Case Analysis: New Okhla Industrial Development vs Anand Sonbhadra

NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY (NOIDA) Vs. ANAND SONBHADRA
CIVIL APPEAL NO. 2222 OF 2021- SUPREME COURT OF INDIA

The Apex Court held that - after considering all aspects of the meaning of lease including financial lease held that the Appellant in this case an operational creditor and not a financial creditor and thus was not entitled to treated as so in the CIRP.

BRIEF FACTS

1. National Company Law Tribunal (NCLT), Bench IV, New Delhi while adjudicating an application filed by NOIDA held that the NOIDA is an operational creditor as there is no financial lease executed between NOIDA and the Corporate Debtor as per the Indian accounting standards and the same was affirmed by NCLAT vide Order dated 16th April 2021,whereas in an other case the Principal Bench of NCLT Delhi held that NOIDA is a Financial Creditor.
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.
3. Whether NOIDA Is A Financial Creditor Under Section 5(8)(D) Of IBC.- NOIDA contended before the Supreme Court that the lease deed executed between the NOIDA and the Corporate Debtor is a Financial Lease as per IND AS and therefore by virtue of provisions of Section 5(8)(D) of the IBC,2016 it will be treated as “ Financial Creditor”.

SECTION 5(8) of IBC,2016

Defines- "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 de-materialised 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 nonrecourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, 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 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-clauses (a) to (h) of this clause;

THE JUDGEMENT

The Supreme Court made a roving inquiry into the various rules of the Indian Accounting Standards which define the characteristics of a financial Lease Supreme Court referred to Rule 63 of the Indian Accounting Standard which 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.”

The Supreme Court held that the lease in question is for a period of
of ninety years and the principle of the economic life of the underlying asset which is the "land" is inapposite in the present case.

“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".

The Supreme Court further held that; "…It may not be possible to hold that the lease is for the major part of the economic life of the 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”.

Thereafter, the Supreme Court examined the contention of NOIDA based on Rule 62 and 65 of Indian Accounting Standard which states that a lease may be classified as a financial if it transfers substantially all the risks and rewards incidental to the ownership of the underlying asset and held that all rewards incidental to the ownership of the underlying asset and held that all rewards incidental to the ownership are not transferred to the lessee by NOIDA and thus the conditions of Rule 62 and 65 do not meet in the present scenario and therefore, NOIDA cannot be considered as a Financial Creditor under Section 5(8)(d) of IBC.

However, Supreme Court made an interesting observation hinting toward a prospective amendment by the Central Government to classify NOIDA as a Financial Creditor and held that;

"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 IND AS in the absence of any rules prescribed under Section 5(8)(d) of the IBC by the Central Government.”

WHETHER NOIDA IS A FINANCIAL CREDITOR UNDER SECTION 5(8)(F) OF IBC

The Supreme Court also examined the case of NOIDA in view of Section 5(8)(f) of the Code which classified a Creditor as a Financial Creditor in case of a debt which;

5(8)(f): any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

The Supreme Court negated the contention of NOIDA and held that;

"138. We are of the view that in the facts of the appeals before us, we are unableto 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 borrowing could not arise. But we can safely say that the obligation incurred by the lessee to pay the rental and the premium cannot be treated as an amount raised by the lessee from the appellant.”

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 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'.

WHETHER THE APPELLANT IS AN OPERATIONAL CREDITOR? 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 this Court in Union of India and Others v. R.C. Jain and Others. 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 others, 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. Forest Corporation, 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.

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.

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.

The Supreme Court dismissed the appeals and held that in view of the concurrent finding of NCLT and NCLAT that NOIDA is an Operational Creditor, NOIDA.

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