceive in respect
of land. Also, nothing is shown to establish how the
ingredients are attracted.
81. The last example in Rule 64 is the ability of the
lessee to continue for a secondary period at a rent
that is substantially lower than the market rent. As
far the lease in question is concerned, the period of
the lease is ninety years. The lease, as such, does
not contemplate a renewal of the lease. No secondary
period is contemplated.
82. Rule 65 goes on to declare that the examples and
indicators in Rules 63 and 64 are not always
conclusive. Though the learned Solicitor General
104
seized upon this enunciation, the very next sentence
would belie the possibility of any expectation on the
basis of the aforesaid declaration. What is stated is
that even despite the presence of the examples and
indicators in Rules 63 and 64, if other features of
the lease do not persuade the Court to conclude that
the lease transfers substantially all the risks and
rewards incidental to ownership, it is to be
classified as an operating lease. It would not be a
financial lease. In this case, the position obtaining
is the converse situation. None of the features in
Rules 63 and 64, advance the case of the appellant
that the lease in question is a financial lease. No
doubt, a perusal of Rule 65 does give an impression
that the most important criteria is that the lease
must effect, substantially, the transfer of all the
risks and the rewards incidental to ownership. The
example, which is given in Rule 65, is based on
transfer of ownership at the end of the lease for a
payment, which is equal to the fair value at the time
of transfer and which is variable. The other example
furnished is variable lease payment, as a result of
105
which, the lessor does not substantially transfer all
the risks and the rewards.
83. Rule 66 provides that the classification of the
lease must be made at the inception date, for which,
there is no claim made by the appellants.
Reclassification is permitted only, if there is a
modification of the lease. Changes in estimates,
which is again related to in the example to the
changes in the estimates of the economic life or the
residual value of the underlying asset, will not
occasion a new classification of the lease for
accounting purposes. So also, changes in
circumstances, such as default by the lessee would
not warrant a new classification being effected. The
appellants have, admittedly, not classified the lease
in question at the inception date as a finance lease.
This, undoubtedly, is a circumstance, which would
militate against the lease of the appellant being
treated as a finance lease.
84. Rule 67 again provides that at the commencement
date, which means the date of commencement of the
lease, the lessor should recognise the assets under a
106
finance lease in its balance sheet and the asset so
recognised must be presented as a receivable. The
matter does not end there. The asset must be
presented as an amount equal to the net investment of
the lease. There is nothing on record to establish
that the underlying asset has been dealt with in the
aforesaid manner by the appellants.
85. Having made a survey of the various situations
and examples under the Statutory Rules, which would
persuade the Court to ‘deem’ a lease as a finance
lease and, having found that none of the situations
or indicators suit the case of the appellant, the
case should rest and the point must be answered
against the appellant. However, the time is now ripe
to examine the contents of Rule 62 and Rule 65. They
declare as to when a lease is to be classified as a
financial lease. It provides that a lease may be so
classified as a financial lease, if it transfers
substantially all the risks and rewards incidental to
ownership of an underlying asset. The converse
position applies to an operating lease and a lease is
to be classified as an operating lease, if the lease
107
does not substantially transfer all the risks and the
rewards incidental to the ownership of the underlying
asset.
86. The concept revolves around the transfer
substantially of risks and rewards incidental to the
ownership of the leasehold property. Therefore, we
must deal with what constitutes ownership of an
asset. We may notice the following discussion
regarding the ‘idea of ownership’ in Salmond on
Jurisprudence, 12th Edition:
“Ownership denotes the relation between a
person and an object forming the subject
matter of his ownership. It consists in a
complex of rights, all of which are rights in
rem, being good against all the world and not
merely against specific person(a). Though in
certain situations some of these rights may
be absent, the normal case of ownership can
be expected to exhibit the following
incidents(b).”
87. Thereafter, the following are treated as the
rights associated with ownership. An owner of a
property will have the right to possess the thing
which he owns, it is stated. Secondly, the second
principle is described as follows: -
108
“Secondly, the owner normally has the right
to use and enjoy the thing owned: the right
to manage it, i.e., the right to decide how
it shall be used; and the right to the income
from it. Whereas the right to possess is a
right in the strict sense, these rights are
in fact liberties: the owner has a liberty to
use the thing, i.e., he is under no duty not
to use it, in contrast with others who are
under a duty not to use or interfere with
it.”
88. The third right is described as follows: -
“Thirdly the owner has the right to consume,
destroy or alienate the thing. The rights to
consume and destroy are straight-forward
liberties. The right to alienate, i.e., the
right to transfer his rights over the object
to another, involves the existence of a
power. A non-owner even though he has
possession, cannot normally transfer the
rights of ownership over a thing to another;
for the law acts on the principle nemo dat
quod habet. To this principle there are
certain exceptions: for example, the Factors
Acts enable non-owners in possession to
transfer ownership in certain circumstances.”
89. Fourthly, the right is one associated with the
indeterminate duration of the right. It is here that
we find the following discussion in this regard: -
“Fourthly, ownership has the characteristic
of being indeterminate in duration. The
position of an owner differs from that of a
non-owner in possession in that the latter’s
109
interest is subject to be determined at some
future set point, whereas the interest of the
owner can endure theoretically for ever. The
interest of a bailee or lessee comes to an
end when the period of hire or of the lease
determines; the owner’s interest is
perpetual, being determined neither by any
set point nor by the owner’s death, because
the property owned can descend to the owner’s
heir or next-of-kin, and if he had sold the
property prior to his death, then the new
owner’s interest would continue unaffected by
the previous owner’s death.”
90. Fifthly, there is a residual nature, in regard to
the concept of ownership, and it is described as
follows: -
“If, for example, a landowner gives a lease
of his property to A, an easement to B and
some other right such as a profit to C, his
ownership now consists of the residual
rights, i.e., the rights remaining when all
these lesser rights have been given away.
Moreover, in English law the general rule is
that the extinction of such lesser rights
will revive in the owner all his original
rights.”
91. A question may arise as to whether in approaching
the subject, we are to be guided by an examination of
the question as to whether the lessee in this case
possesses the rights incidental to ownership or the
expression ‘rewards incidental to ownership’ is
110
different from rights incidental to ownership. Can
there be rewards if the rights which we have
indicated herein before are not transferred? Can
there be rewards which must be interpreted in a
different manner from the idea of rights? In this
regard, we must also remind ourselves that to
constitute a lease, a financial lease, it is not
indispensable that the ownership is in all cases
transferred from the lessor to the lessee. However,
we have noticed the example hereinbefore wherein the
said concept is declared. That is, it is relevant
when the lease term is for the major part of the
economic life. Undoubtedly, ordinarily a financial
lease would be a lease which is born as a lease but
ends as a sale. The lease does involve transfer of
ownership from the previous owner, namely the lessor
to the lessee. In this context, Parliament has
defined financial lease in two enactments through
Amendment Act no. 44/2016 as hereinbefore noticed.
92. We may at once bear in mind two concepts, in the
overarching principle. The two concepts are
“substantially” and “all”. In other words,
111
substantially all the risks and rewards incidental to
ownership must be transferred under the lease. While
we do agree with the appellants that an element of
flexibility is allowed by the presence of the concept
‘substantially’, at the same time, it cannot be a
case where predominantly all the risks and rewards
incidental to ownership are not transferred. In other
words, on a conspectus of all the terms of the lease
and the reference to the situations and examples
which have already been set out, if there is for the
most part, a transfer of all the risks and rewards
incidental to ownership, in effect, it can be treated
as a finance lease.
93. In Black’s Law Dictionary 11th Edition the word
“substance” to begin with, is defined as follows:-
“(i) The essence of something; the essential
quality of something, as opposed to its mere
form (ii) Any matter, esp. an addictive drug
illegal.”
94. The word “substantial” is defined as follows:-
“(i) Of, relating to, or involving substance;
material. (ii) Real and not imaginary; having
actual, not fictitious, existence. (iii)
Important, essential, and material; of real
112
worth and importance (iv) Strong, solid, and
firm; large and strongly constructed (v) At
least moderately wealthy; possessed of
sufficient financial means (vi) Considerable
in extent, amount, or value; large in volume
or number (vii) Having permanence or nearpermanence; long-lasting (viii) Containing
the essence of a thing; conveying the right
idea even if not the exact details (ix)
Nourishing; affording sufficient nutriment.”
95. We would find the word ‘substantially’ occurring
in the provision in question would mean that what
matters is not the form but the substance. In other
words, largely and in substance all the risks and
rewards incidental to ownership is to be transferred
in a lease to constitute it as a finance lease.
96. In the context of the word ‘incidental’, the
contention that with reference to the definition of
the word incidental in Black’s Law Dictionary which
is referred by the appellant, namely that it is
subordinate to something of greater importance or
having a minor role, and therefore the interpretation
must be that it can be less than the absolute, does
not appear to us to be correct. No doubt, the word
incidental has been defined as follows: -
113
“Subordinate to something of greater
importance; having a minor role”
97. In this case we may notice the definition of the
word “incident to employment” in Black’s Law
Dictionary wherein it has been defined as follows: -
“A risk that is related to or connected with
a worker’s job duties.”
98. The words “incident of ownership” itself has been
defined as follows: -
“Any right of control that may be exercised
over a transferred life-insurance policy so
that the policy’s proceeds will be included
in a decedent’s gross estate for estate-tax
purposes. The incidents of ownership include
the rights to change the policy’s
beneficiaries and to borrow against, assign,
and cancel the policy.”
(Emphasis supplied)
99. In State of Orissa and Another V. M/S. Chakobhai
Ghelabhai and Company,
7 one of the questions which
arose was whether under Section 29 of the Orissa
Sales Tax Act, 1947, the State had power to provide
for fee on the memorandum of appeals and applications
in revision. Section 29 of the said Act inter alia
provided for the power to make rules providing for
7 AIR 1961 SC 284
114
the procedure and other matters including fees
incidental to the disposal of appeals and
applications for revision and for review under
Section 23. While dealing with the scope of the word
“incidental”, this Court held as follows: -
“The fees imposed are not taxes at all; they
come within the expression “other matters
(including fees) incidental to the disposal
of appeals and applications for revision etc.
We are unable to agree with the High Court
that the word ‘incidental’ has reference to a
matter of casual nature only. The procedure
for disposal of an appeal includes as a
necessary incidental matter the filing of an
appeal on a proper fee.”
