[Insolvency and Bankruptcy Code] Supreme Court rejects NOIDA's claim of being Financial Creditor

The Supreme Court recently rejected an appeal filed by the New Okhla Industrial Development Authority (NOIDA) pleading to be declared as a financial creditor in the insolvency of group housing projects [NOIDA v. Anand Sonbhadra]. .A Bench of Justices KM Joseph and Hrishikesh Roy held that as the Insolvency and Bankrupcy Code (IBC/ code) stands today, NOIDA could not qualify as a financial creditor but only as an operational creditor."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 judgment stated..The Court was considering an appeal against an order of the National Company Law Tribunal (NCLAT) which had held that the appellant, NOIDA, is an operational creditor under IBC and cannot be considered as a financial creditor of the corporate debtor.The appellant had initially submitted Form ‘B’ under the IBC and claimed raised claims as an operational creditor with regard to the dues outstanding on a lease to the tune of over ₹1,473 crores in the insolvency of group housing projects alone. Later, the appellant filed a claim in Form ‘C’ under the code and raised claims as a financial creditor.The NCLT found that there was no financial lease in terms of the Indian Accounting Standards and there was no financial debt.The NCLAT affirmed the order of the NCLT holding the appellant to be an operational creditor, which prompted the appeal before the Supreme Court. .The question which arose in the appeal was whether the appellant would be a financial creditor and entitled to be so treated in the Corporate Insolvency Resolution Process (CIRP) commenced against the corporate debtor under the IBC.In its judgement, the Supreme Court primarily dealt with the following provisions of the IBC which were at the centre of the controversy: 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 which may include: 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”Section 5(8)(f) : “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”.In the context of the principal provisions of Section 5(8) of the IBC, the Court stated that the essential requirement to attract Section 5(8) is that “there must be a debt along with interest, if any, which is disbursed against the consideration for the time value of money”.Relying on the IAS Rules, provisions of the IBC and various precedents, the Court held that “there is no disbursement under the lease deed” in the instant case. .Regarding Sections 5(8)(d) and 5(8)(f), the Court observed as follows:"Section 5(8)(d) includes only a finance or a capital lease, which is deemed, as such, under the Indian Accounting Standards (IAS). 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", .To consider whether Section 5(d)(f) would apply, the top court considered the provisions of the IAS which prescribe the characteristics of a financial lease. Rule 63 of the IAS states that a lease will be a financial lease if the term of the lease is for the major part of the economic life of the underlying assets, even if the title is not transferred. In the instant, the lease is for a period of 90 years which cannot be said to be for a major part of the economic life of the underlying asset, which in this case, is land. With regard to other relevant rules of the IAS as well, the Supreme Court found that NOIDA cannot be considered as a Financial Creditor under Section 5(8)(d) of IBC..With regard to Section 5(8)(f), the Court held that the raising of any amount under any other transaction having the commercial effect of a borrowing is indispensable for said section to apply.The Court opined that 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). "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", the Court held while dismissing the appeals. .Solicitor General Tushar Mehta and Additional Solicitor General Madhavi Divan appeared for NOIDA. Senior Advocate Ritin Rai and advocate Devashish Bharuka respondents. Senior Advocate AM Singhvi appeared for an intervenor. .[Read Judgment]