Long-term land lease financing test rejects financial debt classification where ownership risks and control stay with the lessor.

A long-term land lease with instalment-based premium payments was analysed under the Insolvency and Bankruptcy Code to determine whether it amounted to a finance lease or a borrowing. The substance of the arrangement prevailed over its label: because the lessor retained ownership rights, supervisory control, cancellation powers, and control over transfer and sub-lease, the lease did not transfer substantially all risks and rewards of ownership and therefore was not a finance lease under Section 5(8)(d). The instalment structure, even with interest, also did not give the transaction the commercial effect of borrowing under Section 5(8)(f).

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Issues: (i) Whether the lease deed constituted a finance lease and therefore a financial debt under Section 5(8)(d) of the Insolvency and Bankruptcy Code, 2016. (ii) Whether the transaction had the commercial effect of borrowing and fell within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.

Issue (i): Whether the lease deed constituted a finance lease and therefore a financial debt under Section 5(8)(d) of the Insolvency and Bankruptcy Code, 2016.

Analysis: The lease had to be tested on its substance and not its label. A finance lease requires transfer of substantially all risks and rewards incidental to ownership, and relevant indicators include transfer of ownership, bargain purchase features, lease term covering the major part of economic life, and lease payments approximating fair value. On the terms of the deed, the lessor retained extensive control over the land and project, retained rights over minerals and supervision, reserved cancellation powers, controlled transfer and sub-lease, and did not transfer ownership or a bargain purchase option. The lessee's obligations to pay premium in instalments and bear certain liabilities did not convert the land lease into a finance lease.

Conclusion: The lease deed was not a finance lease and did not create a financial debt under Section 5(8)(d) of the Insolvency and Bankruptcy Code, 2016.

Issue (ii): Whether the transaction had the commercial effect of borrowing and fell within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.

Analysis: The mere facility to pay lease premium by instalments, even with interest, did not amount to a borrowing transaction. The arrangement was a lease of land under a regulatory development framework, not a financing structure akin to a loan. The real estate borrowing principle applied to homebuyer advances could not be extended to convert this lease into a financial debt, particularly where the lessor retained substantial control and the transaction did not involve a sale or raising of funds for temporary use in the relevant sense.

Conclusion: The transaction did not have the commercial effect of borrowing and did not fall within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.

Final Conclusion: The appeal failed because the lease deed did not satisfy the statutory attributes of financial debt under either provision and the respondent's treatment of the claim was upheld.

Ratio Decidendi: A long-term land lease with instalment-based premium payment and continuing supervisory control by the lessor is not a finance lease or a borrowing in substance unless it transfers substantially all risks and rewards of ownership or otherwise answers the statutory tests of financial debt.

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