(Emphasis supplied)
100. In State of Tamil Nadu V. Binny Ltd., Madras,
8 the
question arose whether the sales of provisions
effected by the assessee in a workman store, was
assessable to tax under a State law. Section 2(d)(ii)
defined business as including any transaction in
connection with or incidental or ancillary to the
trade, commerce, manufacture, adventure or concern
which formed the subject matter of section 2(d)(i).
8 1980 Supp SCC 686
115
The contention taken by the assessee was that it was
necessary that the connection between the sales of
the provisions in the store and manufacture of the
goods in question must be direct and that direct
connection was missing. In other words, the assessee
was carrying on manufacture and sale of textiles. It
was also running a store in question. The word
“business” was defined as including trade and
manufacture inter alia in the first limb of
Section(2)(d) and also any transaction incidental to
such trade and manufacture. This Court took the view
that there is no justification in the contention of
the assessee. We notice the following exposition: -
“It is indeed difficult to see how it can at
all be said that the activity of selling
provisions to the workmen in the Store was
not incidental to the business of manufacture
of textiles in the factory. The sales which
were effected in the Store were to the
workmen employed in the factory where
textiles were being manufactured and the
provision of this facility to the workmen was
certainly incidental to the carrying on the
business of manufacture of textiles. This
view finds support from the decision of this
Court in Royal Talkies, Hyderabad v.
Employees State Insurance Corporation where
the question was as to whether a canteen
116
maintained by a cinema owner in the premises
of the cinema could be said to be incidental
to the business of running the cinema.
Krishna Iyer, J., speaking on behalf of the
court, pointed out that (SCC p.212 : SCC
(L&S) p. 505) “a thing is incidental to
another if it merely appertains to something
else as primary. Surely, such work should not
be extraneous or contrary to the purpose of
the establishment but need not be integral to
it either.”
(Emphasis supplied)
101. The proper interpretation in the context of the
word “incidental” is not that it is subordinate to an
absolute, as it is sought to be made out. In M/s.
Shroff and Co. v. Municipal Corpn. of Greater Bombay
and Another,
9 this Court reiterated the view that the
expression incidental means ‘necessary’ in certain
contexts which does not mean a matter of causal
nature only.
102. In the context of the provision in question, the
expression “incidental to” would mean arising out of
or otherwise connected with. In other words, the
risks and rewards must flow out of ownership. The
rewards must be those arising out of ownership. This
9 1989 Supp 1 SCC 347
117
in fact is central to understanding the concept of a
finance lease.
103. An argument is raised that paragraphs 15A to 17
of the Indian Accounting Standards (in IND AS) 17, it
becomes evident that finance leases are contemplated
in respect of lands. We may notice paragraphs 15A to
17, which read as follows: -
“15A. When a lease includes both land and
buildings elements, an entity assesses the
classification of each element as a finance
or an operating lease separately in
accordance with paragraphs 7-13. In
determining whether the land element is an
operating or a finance lease, an important
consideration is that land normally has an
indefinite economic life.
16. Whenever necessary in order to classify
and account for a lease of land and
buildings, the minimum lease payments
(including any lump-sum upfront payments) are
allocated between the land and the buildings
elements in proportion to the relative fair
values of the leasehold interests in the land
element and buildings element of the lease at
the inception of the lease. If the lease
payments cannot be allocated reliably between
these two elements, the entire lease is
classified as a finance lease, unless it is
clear that both elements are operating
leases, in which case the entire lease is
classified as an operating lease.
118
17. For a lease of land and buildings in
which the amount that would initially be
recognised for the land element, in
accordance with paragraph20, is immaterial,
the land and buildings may be treated as a
single unit for the purpose of lease
classification and classified as a finance of
operating lease in accordance with paragraphs
7-13. In such a case, the economic life of
the buildings is regarded as the economic
life of the entire leased asset.”
104. It is clear that the subject matter of the lease
mentioned in paragraphs 15A to 17 is not merely land
alone. It contemplates a situation where the lease
relates to land and buildings. It is no doubt true
that in paragraph 15A it is stated that in
determining whether the land element is an operating
or finance lease, an important consideration is that
the land normally has an indefinite economic life.
What is significant is that what the provision
contemplates is finding out whether the land element
in a composite lease can be treated as a finance
lease or as an operating lease. In a lease which has
only a land element, the concept of a limited
economic life, which is apposite in the context of
assets which have a life limited by time and which
119
ordinarily depreciate over time, would not be
relevant. We need not deal with the case of the lease
of land at the end of which there is a sale. There
may be instances of such leases entered into by
developmental authorities. It would then turn upon
the terms of the lease.
105. The lease in question, is a lease of the plot of
land, as already found by us. The underlying asset is
the plot of land. Therefore, we cannot treat the
subject matter of the lease, as containing both land
and building elements. We have already noticed, while
dealing with Rule 63(b) that the case of the
appellant before the NCLAT, was only that, apart from
the land, the right to develop or construct the
building, is the underlying asset. It is not the case
of the appellant that the buildings, which are to be
put up by the lessee, are also the subject matter of
the lease. In fact, it is, no doubt, true that the
lease actually contemplates that, as regards the
build-up area/plot or land, the transfer to the
allottee is to be made only by way of a sub-lease.
The sub-lease of the land in favour of the apartment
120
owners, is also contemplated under Section 9 of the
Uttar Pradesh Apartment Owners Act, 2010. The lease,
indeed, does contemplate the execution of a
tripartite sub-lease. The form and the format are to
be dictated to by the lessor. The sub-lease can be
executed subject to the fulfilment of certain
conditions, which we have already adverted to. This
is, indeed, a case where the lease is of the plot and
the interest or the right to enjoy the lease is by
way of construction of residential buildings only and
the use, both by the lessor and lessee and even the
sub-lessee is regulated and circumscribed by the
terms of the lease and the sub-lease. Even, according
to the appellant, it is the lessee, who is to find
out the allottees and to transfer the rights in the
building, also the land, only by way of a sub-lease.
The consideration for the transfer of apartments is
subject to the transfer fee being paid, to be
appropriated by the lessee. The lease, therefore,
contemplates a sub-lease, whereunder, the rights over
the apartments, are regulated. Not unnaturally,
therefore, the appellant cannot project the case that
121
the flats/apartments, would constitute part of the
underlying asset. We notice this, as though it was
not argued, we did toy with the idea that if the
lease is a composite lease of land and building, the
Rules made under the IAS, may have to be appreciated
differently. However, we need not explore that line
of thought any further.
106. The NCLAT has found that while all risks are
transferred, the rewards are not transferred,
therefore, we need consider only whether this is
correct. While we are on the concept of the rewards
incidental to ownership, we must record the
assistance which was provided by the fairness of Shri
Ritin Rai, learned Senior Counsel, who drew our
attention to the Clause B53 of IAS 116 which is as
follows: -
“B53: “The classification of leases for
lessors in this Standard is based on the
extent to which the lease transfers the risks
and rewards incidental to ownership of an
underlying asset. Risks include the
possibilities of losses from idle capacity or
technological obsolescence and of variations
in return because of changing economic
conditions. Rewards may be represented by the
expectation of profitable operation over the
122
underlying asset’s economic life and of gain
from appreciation in value or realisation of
a residual value.”
107. There is reference to ‘idle capacity or
technological obsolescence’. In the context of risk,
it appears to be irrelevant, in the context of land.
Rewards are again predicated with reference to the
expectation of profitable operation over the
underlying asset’s economic life and the gain from
appreciation in value or the realisation of a
residual value. The concept of ‘economic life’ in the
first place is inapposite in the case of lease of
land alone. The residual value is predicated again
with the expiry of the term of the lease which is
predicated with reference to the end of the lease. In
other words, it would be the value of an asset
predicated with reference to the end of the useful
life of the asset [see in this regard definition of
residual value in para 77] at the expiry of the term
of the lease. The lease in question contemplates a
period of 90 years. The lease is only of the land.
123
108. We may now turn to the provisions of the lease
and the contentions in the context of
Section(5)(8)(d). Undoubtedly, the lessee is put in
possession of the land. Call it a right or a reward
incidental to ownership, possession, or the right to
possession has been transferred to the lessee. The
lessee is entitled to hold the plot. The lease
further proclaims that the lessee shall use the
allotted plot for the purpose indicated. Possession
being in the context of a lease does not partake of a
liberty to not use as would be the case of an owner.
In fact, the manner of the use is stipulated. Non-use
even entails penalty and even cancellation. In fact,
things could not be clearer when Clause 13 under
‘other clauses’ is borne in mind. The said clause
unequivocablly declares that the lessor in larger
public interest may take back the possession of the
land/ building and making payment at the prevailing
rate. This, no doubt, is subject to what we will
pronounce on its impact on the fate of this case.
109. Next, we may notice whether there is right with
the lessee to transfer the leasehold property. In
124
this regard, it is relevant to notice that under the
law which is as contained in the Transfer of Property
Act, 1882, Section 108, thereof, provides for rights
and liabilities of a lessor and lessee. It declares
that in the absence of the contract or local usage to
the contrary, the lessor and lessee of immovable
property would possess rights and be subject to
liabilities as provided therein. Section 108(j) reads
as follows: -
“(j) the lessee may transfer absolutely or by
way of mortgage or sub-lease the whole or any
part of his interest in the property, and any
transferee of such interest or part may again
transfer it. The lessee shall not, by reason
only of such transfer, cease to be subject to
any of the liabilities attaching to the
lease:
nothing in this clause shall be deemed to
authorise a tenant having an untransferable
right of occupancy, the farmer of an estate
in respect of which default has been made in
paying revenue, or the lessee of an estate
under the management of a Court of Wards, to
assign his interest as such tenant, farmer or
lessee:”
110. Therefore, in the case of a lease where there is
no contract placing restrictions on the right of the
lessee, the lessee can transfer absolutely or by way
125
of mortgage or sub lease, the whole or any part of
his interest in the property and any transferee of
such interest or part may again transfer. This is no
doubt subject to the clause which deals with the
category of untransferable right of occupancy and the
other categories mentioned therein. In this context
the lease in question must be probed in order to find
out whether there is a contract placing restrictions
on the right of the lessee to transfer. As far as an
absolute assignment by the lessee, Clause 12 under
‘other clauses’, clearly prohibits any assignment by
the lessee. It declares that the lessee shall not be
allowed to assign or change his role. The lessee
would be liable to be visited with the penalty of
cancellation of the lease itself for breach. It
further provides that the entire money which the
lessee would have deposited would stand forfeited.
