The Supreme Court on Tuesday declared NOIDA as an operational creditor under the Insolvency and Bankruptcy Code, 2016.

The two-judge Bench of Justice KM Joseph and Justice Hrishikesh Roy dismissed the appeal filed by Noida assailing the order of NCLAT which had declared the Appellant (Noida) as an operational creditor and held that it could not be considered as a financial creditor of the Corporate Debtor as per the provisions of the IBC.

The issue which was dealt with by the Court was –

  • Whether the Appellant is entitled to be treated as a financial creditor within the meaning of IBC.

The Appellant had argued before the Supreme Court that as per Sections 5(8)(d) and 5(8)(f) of IBC, it is a financial creditor. It was further argued that the lease deed executed between the Appellant and the Corporate Debtor is actually a financial lease as per the Indian Accounting Standards (IAS) within the meaning of Section 5(8)(d) enacted under the Companies Act.

  • Section 5(8)(d) of IBC

In this context, the Bench while referring to various rules of IAS that deal with ingredients of the financial lease, held –

"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."

Additionally, the Bench also observed –

"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 Court also held that there has been no disbursement of loan or any sums by the Appellant to the lessee, therefore, the Appellant would not be a financial creditor within the ambit of Section 5(8).

The Bench while placing reliance on various statutory rules of IAS, held –

"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."

While placing reliance on Rule 62 and Rule 65 of IAS, the Bench observed –

"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 does not substantially transfer all the risks and the rewards incidental to the ownership of the underlying asset."

Thus, the Bench held that the Appellant (Noida) is not the financial lessor under Section 5(8)(d) of IBC.

However, the Court held that there is always a power to amend the provisions which essentially consist of the Indian Accounting Standards (IAS) in the absence of any rules prescribed under Section 5(8)(d) of the IBC by the Central Government.

  • Section 5(8)(f) of IBC

In this context, the Court dealt with the issue of whether the Appellant can be classified as a financial creditor under Section 5(8)(f) of IBC.

Section 5(8(f) defines 'financial debt' as meaning a debt along with interest, if any, which is disbursed against the consideration of time value of money.

The Bench while declining the plea of the Appellant of being a financial creditor, held, "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 to pay the rental and the premium cannot be treated as an amount raised by the lessee from the appellant."

"We would proceed on the basis that, while the appellant is not a financial creditor, it would constitute an operational creditor," the Bench concluded.

In the light of these observations, the Court dismissed the appeals and held that the Appellant – NOIDA is an operational creditor.

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