Therefore, while it may be that this clause is to
enable the proper and successful implementation of
the objective of the appellant which is tasked with
the planned development of the area and the use of
the property for the laudable purpose of construction
126
of group housing, it cannot detract from our finding
that there is a prohibition on assignment of the
right within the meaning of a contract which is
contrary under Section 108. Jurisprudentially, a
right which is the soul of ownership and which is
clearly incidental or arising out of ownership is
denied to the lessee, that is, the right to transfer
the leasehold right.
111. Undoubtedly, in law, generally the lessee can
assign his rights as a lessee which amounts to
assignment of his right. A lessee may create a sublease. A lessee can also create a mortgage. All of
these rights vest with a lessee, subject to a
contract to the contrary. In the lease in question
what is prohibited in Clause 12 under other clauses
is the right to assign his rights as lessee. Any
reward which the lessee could have obtained if it
wished to absolutely assign its right, is clearly
denied by virtue of the provision in the lease which
acts as a contract to the contrary.
112. No doubt, the lease deed would show that the
subject matter of the lease is Plot No.GH-05/B
127
Sector-137, Noida. It is further shown as measuring
22565.77 Sq. mts. The purpose of the lease is
constructing the residential flats. It is no doubt
true that under the head ‘transfer of plot’ it is
indicated that without obtaining the completion
certificate the Lessee will have the right to subdivide the allotted plot into suitable smaller plots
as per the planning norms and to transfer the same to
interested parties. This can be done upto 30.09.2010
with prior approval of the appellant-Lessor on
payment of transfer charges at the rate of 2% of the
allotment rate. However we notice that there is a
stipulation that the area of each of the sub-divided
plot should not be less than 20,000 sq.mtrs. We have
already noticed that the total extent of the lease
property is only 22565.77 square mtrs. Thereafter, it
is no doubt mentioned that individual flat /plot will
be transferrable with prior approval of the Lessor,
subject to various conditions which include execution
of the lease deed and the sub-lessee undertaking to
put the premises for residential use only. Even
though there is reference to transfer of plot which
128
is to consist of not less than 20,000 sq.meters with
the prior approval of the Lessor, it was to be done
before 30.09.2010. It is difficult to conceive how
when the total extent is little over 20,000 sq. meter
i.e., 22565.77 sq. metres and when the condition for
transfer of the plot is that the area of the sub
divided plot should not be less than 20,000 sq. meter
and the construction has to be completed in the
manner provided and yet the transfer in the aforesaid
manner is permitted only upto 30.09.2010. The parties
contemplated transfer only if there is prior approval
of the plot of not less than 20,000 sq. metres before
30.09.2010. At least it is not a case before us that
this clause has been invoked or worked. The transfer
of the first sale/transfer of a flat/ plot to an
allottee is to be done through sub-lease/ lease deed.
No doubt, we have already noticed the difference in
area in the lease in the connected appeal and the
lease which is the subject matter of the sub-lease
provided before us.
113. As far as the right to mortgage is concerned the
lessee is indeed permitted to mortgage the land.
129
However, the mortgage can be effected only with prior
permission of the lessor. The right to mortgage which
flows as an incident of ownership is one of the
bundle of rights which vests with an owner. It is
undoubtedly a lesser right and the owner would be
possessed of the residual right. However, it is one
of the many rights which is incidental to ownership
but there is no absolute right to create a mortgage.
114. The requirement of prior permission to create a
mortgage would mean that the permission may be
forthcoming or it can be denied. If there is a denial
of the right to create a mortgage, then it would
impliedly mean that to the said extent the right to
raise funds for the purpose of financing the
investment is impaired. Depending on whether or not
the right is permitted actually the rewards
incidental to ownership is transferred. In other
words, if we were to imagine that the lessee stood in
the shoes of an owner of the property, he would be in
a position to create a mortgage, raise funds as he
chose and deal with the property in the manner, he
felt advised to. The clause relating to mortgage, in
130
fact, indicates that the purpose contemplated, is
that the mortgage can only be for the purpose of
raising loan or for the purpose of financing the
lessee’s investment in the project. This in turn is
to be on receipt of the payment by the allottee or on
receipt of assurance of payment by the bank or under
any other suitable arrangement. In this regard, the
lease contemplated a mutual settlement amongst the
lessor, the developer and the financial
institution/bank. It clearly constitutes a foray into
the right of a person ‘if an owner’ to deal with the
property including the right to create a mortgage.
The suitable arrangement in mutual settlement
contemplates the lessor giving its consent to the
terms of the mortgage. It includes the right of the
lessor to prevail upon, in regard to the terms of the
mortgage. Its object may be lofty and in keeping with
its role as a statutory authority but its impact on
the true interpretation of the lease and as to
whether it involves transfer of rewards incidental to
ownership is another matter. The terms and conditions
of the NOC which is contemplated as necessary for
131
mortgaging the land to facilitate housing loans of
final purchaser will be as decided by the lessor.
Still further we may notice that under the proviso if
there is a sale or a foreclosure of the mortgaged
property, the lessor is given the right to such
percentage of the unearned increase in value as will
be decided by the lessor.
115. Moving on to the transfer of the plot having
regard to the purpose of the lease it is as follows:-
The lease contemplates the lessee is to put up
construction of group housing. The lessee is entitled
to allot the dwelling units on sub-lease basis to its
allottee and shall provide space for facilities which
are indicated which include roads, parks, etc. It is
further indicated that however transfer/ sub lease
shall be governed by the transfer policy of the
lessor. No doubt, restrictions are put in regard to
how allotment can be made. Allotments can be made
only to citizens of India competent to contract. This
means that if the law permits (Barring citizens of
certain countries, the law does permit citizens of
other countries to acquire property in India) the
132
allotment of what is constructed by the lessee by way
of group housing to persons who are not citizens and
make profits on such transfer, this clause indeed
impacts such right and also takes away the profits
which it could make thereunder. The lease further
indicates that there will be no permission to part
transfer of plot. In this regard, it must be noticed
that what is permitted under the lease is the
creation of a sub-lease of the dwelling units to the
allottee. No doubt there would be a sub-lease over
the plot as well. The lease goes on to state that
the lessee shall not be entitled to complete
transaction for sale, transfer, assign or otherwise
part with the possession of whole or part of any of
the buildings constructed thereon, before making
payment in terms of the schedule under the lease.
Though it is described as sale, transfer, assignment
or otherwise as all of it relates to the building
which is constructed on the underlying leased
property. We must not lose sight of the fact that
the subject matter of the lease is the plot described
as plot no. GH-05/B Sec.137, Noida consisting of
133
22565.77 square metres. What is essentially and in
reality permitted apparently is the creation of only
the sub-lease. Undoubtedly by the lessee the transfer
of the built-up area is permitted subject to payment
of transfer charges in terms of the policy. The
lessor is given an absolute right to reject any
application for transfer. The lessee is to pay the
transfer charges in terms of the policy which is
determined. The transfer of the built-up flats is to
be premised on a tripartite sub lease. The terms of
such a sub-lease will be dictated to by the lessor.
The sub-lease interchangeably is described as sale by
the lease. The sale in turn is to be captured in the
terms of a sub-lease for it is clear that the lessee
is obliged to execute a sub-lease. We have referred
to the lease and the terms of a sample sub lease.
The sub lessee also can use the premises only for
residential purposes. In this case it must be noticed
that being a part of the fulfilment of its goal under
the act to transfer plots for residential purposes
inter alia and the lease in question being one for
developing group housing, the lessee can transfer the
134
built-up flats only for residential purposes. The
argument of the appellant is that being a necessary
corollary of the lease being one to effectuate the
appellants duty and being a reasonable restriction,
it is undoubtedly the duty of the appellant in the
context of the purpose that a regulatory and the
restrictive mechanism in question is put in place. As
to whether there is a substantial transfer of all the
rewards incidental to ownership as an owner or
whether the lessee would stand in the shoes of a
person resembling an owner is another matter. Were
the lessee to enjoy the right as owner, there would
be liberty to transfer the premises subject to the
law of the land for any purpose. Being limited to
only residential purpose indeed robs the lessee of
one of the cardinal rights of a person who can be
described as an owner. The lease, read as a whole,
contemplates the transfer to enjoy/use the leasehold
property for the period of 90 years for the purpose
limited to the construction of the residential
complex only. This is apart from all the concomitant
constraints and restrictions which have been put in
135
place to achieve the goal of the appellant in its
statutory role.
116. It is no doubt true that the appellants
correctly point out that the lessor does not purport
to seek any sharing of the consideration which may be
received by the lessee from the allottees. In that
sense ‘rewards’ are transferred. We have in this
regard noticed the qualifications and conditions such
as forbidding transfer to non-citizens and the
purpose for which the said property can be used. The
other aspects, which even limit the rights and
therefore, dampen the prospect of profit, have been
adverted to.
117. Though the rules under the Uttar Pradesh
Ownership of Flat Act, 1975 is referred to in the
lease as noticed by us earlier, the Uttar Pradesh
Apartments (Promotion of Construction, Ownership and
Maintenance) Act, 2010 (hereinafter referred to as
‘the UP 2010 Act’, for short) repealed the 1975 Act.
The UP Act 2010 came into force on 21.07.2010. The
lease deed, in this case, came to be executed on
30.07.2010. We notice that in the UP 2010 Act,
136
Section 2 provides that the Act applies to all
buildings having four or more apartments in any
building constructed or converted into apartment and
land attached to the apartment whether freehold or
held on lease excluding shopping malls and
multiplexes. Section 3 defines common areas and
facilities as including the land on which the
building is located and all easements, rights and
appurtenances belonging to the land and building.
Section 5(1) declares that every person to whom any
apartment is sold or otherwise transferred by the
promotor, shall, subject to the provisions of the
Act, be entitled to the exclusive ownership and
possession of the apartment so sold or otherwise
transferred to him. The person, who is entitled to
the exclusive ownership and possession of the
apartment, is also declared entitled to such
percentage of the undivided interest in the common
areas and facilities as may be specified in the deed
of apartment. The percentage is to have a permanent
character and cannot be altered except with a written
137
consent of all the apartment owners. Section 7 reads
as follows:
“Section 7 - Apartment to be heritable and
transferable
Each apartment, together with the undivided
interest in the common areas and facilities
appurtenant to such apartment, shall, for all
purposes constitute a heritable and
transferable immovable property within the
meaning of any law for the time being in
force, and accordingly, an apartment owner
may transfer his apartment and the percentage
of undivided interest in the common areas and
facilities appurtenant to such apartment by
way of sale, mortgage, lease, gift, exchange
or in any other manner whatsoever in the same
manner, to the same extent and subject to the
same rights, privileges, obligations,
liabilities investigations, legal
proceedings, remedies and to penalty,
forfeiture or punishment as any other
immovable property or make a bequest of the
same under the law applicable to the transfer
and succession of immovable property.
Provided that where the allotment, sale or
other transfer of any apartment has been made
by any group housing cooperative society or
association in favour of any member thereof,
the transferability of such apartment and all
other matters shall be regulated by the law,
which may provide a transfer fee at a maximum
rate of 2 percent but not less than 1 percent
in any case of the sale value, applicable to
such group housing cooperative society or
association whosoever maintains the common
areas and facilities. The transfer fee shall
no be leviable in case of heritability.”
138
118. The most crucial provision is Section 9. It
reads as follows:
“Section 9 - Right of re-entry
(1) Where any land is given on lease by a
person (hereafter in this section referred to
as the lessor) to another person (hereafter
in this section referred to as the lessee,
which term shall include a person in whose
favour a sublease of such land has been
granted), and any building has been
constructed on such land by the lessee or by
any other person authorised by him or
claiming through him, such lessee shall grant
in respect of the land as many subleases as
there are apartments in such building and
shall execute separate deeds of sub lease in
respect of such land in favour of each
apartment owner before handing over the
possession of apartment in such building to
him. The lessor shall be duty bound to supply
the plans and other legal documents to the
lessee. Provided that no sublease in respect
of any land shall be granted except on the
same terms and conditions on which the lease
in respect of the land has been granted by
the lessor and no additional terms and
conditions shall be imposed by the lessee
except with the previous approval of the
lessor.
(2) Where the lessee has any reason to
suspect that there had been any breach of the
terms and conditions of the sublease referred
to in subsection (1), he may himself inspect
the land on which the building containing the
concerned apartment has been constructed, or
may authorise one or more persons to inspect
such land and make a report as to whether
there had been any breach of the terms and
conditions of any sublease in respect of such
land and, if so, the nature and extent of
139
such breach, and for this purpose, it shall
be lawful for the lessee or any person
authorised by him to enter into, and to be
in, the land in relation to which such breach
has been or is suspected to have been
committed.
(3) Where the lessee or any person
authorised by him makes an inspection of the
land referred to in subsection (1), he shall
record in writing his findings on such
inspection [a true copy of which shall be
furnished to the apartment owner by whom such
breach of the terms and conditions of
sublease in respect of the land appurtenant
to the apartment owned by him has been
committed (hereinafter referred to as the
defaulting apartment owner)] and where such
findings indicate that there had been any
breach of the terms and conditions of the
sublease in respect of such land, the lessee
may, by a notice in writing, require the
defaulting apartment owner to refrain from
committing any breach of the terms and
conditions of the sublease in respect of such
land, or to pay in lieu thereof such
composition fees as may be specified in the
notice in accordance with such scales of
composition fees as may be prescribed.
(4) The defaulting apartment owner who is
aggrieved by any notice served on him by the
lessee under subsection (3) may, within
thirty days from the date of service of such
notice, prefer an appeal to the Court of the
District Judge having jurisdiction
(hereinafter referred to as the District
Court), either challenging the finding of the
lessee or any person authorised by him or
disputing the amount of composition fees as
specified in the notice, and the District
Court may, after giving the parties a
reasonable opportunity of being heard,
confirm, alter or reverse those finding or
may confirm, reduce or increase the amount of
composition fees or set aside the notice.
140
(5) Where, on the breach of any terms and
conditions of any sublease in respect of any
land, any composition fees become payable,
the defaulting apartment owner shall be
deemed to have been guilty of such breach and
in default of payment thereof it shall be
lawful for the lessee to recover the amount
of the composition fees from the defaulting
apartment owner as arrears of land revenue.
(6) Where any composition fees are paid
whether in pursuance of the notice served
under subsection (3) or in accordance with
the decision of the District Court or a
higher court on appeal, no further action
shall be taken by the lessee for the breach
of the terms and conditions of the sublease
in respect of the land in relation to which
payment of such composition fees has been
realised.
(7) If the defaulting apartment owner omits
or fails to refrain from committing any
breach of the terms and conditions of the
sublease in respect of the land or, as the
case may be, omits or fails to pay the
composition fees in lieu thereof-
(i) in accordance with the notice issued by
the lessee under subsection (3); or
(ii) where the finding of the lessee or the
person authorised to inspect the land about
any breach of the terms and conditions of any
sublease in respect of the land or the amount
of composition fees specified in the notice
issued by the lessee are altered by the
District Court on appeal or by any higher
court on further appeal, in accordance with
the decision of the District Court or such
higher court, as the case may be; the lessee
shall be entitled,-
(a) where no appeal has been preferred under
subsection (4), within sixty days from the
date of service of the notice under
subsection (3), or
(b) where an appeal has been preferred under
subsection (4), within sixty days from the
141
date on which the appeal is finally disposed
of by the District Court or, where any
further appeal is preferred to a higher
court, by such higher court, to exercise the
right of reentry in respect of the undivided
interest of the lessee in the land
appurtenant to the apartment owned by the
defaulting apartment owner, and where such
right of reentry cannot be exercised except
by the ejectment of the defaulting apartment
owner from his apartment, such right of
reentry shall include a right to eject the
defaulting apartment owner from the concerned
apartment: Provided that no such ejectment
shall be made unless the defaulting apartment
owner has been paid by the lessee such amount
as compensation for such ejectment as may be
determined in accordance with the prescribed
scales of compensation.
(8) No appeal preferred under subsection (4)
shall be admitted, unless twentyfive per cent
of the composition fees specified in the
notice served on the defaulting apartment
owner has been deposited to the credit of the
District Court in savings bank account to be
opened by the District Court in any branch of
an approved bank:
Provided that the District Court may, on
sufficient cause being shown, either remit or
reduce the amount of such deposit, and the
interest accruing on such deposit, shall
ensure to the credit of defaulting apartment
owner by whom such deposit has been made:
Provided further that the amount of such
deposit together with the interest due
thereon shall be distributed by the District
Court in accordance with the decision in such
appeal, or where any further appeal has been
preferred against such decision, in
accordance with the decision in such further
appeal.
142
(9) The defaulting apartment owner, who is
aggrieved by the amount offered to be paid to
him under the proviso to subsection (7) as
compensation for ejectment from his apartment
may, within thirty days from the date of such
offer, prefer an appeal to the District Court
and the District Court may, after giving the
parties a reasonable opportunity of being
heard, maintain, increase or reduce the
amount of compensation.
(10) On the ejectment of the defaulting
apartment owner from the apartment under
subsection (7), the lessee by whom such
ejectment has been made may make a fresh
allotment of the concerned apartment to any
other person on such terms and conditions as
he may think fit.
(11) Where any lessee omits or fails to take
any action either in accordance with the
provisions of subsection (2) or subsection
(3) or subsection (7) the lessor may, in the
first instance, require the lessee by a
notice in writing to take action against the
defaulting apartment owner under subsection
(2) or subsection (3) or, as the case may be,
under subsection (7), within a period of
ninety days from the date of service of such
notice, and in the event of the omission or
failure of the lessee to do so within such
period, the lessor may himself take action as
contained in subsection (2) or subsection (3)
or subsection (7), and the provisions of
subsection (4) to subsection (6) and
subsection (8) to subsection (10), shall, as
far as may apply to any action taken by him
as if such action had been taken by the
lessee.
(12) For the removal of doubts, it is hereby
declared that no work in any apartment by the
owner thereof shall be deemed to be a breach
of the terms of the sublease in respect of
the land on which the building containing
such apartment has been constructed unless
143
the work is prohibited by subsection (2) of
section 6.”
(Emphasis supplied)
119. Section 5 contemplates a sale or transfer
otherwise of an apartment by the promoter. Then
subject to the other provisions of the Act, the buyer
or transferee becomes entitled to exclusive ownership
and possession. He becomes entitled to a percentage
of the undivided interest in the common areas.
Section 8 is a provision which conditions ownership
based on amounts remaining to be paid. Still further
Section 9 is another provision which conditions
Section 5.
120. The mere fact that Section 7 declares that each
apartment, together with the undivided interest in
common areas, is to be heritable and transferable,
would not amount to creating a freehold right over
the land, which is the subject matter of the sublease, in favour of the apartment owner, under
Section 9 of the UP Act of 2010. In other words, no
enlargement of the rights of the sub-lessee into that
of a freehold owner of the land is contemplated. The
mere fact that an undivided interest in the common
144
area, is created including the land (the definition
of ‘common area’ includes land) and is made heritable
and transferable, would only mean that the specific
right, which the sub-lessee (apartment owner) has
under the sub-lease executed within meaning of
Section 9, both over the land and the apartment, will
be heritable and transferable. In fact, Section 10 of
the UP Act of 2010 provides for a declaration to be
given by a promotor containing, inter alia, the
statement as to whether, land is freehold or
leasehold. No doubt, the effect of Section 7 of the
UP Act is that the proviso in Section 7 does
contemplate that in the case of any allotment, sale
or other transfer made by any group housing
cooperative society or association, the
transferability of the apartment and all other
matters, will be as regulated by the law and it may
include the transfer fee at the maximum rate of two
per cent. Section 7, no doubt, permits the apartment
owner the right to transfer the apartment with the
common area including the right in the land by way of
sale, mortgage, lease, gift, in the same manner and
145
to the same extent and subject to the same rights,
privileges, obligations and liabilities, inter alia,
under the law applicable to the transfer and
succession of an immovable property. Also since
Section 9 contemplates sub-lease over the land, there
cannot be claims of enlargement over the same vide
either Section 5 or Section 7. The case of sale if
it relates to land in the balance sheet projected by
the appellant represented by Ms. Madhavi Divan cannot
but be rejected.
121. We have noticed that the lessee has no power to
cancel the lease. However, cancellation of lease deed
under various contingencies is permitted to the
lessor. They include allotment obtained through
misrepresentation/ suppression of material facts
inter alia violation of directions issued or rules
and the regulations framed by the lessee or any other
statutory authority, default on the part of the
lessee on the terms and conditions of registration/
allotment lease. The provisions provide for the
extent to which the premium can be forfeited in the
event of cancellation among the other clauses. This
146
is apart from the earlier reference to the power to
cancel in specified contingencies. It is relevant to
notice that the lessor is clothed with an absolute
power to make additions/ alterations or modifications
in the terms of the lease deed inter alia apart from
the sub lease. One clause which we have already
noticed is Clause 13 falling in other clauses. It
empowers the lessor to take back possession of the
land/ building. The only limitation is that larger
public interest must justify such taking back of the
possession. It also must be attended/ accompanied by
the lessor becoming liable to only make the payment
at what is described as the ‘prevailing rate.’ It is
clear that it is incompatible with the lessee
enjoying rights/rewards incidental to ownership. The
only requirement then being what the lessor perceives
as larger public interest, the overriding power
constitutes a shadow over the rights of the lessee
which is clearly incompatible with the rights and
therefore even rewards which would follow the normal
exercise of rights as an owner. The right to
possession and the rewards associated with it can be
147
extinguished upon the lessor invoking the said power.
Therefore, we would find on the whole that the
appellant is not the financial lessor under section
5(8)(d) of the IBC. No doubt we would observe that
we have arrived at the findings based on the
prevailing statutory regime. Needless to say there
is always power to amend the provisions which
essentially consist of the Indian Accounting
Standards in the absence of any rules prescribed
under Section 5(8)(d) of the IBC by the Central
Government.
THE CASE UNDER SECTION 5(8)(f)
122. Section 5(8) defines ‘financial debt’ as meaning
‘a debt along with interest, if any, which is
disbursed against the consideration of time value of
money’. Thereafter, Clauses (a) to (i) deal with
transactions which are included as financial debt. It
is, thereafter, that Clause (f) provides that a
financial debt includes any amount raised under any
other transaction, including any forward sale or
purchase agreement, having the commercial effect of a
148
borrowing. To further simplify the concept, in
Section 5(8)(f), we may eclipse the words ‘includes
any forward sale or purchase agreement’, and then,
the provision would read as ‘any amount raised any
other transaction having commercial effect of a
borrowing’. The word ‘transaction’ has been defined
in Section 2(33) to include ‘an agreement or
arrangement in writing for the transfer of an asset,
or funds, goods or services from or to the corporate
debtor. At this very juncture, we may notice that
‘operational debt’ has been defined in Section 5(21),
which means ‘a claim in respect of provision of goods
or services including employment’. Operational debt
also means a debt in respect of payment of dues
arising under any law for the time being in force and
payable to any Local Authority, inter alia.
‘Operational creditor’ is defined in Section 2(20) as
meaning ‘a person to whom operational debt is owed
and includes any person to whom such debt has been
legally assigned or transferred’.
123. ‘Transaction’, as defined in Section 3(33),
would, undoubtedly, include an agreement or
149
arrangement in writing or the transfer of funds. The
transfer of funds may take place from a corporate
debtor. A transfer can also take place when there is
transfer of funds to the debtor. A transfer may
include a transfer of assets in writing again from or
to the corporate debtor. The definition of the word
‘debt’ in Section 3(11) is intertwined with the
definition of the word ‘claim’ in Section 3(6). The
impact of these provisions has been considered by
this Court in Pioneer Urban Land and Infrastructure
Limited and Another v. Union of India and Others10. It
may be profitable to advert to the same.
“68. Thus, in order to be a “debt”, there
ought to be a liability or obligation in
respect of a “claim” which is due from any
person. “Claim” then means either a right to
payment or a right to payment arising out of
breach of contract, and this claim can be
made whether or not such right to payment is
reduced to judgment. Then comes “default”,
which in turn refers to non-payment of debt
when whole or any part of the debt has become
due and payable and is not paid by the
corporate debtor. The learned counsel for the
petitioners relied upon the judgment in Union
of India v. Raman Iron Foundry [Union of
India v. Raman Iron Foundry, (1974) 2 SCC
10 (2019) 8 SCC 416
150
231], and, in particular relied strongly upon
the sentence reading: (SCC p. 243, para 11)
“11. … Now the law is well settled that a
claim for unliquidated damages does not give
rise to a debt until the liability is
adjudicated and damages assessed by a decree
or order of a court or other adjudicatory
authority.”
69. It is precisely to do away with judgments
such as Raman Iron Foundry [Union of
India v. Raman Iron Foundry, (1974) 2 SCC
231] that “claim” is defined to mean a right
to payment or a right to remedy for breach of
contract whether or not such right is reduced
to judgment. What is clear, therefore, is
that a debt is a liability or obligation in
respect of a right to payment, even if it
arises out of breach of contract, which is
due from any person, notwithstanding that
there is no adjudication of the said breach,
followed by a judgment or decree or order.
The expression “payment” is again an
expression which is elastic enough to include
“recompense”, and includes repayment. For
this purpose, see H.P. Housing & Urban
Development Authority v. Ranjit Singh
Rana [H.P. Housing & Urban Development
Authority v. Ranjit Singh Rana, (2012) 4 SCC
505 : (2012) 2 SCC (Civ) 639] (at paras 13
and 14 therein), where Webster's
Comprehensive Dictionary (International
Edn.), Vol. 2 and Law Lexicon by P. Ramanatha
Aiyar (2nd Edn., Reprint) are quoted.”
151
124. The question, which fell for consideration in
Pioneer (supra) was whether a homebuyer, who made
advances to the real estate developer, utilising
which, the real estate developer puts up the project
and what the homebuyer got in return or was expected
to get in return was a developed flat or an
apartment, would be covered as a financial creditor.
It would be apposite to refer to the following
observations:
“75. And now to the precise language of
Section 5(8)(f). First and foremost, the subclause does appear to be a residuary
provision which is “catch all” in nature.
This is clear from the words “any amount” and
“any other transaction” which means that
amounts that are “raised” under
“transactions” not covered by any of the
other clauses, would amount to a financial
debt if they had the commercial effect of a
borrowing. The expression “transaction” is
defined by Section 3(33) of the Code as
follows:
3. (33) “transaction” includes an agreement
or arrangement in writing for the transfer of
assets, or funds, goods or services, from or
to the corporate debtor;
As correctly argued by the learned Additional
Solicitor General, the expression “any other
transaction” would include an arrangement in
152
writing for the transfer of funds to the
corporate debtor and would thus clearly
include the kind of financing arrangement by
allottees to real estate developers when they
pay instalments at various stages of
construction, so that they themselves then
fund the project either partially or
completely.
76. Sub-clause (f) Section 5(8) thus read
would subsume within it amounts raised under
transactions which are not necessarily loan
transactions, so long as they have the
commercial effect of a borrowing. We were
referred to Collins English Dictionary &
Thesaurus (2nd Edn., 2000) for the meaning of
the expression “borrow” and the meaning of
the expression “commercial”. They are set out
hereinbelow:
“borrow.—vb 1. to obtain or receive
(something, such as money) on loan for
temporary use, intending to give it, or
something equivalent back to the lender. 2.
to adopt (ideas, words, etc.) from another
source; appropriate. 3. Not standard. to
lend. 4. (intr) Golf. To putt the ball uphill
of the direct path to the hole: make sure you
borrow enough.”
***
“commercial.—adj. 1. of or engaged in
commerce. 2. sponsored or paid for by an
advertiser: commercial television. 3. having
profit as the main aim: commercial music. 4.
(of chemicals, etc.) unrefined and produced
in bulk for use in industry. 5. a
commercially sponsored advertisement on radio
or television.””
153
125. In the said example, therefore, the homebuyer,
by providing amounts to the real estate developer,
was found to be entitled to be treated as a financial
creditor on the basis that the real estate developer
must be treated as having raised money under the
transaction in question. In other words, it was a
case of a transaction by reason of the fact that
there was transfer of funds to the corporate debtor.
The transfer of funds was in the form of the advance
payments and the installments payable by the
homebuyer under the agreement to the developer. Thus,
this Court concluded that it must be treated as a
case falling under Section 5(8)(f), even without the
aid of the Explanation added by an amendment, which
was challenged in the said case. The real estate
developer, in other words, raised amounts within the
meaning of Section 5(8)(f) under the transfer of
funds by the homebuyer to the developer and it was
found to possess a commercial effect. In this regard,
the discussion is as follows:
“77. A perusal of these definitions would
show that even though the petitioners may be
154
right in stating that a “borrowing” is a loan
of money for temporary use, they are not
necessarily right in stating that the
transaction must culminate in money being
given back to the lender. The expression
“borrow” is wide enough to include an advance
given by the homebuyers to a real estate
developer for “temporary use” i.e. for use in
the construction project so long as it is
intended by the agreement to give “something
equivalent” to money back to the homebuyers.
The “something equivalent” in these matters
is obviously the flat/apartment. Also of
importance is the expression “commercial
effect”. “Commercial” would generally involve
transactions having profit as their main aim.
Piecing the threads together, therefore, so
long as an amount is “raised” under a real
estate agreement, which is done with profit
as the main aim, such amount would be
subsumed within Section 5(8)(f) as the sale
agreement between developer and home buyer
would have the “commercial effect” of a
borrowing, in that, money is paid in advance
for temporary use so that a flat/apartment is
given back to the lender. Both parties have
“commercial” interests in the same—the real
estate developer seeking to make a profit on
the sale of the apartment, and the
flat/apartment purchaser profiting by the
sale of the apartment. Thus construed, there
can be no difficulty in stating that the
amounts raised from allottees under real
estate projects would, in fact, be subsumed
within Section 5(8)(f) even without adverting
to the Explanation introduced by the
Amendment Act.”
126. It is, therefore, the appellants case that if
the home buyer could be treated as covered under
Section 5(8)(f), and therefore, a financial creditor,
155
the appellant also should be treated as a financial
creditor under the lease. Instead of approaching a
bank or a financial institution, the lessee is
facilitated to pay the consideration for the lease in
the following manner:
The lessee would pay ten percent of the total
premium upfront. The balance of the premium is to
be paid in sixteen half-yearly installments with
interest falling due after the expiry of the
period of moratorium, which consisted of two
years from the date of the commencement of the
lease. During the moratorium, the lessee, would,
no doubt, have to pay the lease amount and the
interest which is not to be confused with the
premium. In other words, the lease contemplated
payment of the named sum of premium and also
lease rent. The rent could be paid on an annual
basis or it could be paid at one go as provided
in the agreement. There was, thus, amount raised
by the lessee in the manner in that, while no
amount was paid or disbursed in the conventional
sense by the appellant-lessor to the lessee, by
156
permitting the lessee under the lease to effect
the payments due from it under the lease after
the moratorium was over in a staggered manner,
viz., by payment of sixteen half-yearly
installments with interest, it had the effect of
raising of funds in the sense that it operated as
a tool for raising finance. The expression
‘raising funds’ employed in Section 5(8)(f), it
is the case of the appellant, must receive an
expansive interpretation. In the modern world
myriad manifestations not to be pigeonholed to
any set or finite number of transactions, may be
contemplated. The legislative intention is to
provide a catch-all or residuary provision. It is
emphasised, in this context, before us that the
Court must adopt a purposive interpretation. The
concept of a financial creditor is that of a
person who is not merely interested in recovery
of the money, which perhaps characterises an
operational creditor. The appellant, being an
Authority under the UPIAD Act, charged with the
duty of developing the land for various purposes,
157
including residential purposes, has a long-term
perspective and interest in the lease property
like a conventional financial creditor who would
do deep and due diligence and undertake careful
and elaborate study before entering into a
transaction. The appellant also has a binding
stake or interest in the transaction. What is
involved is public money. The land, which is
subject matter of the lease, came to vest with
the appellant on the strength of acquisition of
land after payment of huge amounts as
compensation. The said amount would represent the
cost of the land. It is such land, which is the
subject matter of the lease. When the appellants
have such an interest, as described earlier,
excluding the appellant from the decision-making
process itself by not including it in the
Committee of Creditors, is described as illegal
and a manifest absurdity.
127. Per contra, apart from pointing out that this
Court is being asked to overturn the concurrent
findings rendered by the NCLT and NCLAT, the
158
prevarication in the stand of the appellant is
emphasised. Apart from the fact that originally
appellant claimed as operational creditor in Form B
and filed the Form-C later, declaring it as a
financial creditor, it is pointed out that the
appellant has attempted to shift its stand at
different stages. Initially, the stand was that
appellant fell under Section 5(8)(d) on the basis
that what was involved was a finance lease. Finding
itself unable to fulfil the requirement of being a
financial lessor before the NCLAT, the focus shifted
to Section 5(8)(f). Since, the case was initially set
up under Section 5(8)(d), the case of the appellant
involved reliance being placed on a specific
provision, and simultaneously, on a general
provision. In other words, resort to Section 5(8)(d)
would preclude invoking of Section 5(8)(f). It is
pointed out that there is no disbursement under the
lease deed. With reference to the Judgment of this
Court in Anuj Jain, Interim Resolution Professional
for Jaypee Infratech Limited v. Axis Bank Limited and
159
Others11, it is contended that there is no
disbursement by the appellant, an indispensable
element under the main provisions of Section 5(8)
without which the appellant could not rely upon
Section 5(8)(f). On facts, it is pointed out that the
treatment given to the appellant under the Resolution
Plan dated 30.10.2019, is better than that of a
financial creditor, i.e., forty-one percent of the
amount claimed.
128. In the context of the Explanation to Section
5(8)(f), inter alia, by which, homebuyers were
expressly brought within the scope of Section
5(8)(f), this Court in Pioneer (supra), inter alia,
laid down as follows:
“70. The definition of “financial debt” in
Section 5(8) then goes on to state that a
“debt” must be “disbursed” against the
consideration for time value of money.
“Disbursement” is defined in Black's Law
Dictionary (10th Edn.) to mean:
“1. The act of paying out money, commonly
from a fund or in settlement of a debt or
account payable. 2. The money so paid; an
11 (2020) 8 SCC 401
160
amount of money given for a particular
purpose.”
71. In the present context, it is clear that
the expression “disburse” would refer to the
payment of instalments by the allottee to the
real estate developer for the particular
purpose of funding the real estate project in
which the allottee is to be allotted a
flat/apartment. The expression “disbursed”
refers to money which has been paid against
consideration for the “time value of money”.
In short, the “disbursal” must be money and
must be against consideration for the “time
value of money”, meaning thereby, the fact
that such money is now no longer with the
lender, but is with the borrower, who then
utilises the money. Thus far, it is clear
that an allottee “disburses” money in the
form of advance payments made towards
construction of the real estate project. We
were shown the Dictionary of Banking
Terms (2nd Edn.) by Thomas P. Fitch in which
“time value for money” was defined thus:
“present value: today's value of a payment or
a stream of payment amount due and payable at
some specified future date, discounted by a
compound interest rate of DISCOUNT RATE. Also
called the time value of money. Today's value
of a stream of cash flows is worth less than
the sum of the cash flows to be received or
saved over time. Present value accounting is
widely used in DISCOUNTED CASH FLOW analysis.”
(Emphasis supplied)
That this is against consideration for the
time value of money is also clear as the
money that is “disbursed” is no longer with
161
the allottee, but, as has just been stated,
is with the real estate developer who is
legally obliged to give money's equivalent
back to the allottee, having used it in the
construction of the project, and being at a
discounted value so far as the allottee is
concerned (in the sense of the allottee
having to pay less by way of instalments than
he would if he were to pay for the ultimate
price of the flat/apartment).
72. Shri Krishnan Venugopal took us to ACT
Borrower's Guide to the LMA's Investment
Grade Agreements by Slaughter and May (5th
Edn., 2017). In this book “financial
indebtedness” is defined thus:
“Definition of Financial Indebtedness
(Investment Grade Agreements)
“Financial indebtedness” means any
indebtedness for or in respect of:
(a) moneys borrowed;
(b) any amount raised by acceptance under any
acceptance credit facility or dematerialised
equivalent;
(c) any amount raised pursuant to any note
purchase facility or the issue of bonds,
notes, debentures, loan stock or any similar
instrument;
(d) the amount of any liability in respect of
any lease or hire purchase contract which
would, in accordance with GAAP, be treated as
a balance sheet liability [(other than any
liability in respect of a lease or hire
purchase contract which would, in accordance
with GAAP in force [prior to 1-1-2019]/[prior
to []]/[] have been treated as an operating
lease)];
162
(e) receivables sold or discounted (other
than any receivables to the extent they are
sold on a non-recourse basis);
(f) any amount raised under any other
transaction (including any forward sale or
purchase agreement) of a type not referred to
in any other paragraph of this definition
having the commercial effect of a borrowing;
(g) any derivative transaction entered into
in connection with protection against or
benefit from fluctuation in any rate or price
[and, when calculating the value of any
derivative transaction, only the marked to
market value (or, if any actual amount is due
as a result of the termination or close-out
of that derivative transaction, that amount)
shall be taken into account];
(h) any counter-indemnity obligation in
respect of a guarantee, indemnity, bond,
standby or documentary letter of credit or
any other instrument issued by a bank or
financial institution; and
(i) the amount of any liability in respect of
any guarantee or indemnity for any of the
items referred to in Paras (a) to (h) above.”
73. When compared with Section 5(8), it is
clear that Section 5(8) seems to owe its
genesis to the definition of “financial
indebtedness” that is contained for the
purposes of investment grade agreements. Shri
Venugopal argued that even insofar as
derivative transactions are concerned, it is
clear that money alone is given against
consideration for time value of money and a
transaction which is a pure sale agreement
between “borrowers” and “lender” cannot
possibly be said to fit within any of the
163
categories mentioned in Section 5(8). He
relied strongly on the passage in Slaughter
and May's book which is extracted
hereinbelow:
“Any amount raised having the “commercial
effect of a borrowing”
A wide range of transactions can be caught by
Para (f), including for example forward
purchases and sales of currency and repo
agreements. Conditional and credit sale
arrangements could also be covered here as
could certain redeemable shares.
The precise scope of this limb can be
uncertain. Ideally, from the borrower's
perspective, if there are additional
categories of debt which should be included
in “financial indebtedness”, these should be
described specifically and this catch-all
paragraph, deleted. A few strong borrowers do
achieve that position. Most, however are
required to accept the “catch all” and will
therefore need to consider which of their
liabilities might be caught by it, and
whether specific exclusions might be
required.”
We have already referred to paragraphs 75 and
76 above and hence do not refer to it.
129. It is thereafter, while dealing with the impact
of the employment of the word ‘means’ followed by
certain words and finally followed by the word
‘includes’, be found in Section 5(8), this Court in
Pioneer (supra), inter alia, held as follows:
164
“82. This statement of the law, as can be
seen from the quotation hereinabove, is
without citation of any authority. In fact,
in Jagir Singh v. State of Bihar [Jagir
Singh v. State of Bihar, (1976) 2 SCC 942 :
1976 SCC (Tax) 204] , SCC paras 11 and 19 to
21 and Mahalakshmi Oil Mills v. State of
A.P. [Mahalakshmi Oil Mills v. State of A.P.,
(1989) 1 SCC 164 : 1989 SCC (Tax) 56] , SCC
paras 8 and 11 (which has been cited in P.
Kasilingam [P. Kasilingam v. PSG College of
Technology, 1995 Supp (2) SCC 348] ), this
Court set out definition sections where the
expression “means” was followed by some
words, after which came the expression “and
includes” followed by other words, just as
in Krishi Utpadan Mandi Samiti case [Krishi
Utpadan Mandi Samiti v. Shankar Industries,
1993 Supp (3) SCC 361 (2)] . In two other
recent judgments, Bharat Coop. Bank (Mumbai)
Ltd. v. Employees Union [Bharat Coop. Bank
(Mumbai) Ltd. v. Employees Union, (2007) 4
SCC 685 : (2007) 2 SCC (L&S) 82] , SCC paras
12 and 23 and State of W.B. v. Associated
Contractors [State of W.B. v. Associated
Contractors, (2015) 1 SCC 32 : (2015) 1 SCC
(Civ) 1] , SCC para 14, this Court has held
that wherever the expression “means” is
followed by the expression “and includes”
whether with or without additional words
separating “means” from “includes”, these
expressions indicate that the definition
provision is exhaustive as a matter of
statutory interpretation. It has also been
held that the expression “and includes” is an
expression which extends the definition
contained in words which follow the
expression “means”. From this discussion, two
things follow. Krishi Utpadan Mandi
Samiti [Krishi Utpadan Mandi
Samiti v. Shankar Industries, 1993 Supp (3)
SCC 361 (2)] cannot be said to be good law
insofar as its exposition on “means” and
“includes” is concerned, as it ignores
165
earlier precedents of larger and coordinate
Benches and is out of sync with later
decisions on the same point. Equally, Dr
Singhvi's argument that clauses (a) to (i) of
Section 5(8) of the Code must all necessarily
reflect the fact that a financial debt can
only be a debt which is disbursed against the
consideration for the time value of money,
and which permeates clauses (a) to (i),
cannot be accepted as a matter of statutory
interpretation, as the expression “and
includes” speaks of subject-matters which may
not necessarily be reflected in the main part
of the definition.”
130. It is, therefore, the case of the appellant that
it is not the law that in order that a creditor is
found entitled to be treated as a financial creditor
under any of the inclusionary clauses, he must also
satisfy the requirements in the main provision. In
other words, the concept of disbursement of the debt
to be found in Section 5(8), is not to be rigorously
insisted upon in appreciating the scope of Section
5(8)(f).
131. The stand of the respondents, on the other hand,
is the decision of this Court in Anuj Jain, Interim
Resolution Professional for Jaypee Infratech Limited
v. Axis Bank Limited and Others12, wherein a Bench of
12 (2020) 8 SCC 401
166
two learned Judges of this Court, inter alia, held as
follows:
“46. Applying the aforementioned fundamental
principles to the definition occurring in
Section 5(8) of the Code, we have not an iota
of doubt that for a debt to become “financial
debt” for the purpose of Part II of the Code,
the basic elements are that it ought to be a
disbursal against the consideration for time
value of money. It may include any of the
methods for raising money or incurring
liability by the modes prescribed in clauses
(a) to (f) of Section 5(8); it may also
include any derivative transaction or
counter-indemnity obligation as per clauses
(g) and (h) of Section 5(8); and it may also
be the amount of any liability in respect of
any of the guarantee or indemnity for any of
the items referred to in clauses (a) to (h).
The requirement of existence of a debt, which
is disbursed against the consideration for
the time value of money, in our view, remains
an essential part even in respect of any of
the transactions/dealings stated in clauses
(a) to (i) of Section 5(8), even if it is not
necessarily stated therein. In any case, the
definition, by its very frame, cannot be read
so expansive, rather infinitely wide, that
the root requirements of “disbursement”
against “the consideration for the time value
of money” could be forsaken in the manner
that any transaction could stand alone to
become a financial debt. In other words, any
of the transactions stated in the said
clauses (a) to (i) of Section 5(8) would be
falling within the ambit of “financial debt”
only if it carries the essential elements
stated in the principal clause or at least
has the features which could be traced to
such essential elements in the principal
clause. In yet other words, the essential
167
element of disbursal, and that too against
the consideration for time value of money,
needs to be found in the genesis of any debt
before it may be treated as “financial debt”
within the meaning of Section 5(8) of the
Code. This debt may be of any nature but a
part of it is always required to be carrying,
or corresponding to, or at least having some
traces of disbursal against consideration for
the time value of money.”
132. Under Section 5(8)(f), the words used, inter
alia, are ‘any amount raised under any other
transaction’. In our quest for similar words, namely,
any amount raised, we discover that similar words are
used namely ‘any amount raised’ specifically in
clauses 5(8)(b) and 5(8)(c). We may notice that, in
fact, Section 5(8)(a) specifically deals with money
borrowed against the payment of interest. We have
already found that under the main provision an
interest free loan has been held by this Court to
entitle the unpaid creditor to describe himself as a
financial creditor. The words ‘any amount raised
pursuing to any note purchase facility or issue of
bonds, notes, debentures, loans stocks’ are followed
by the words or by any similar instrument. Since,
Part II of the IBC deals with resolution and
168
liquidation for corporate persons and the definition
of financial debt is found in Section 5(8) falling
under Part II, we may bear in mind that Section 3(8)
defines corporate debtor as a corporate person who
owes a debt to any person. The word corporate person
has in turn been defined under Section 3(7) as a
company under the Companies Act as defined in Section
2(20) of the Companies Act, 2013, a limited liability
partnership as defined in the Limited Liability
Partnership Act, 2008 or any other person
incorporated with limited liability but under any law
for the time being in force but will not include any
financial service provider. In fact, a perusal of
Part III of IBC which deals with Insolvency
Resolution for individuals and partnership firms will
show that it does not contain the concept of
financial debt as indicated in Section 5(8). Section
5(8)(c) comprehensively refers to raising of any
amount based on note purchase facility, issue of
bonds, notes, debentures, loan stock or any similar
instrument. Thus, what is contemplated is ordinarily
the corporate debtor raises funds by issuing bonds,
169
notes, debentures or loan stock which are well known
instruments usually used by corporate bodies to
generate funds for its needs. These instruments are
ordinarily transferable. It is after enumeration of
such instruments specifically that the words ‘similar
instrument’ are employed. The expression ‘similar
instrument’ came to be considered by this Court in
the decision reported in State of Orissa v. State of
A.P.
13. Therein the question related to the
jurisdiction of the Supreme Court under Article 131
of the Constitution. The proviso to Article 131
operates to oust the jurisdiction of this Court. It
reads as follows:
“Provided that the said jurisdiction shall not
extend to a dispute arising out of any treaty,
agreement, covenant, engagement, sanad or
other similar instrument which, having been
entered into or executed before the
commencement of this Constitution, continues
in operation after such commencement, or which
provides that the said jurisdiction shall not
extend to such a dispute.”
(Emphasis supplied)
In the context of the said provision, we notice the
following discussion.
13 (2006) 9 SCC 591
170
“15. The word “or” indicates that the
succeeding phrase “other similar instrument”
is to be read disjunctively. At the same time
the word “similar” means that the instrument
must be of the same nature as those
preceding. An instrument, to fall within this
phrase would, in the context, have to be a
formal writing by which a right or liability,
is or purports to be, created, transferred,
limited, extended, extinguished, or recorded.
Thus a document acknowledging title in a
third person has been held to be an
instrument in Biswambhar Singh v. State of
Orissa [1954 SCR 842 : AIR 1954 SC 139] .”
(Emphasis supplied)
133. We need not further explore the scope of the
said clause 5(8)(c) except to notice that the word
similar instrument would indicate instruments similar
to the instruments which are specifically enumerated.
It is unnecessary for us to expound the different
types of instruments which answer the description of
similar instruments and we need only notice that the
golden thread that runs through the specific
instruments is that they all contain an
acknowledgement of debt. They are debt instruments
ordinarily issued by corporate bodies. They also are
transferable in the market and the holder can indeed
bring an action on the same even if he is not the
person who has made the initial disbursement of funds
171
to the corporate debtor. A glance at another
immediate neighbour which is the immediate
predecessor of Section 5(8)(f), throws some light on
the mind of the Law-Giver. Section 5(8)(e) deals with
receivables sold or discounted other than any
receivable sold on non-recourse basis. It will be
noted that the receivables are treated as current
assets. Ordinarily, they represent the value of goods
or services for which the creditor can expect payment
within a short time, ordinarily, during the balance
period of the financial year. If it were mere
receivables, then it would rightly belong to the fold
of an operational debt as such debt includes a claim
in respect of the provision of goods or services
including employment. However, what legitimises its
presence as a financial debt is the sale or
assignment of the receivables or its discounting. In
other words, when amounts are due to the seller of
goods or services which represent receivables in his
accounts, should he need payment immediately, it is
open to such a creditor to assign the right to
recover the amount to a third party. The third party
172
can recover it from the debtor. He can also have
recourse from the assignor of the receivables. When
there is a non-recourse clause, it is taken outside
the category of financial debt. It is also after
providing explicitly for raising of funds under
clause (b) which deals with acceptance of or under
any acceptance credit facility and through the
issuance of various instruments and further providing
for a residuary clause through the medium of similar
instruments in Section 5(8)(c), seemingly exhaustive
transactions, and further including the category of
financial debt in section 5(8)(e) that the
legislature has thought it fit to provide for the
catch-all or residuary provision in section 5(8)(f).
In section 5(8)(g), the legislature has included any
derivative transaction entered into or in connection
with protection against or benefit from fluctuation
in any rate or price as also a financial debt.
Derivative transactions are essentially instruments
which involve the deriving of the value of the
instrument with respect to and in relation to an
underlying asset. It could be a commodity or a share
173
or any other asset having a value. Ordinarily
derivatives comprehend within its scope forward
contracts, futures, options and swaps and an instance
of a swap would be an interest rate swap (IRS). The
derivative market is a gigantic financial market.
They also share the quality of marketability not
unlike instruments which are specifically dealt with
in Section 5(8)(c). While on any derivative
transaction, a derivative transaction is ordinarily
intended to hedge risk. This means it is intended to
potentially protect the person from the ill-effects
of the fluctuation in the price or the rate of an
underlying asset. A resort is also made to
derivatives as a matter of speculation in which case
it partakes of a benefit. The words used in Section
5(8)(g) appear to suggest that the law giver has
contemplated any derivative transaction, in
connection with the protection of the benefit from
fluctuation in the rate or price. There appears to be
an intricate and complex web of transactions which
can take place under a derivative transaction. The
174
important aspect is, however, a debt in the context
of its mention as a financial debt.
134. While there may be again a brooding omnipresence
of a disbursement at some level as between the
parties very often in such transactions referred to
as counter parties, there may not be a disbursement.
It is clear that the law-giver has provided for
calculation purposes, the market value of the
transaction for determining the value of the
derivative transaction. We are making these
observations only to indicate that the device of the
definition of the clause which employs the word
‘means’, followed by certain elements, and
thereafter, ending with an inclusionary clause,
providing for various distinct categories would
indicate that for invoking the specified categories,
there may not be a need for the presence of all the
elements included in the main provision.
135. However, this is different from holding that the
conditions in section 5(8)(f) would stand fulfilled
even without a person falling within its four walls
by satisfying even the requirements indicated
175
therein. In other words, as we have indicated the
raising of any amount under any other transaction
having the commercial effect of a borrowing is
indispensable to apply Section 5(8)(f).
136. The contention of the appellant on the one hand
is that the terms of the lease under which as far as
it provides for a moratorium for two years after the
initial upfront payment and facility of payment of
the balance amount of the premium with interest and
spread over 16 half-yearly instalments, amounts to
raising funds by the lessee from the appellant and it
has the commercial effect of a borrowing from the
perspective of the lessee. This is to counter the
case of the respondents that having regard to its
position as a statutory authority and a public
authority under the UPIAD, the transaction does not
have the commercial effect of borrowing. In other
words, the case of the respondent is being
indispensable requirement under Section 5(8)(f) that
the amount raised under any other transaction
referred to must have a commercial effect of a
borrowing, it would bring in its train a profit
176
motive which is incompatible with the position of the
appellant as a public authority charged with the
sublime duty it claims of planned development of the
area. Shri Madhavi diwan would apparently point out
along with the learned solicitor general that from
the point of view of the lessee, there is a
commercial effect. She also submits that the
appellant has also charged interest.
137. We have already noticed the view expressed by
this Court in Pioneer (supra). The view propounded is
that the presence of profit as the main aim is
essential for the commercial effect of a borrowing.
This Court found that both the real estate developer
and the home buyer are actuated by profit motive as
underlying the transaction.
138. We are of the view that in the facts of the
appeals before us, we are unable to hold that the
lessee has raised any amounts from the appellant. The
question, therefore, of considering the last limb of
Section 5(8)(f), namely, whether it has commercial
effect of a borrowing could not arise. But we can
safely say that the obligation incurred by the lessee
177
to pay the rental and the premium cannot be treated
as an amount raised by the lessee from the appellant.
It may be noticed that it is reasonably possible to
find that the lessee has raised this amount which it
had to pay to the appellant from some other sources.
The reliance on the concept of ‘a tool of raising
finance’ canvassed by the appellants would be
carrying things too far and to allow them to invoke
it carries with-it far-reaching implications and
bears dangerous portent for the purpose of Section
5(8)(f). We would think that the concept of
disbursement as present in the main provision appears
to be mandatory in Section 5(8)(f). The purport of
Section 5(8)(f) is to provide for an exhaustive
catch-all provision.
139. One of the contentions raised on behalf of the
respondent that, since the Law Giver has referred to
lease in Section 5(8)(d) of the IBC and defined
‘financial lease’, as limited only to finance lease
and capital lease, deemed, as such, under the Indian
Accounting Standards, no recourse can be made by the
appellants to Section 5(8)(f), which is a residuary
178
provision. On the other hand, the appellant, while
agreeing that all cases of financial or capital
lease, covered by Section 5(8)(d), cannot be
considered under Section 5(8)(f) contends that there
can be no embargo on the Court, considering whether,
in the lease in question, any amount is raised,
having the commercial effect of a borrowing. The case
of the respondent can be understood differently by
applying the principle that, when there is a special
provision, no light must be allowed to emanate from
the general provision. Another allied issue, which,
at this juncture, we must address is, whether the
words, ‘any amount raised under any other
transaction, in Section 5(8)(f), would involve
attributing the presence of a transaction on the
preceding provisions of Section 5(8). To put it
differently, the use of the word, ‘any other’, before
the word, ‘transaction’, would involve the
presumption that the preceding sub-clauses of Section
5(8), embodied specific transactions. Going by the
wide definition of the word ‘transaction’ in Section
2(33), we find that there is merit in the argument of
179
the appellant. Section 5(8)(a) to Section 5(8)(e)
proceed on the basis that there is a transaction, as
conceived by the Law Giver. As far as the contention
that, since the words, ‘lease or hire-purchase
contract’, is specifically confined to, what is
deemed as finance or capital lease, falling under the
Indian Accounting Standards, and, therefore, any
liability under such a lease, is not falling under
Section 5(8)(f).
140. It is, no doubt, true that in Section 2(33), a
transaction can be an arrangement in writing, under
which, there is transfer of assets, funds, goods and
services, from or to the corporate debtor. A perusal
of the terms of lease contemplate that the appellant
must not make available financial facility to the
lessee. The appellant has, admittedly, not made
available any loan to the lessee. No advance payment
is made by the appellant. It is for the lessee to
fund the project and make the payment from its own
sources. It is entirely for the lessee to finance the
payment of the rent, premium and interest due to the
appellant under the lease. The claim of the
180
appellant, it must be noticed, is for the amount due
by way of premium and interest, besides the lease
amount due as on the date of the claim. As far as
these amounts are concerned, they are not amounts,
which have been raised by the lessee from the
appellant. They would have been either from its own
sources or by availing financial facilities from
others. It is vital to notice that as far as the
amount saved by the corporate debtor, to pay the
amounts to the appellant, there would be a financial
debt incurred by the lessor to its lender. The
acceptance of the appellants argument would involve
that for the said amount the possibility of two
financial creditors being present. This is
unacceptable. In fact, the provision relating to
limited power of mortgaging, available to the lessee,
is for the purpose of financing the construction of
the flats over the leasehold property. While, under
the lease, the lessee may have incurred debt towards
third party, which may be a financial debt. We are of
the view that we would be placing a wholly strained
and unreasonable interpretation on Section 5(8)(f),
181
if we were to hold that lessee has raised funds from
the lessor (appellant) under the lease in question.
Merely granting a moratorium, followed by the
staggered payment in sixteen half-yearly installments
of the balance of premium, cannot possibly lead to
the conclusion that the respondent has raised the
funds, under the lease, from the appellant.
141. We may notice that what Section 5(8)(d) of the
IBC provides for is, any liability in respect of any
lease, inter alia, which is, however, confined to a
finance or capital lease. We are not ruling out the
possibility that, in a lease, not a finance or a
capital lease, falling under Section 5(8)(d), if it
otherwise fulfils the requirements of Section
5(8)(f), it would not fall under the definition of
the word ‘financial debt’. In other words, Section
5(8)(d) includes only a finance or a capital lease,
which is deemed, as such, under the Indian Accounting
Standards. Section 5(8)(f) is a residuary and catch
all provision. A lease, which is not a finance or a
capital lease under Section 5(8)(d), may create a
financial debt within the meaning of Section 5(8)(f),
182
if, on its terms, the Court concludes that it is a
transaction, under which, any amount is raised,
having the commercial effect of the borrowing. All
that we are finding, in the facts of this case, is
that the lease in question does not fall within the
ambit of Section 5(8)(f). This is for the reason that
the lessee has not raised any amount from the
appellant under the lease, which is a transaction.
The raising of the amount, which, according to the
appellant, constitutes the financial debt, has not
taken place in the form of any flow of funds from the
appellant/lessor, in any manner, to the lessee. The
mere permission or facility of moratorium, followed
by staggered payment in easy installments, cannot
lead us to the conclusion that any amount has been
raised, under the lease, from the appellant, which is
the most important consideration.
WHETHER THE APPELLANT IS AN OPERATIONAL
CREDITOR?
142. As far as the case of the respondents that the
appellant is a Local Authority goes, the case of the
respondent was largely premised on the Judgment of
183
this Court in Union of India and Others v. R.C. Jain
and Others14. In short, the case of the respondent was
that the appellant is a Local Authority and the
rental and premium in question, claimed by the
appellant, constitutes amount due to the appellant
under a law, viz., the UPIAD, read with Section 40 of
the UP Act of 1973, made applicable to the UPIAD.
Upon this Court pointing out the decision of this
Court reported in New Okhla Industrial Development
Authority v. Chief Commissioner of Income Tax and
others15, wherein this Court has taken the view in the
case of the appellant itself, that it is not a Local
Authority. The parties would point out that the said
Judgment, may not apply, as it was rendered in the
context of the Income Tax Act. It is also pointed out
that Judgments, which have been rendered after R.C.
Jain (supra), which includes Housing Board of Haryana
v. Haryana Housing Board Employees’ Union and Others16
and Commissioner of Income Tax, Lucknow v. U.P.
14 (1981) 2 SCC 308
15 (2018) 9 SCC 351
16(1996) 1 SC 95
184
Forest Corporation17, are also distinguishable. It is
contended that of the five tests propounded in R.C.
Jain (supra), there is substantial fulfilment of the
same qua the appellant.
143. It was pointed out that under Section 3(r) of the
UP Act of 2010, a cognate law, the appellant is
treated as a Local Authority. It is also pointed out
that the appellant does provide civic amenities to
the local inhabitants and, for the purpose of the
IBC, it is, indeed, a Local Authority. It is also
pointed out that the appellant is treated as a Local
Authority under the Goods and Services Act. Prima
facie the decision in Noida (supra) may not detract
from the appellant being found to be a local
authority for the purpose at hand. No doubt, we do
notice that in the context of the proviso to Article
131 of the Constitution of India, this Court did
notice the distinction between the words ‘arising out
of’ and the words ‘arising under’ and held that the
words ‘arising under’ bears a narrower meaning (See
also the discussion of the meaning of the word
17(1998) 3 SCC 530
185
‘arises’ as meaning ‘coming into existence’, in a
Judgment of this Court by Justice Mukherji in Re:
Rogers Pyatt Shellac Co. v. The Secretary of State
for India in Council18, which stands approved in The
Commissioner of Income Tax, Bombay v. Ahmedbhai
Umarbhai and Co., Bombay19.
144. The appellant would, in fact, point out that it
is not necessary to probe the matter further, in view
of the concurrent findings that the appellant is an
operational creditor. No doubt, Smt. Madhavi Divan
does point out that the words ‘arising under any
law’, may not be the same as amounts being made
recoverable under a law. Of course, she would point
out that as far as the rental part of the claim, it
may be relatable to the first limb of an operational
debt. When questioned further, as to what her
position is, if this Court found that the appellant
is not a financial creditor, the appellant may be
entitled, at least, to be treated as an operational
creditor. We would think that, having regard to the
18 AIR 1925 Calcutta 34
19 AIR 1950 SC 134
186
fact that both the NCLT and NCLAT have proceeded on
the basis that the appellant is an operational
creditor, we need not stretch the exploration further
and pronounce on the questions, which may otherwise
arise. We must not be oblivious to the following
prospect, should we find that the appellant is not an
operational creditor, even under the IBC Regulations
apart from claims by financial creditors and
operational creditors, claims can be made by other
creditors. However, there are, undoubtedly, certain
advantages, which an operational creditor enjoys over
the other creditors. We would proceed on the basis
that, while the appellant is not a financial
creditor, it would constitute an operational
creditor.
145. The upshot of the above discussion is that the
appeals must fail. The appeals are, accordingly,
dismissed. Parties to bear their own costs.
……………………………………,J
 (K.M. JOSEPH)
…………………………………,J.
NEW DELHI; (HRISHIKESH ROY)
MAY 17, 2022.

Comments

Popular posts from this blog

100 Questions on Indian Constitution for UPSC 2020 Pre Exam

संविधान की प्रमुख विशेषताओं का उल्लेख | Characteristics of the Constitution of India

भारतीय संविधान से संबंधित 100 महत्वपूर्ण प्रश्न उतर