AI Drafter 
TaxTMI 
TaxTMI 
2021 (4) TMI 1081
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....anted in favour of the Corporate Debtor which amount was of Rs. 99,32,55,183. The Representative of the Appellant even attended COC (Committee of Creditors) as Operational Creditor. Later, the Appellant filed claim in Form 'C' seeking status of NOIDA as Financial Creditor. As there was no response by the Resolution Professional (RP - in short), the Appellant entered into correspondence and even moved Adjudicating Authority (National Company Law Tribunal, New Delhi) which passed Orders on 26.07.2019 and sent matter to the Resolution Professional but still when the Appellant was not treated as Financial Creditor, Application CA 257/ND/2019 was filed claiming that RP had disobeyed earlier directions and that Appellant deserved to be treated as Financial Creditor and should be permitted to participate in COC with voting rights. 2. The matter was taken up before the Adjudicating Authority and the Adjudicating Authority after hearing both sides held that the lease deed concerned was not a financial lease as per the terms laid down under the guidelines of "Indian Accounting Standards". Thus, the present Appeal. 3. It is argued and the Appeal claims that the Adjudicating Authority di....
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....ship 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. 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 equalling most ....
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....ed against payment of interest" or clearly has the "commercial effect of a borrowing" (Para - 7.17 of Appeal). The upfront premium has to be paid by 16 half yearly instalments starting from 11.09.2010 till 11th March, 2020. The Appeal gives breakup of the instalments. According to the Appellant, interest @ 11% per annum was to be paid on "outstanding balance of upfront lease premium" which was secured by creation of first charge in favour of the Appellant over the leased land. On this basis, it is claimed (in Appeal Para - 7.18) as under:- "Thus, even though no monies were directly disbursed by the Appellant to the Corporate Debtor, there was effectively, a deemed disbursement whereby the payment of upfront lease premium was financed by way of an inbuilt financial facility (availed from the Appellant itself), pursuant to which the Respondent was permitted to pay such upfront lease premium amount by way of instalments along with interest, representing time value of money for the Appellant. Therefore, the Lease Deed was a merger of a simpliciter lease transaction and a secured interest bearing financial ability. Thus, by virtue of the nature of the Lease Deed the debt payabl....
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....rmitted to pay such upfront lease premium amount by way of instalments along with interest". Thus, it is claimed that this represented value of money for the Appellant. It is argued and the Appeal refers to the portion in lease deed regarding transfer of plot and misuse, addition, subtraction, etc. to submit that the Appellant was "only exercising minor supervision over the land". 8. On such basis, the learned Counsel for the Appellant has argued to submit that it was a financial lease under Section 5(8)(d). For such reasoning, the Appellant is also further arguing that the claim of the Appellant that it is financial debt, is not merely on the basis of Section 5(8)(d) but also on the basis that the transaction has "commercial effect of borrowing", and so is covered under Section 5(8)(f). 9. Against this, the Respondent - Resolution Professional relies on the Reply filed to the Appeal (Diary No.16867) and referring to the contents of the lease deed as well as the Indian Accounting Standards, the Respondent has argued that it is not a financial debt and the Appellant initially correctly claimed itself to be only an Operational Creditor but later on, has been trying to bring the....
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.... 14. The Hon'ble Supreme Court dealt with the issue as to what is a lease finance. Para - 13 to 17 of the Judgement of Hon'ble Supreme Court may be reproduced:- "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) 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 long-term debt financing. In financial lease, the leasing company buys the eq....
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....period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest." 17. 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 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 an....
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....bstantially all the risks and rewards incidental to ownership", we find that the present lease deed hopelessly fails in this regard. We have gone through the contents of the lease deed (Annexure A-2 - Page 57 to 87) (Page Nos.86 and 87 are a subsequent communication which is not part of the lease deed). The lease deed is heavily tilted in favour of the Appellant controlling almost all the aspects and while passing over the risks to the Corporate Debtor, keeps the rewards with Lessor, except the liberty to sell the flats which would be constructed. 15. We proceed to refer to portions of the lease deed which would rather show that rewards incidental to ownership of the underlying asset which is land, were not transferred. 16. We will refer to page number of the lease deed (rather than page number of the Appeal) while referring to the contents of the lease deed with the Corporate Debtor. The Appellant put condition to the Corporate Debtor that the lessee will be allowed to transfer/sell upto 49% of its shareholding, subject to the condition that the original shareholder indicated (on the date of submission of the tender) shall continue to hold at least 51% of shareholding till t....
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....ct to) "unless the Lessor decides to withdraw this facility". The Clause states that on payment of onetime lease rent, no further annual lease rent would be required to be paid for the balance lease period and that this option may be exercised at any time during lease period provided the lessee has paid the earlier lease rent due and lease rent already paid will not be considered in onetime lease rent option. Page - 7 shows that liabilities to pay all rates, taxes, charges, etc. assessed or imposed by the lessor or any Government Authority were that of the lessee. Relevant part (at Page -7 of Lease Deed) reads as under:- "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 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." Then the Clause goes on to state that the allottee/sub-less....
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.... number of phases were fixed which were stated to be 5 phases to be completed in 7 years. 20. Page -11 of the Lease Deed refers to Mortgage. Even here, if the lessee was to mortgage the land to financial institutions/banks to raise loan, permission of the Appellant was necessary and priority of charge of the Appellant was kept. Page - 13 refers to misuse, additions, alterations, etc. with regard to the flats that the lessee shall not use flat for any purpose other than residential purpose and in case of violation of the above condition, the allotment shall be liable to be cancelled and possession of the premises along with structure thereon, if any, shall be resumed by the Appellant. There are further conditions put with regard to alterations or additions, etc. The liability to pay taxes, charges, etc. was put on lessor (Page - 14 of the Lease Deed). At Page - 14, there is Clause with regard to overriding power over Government properties with right to mines, minerals, etc. on or under the concerned plot, which is similar to the Clause noticed at Page - 6 of the lease deed. Thus, the Appellant reserved right to even remove the vertical support for the surface of the plots/flats a....
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....eping 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 ....
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....om the Appellant when it permitted the Respondent to pay premium in instalments. We do not think that by such artful use of words, the transaction can be converted into one of a financial debt. 27. Learned Counsel for the Appellant submitted that Section 5(8)(f) shows that it is not necessary that there should be disbursement of money to make the same of financial debt. According to the Appellant permitting payment of premium in instalments by the lessee should be treated as having commercial effect of borrowing. Reliance is placed on Judgement in the matter of "Pioneer Urban Land and Infrastructure Limited and Another Versus Union of India and Others" (2019) 8 SCC 416 - SCC OnLine SC 1005 where Section 5(8)(f) was discussed by the Hon'ble Supreme Court in paragraphs - 75 to 77. 28. Pursuant to a Report prepared by Insolvency Law Committee dated 26th March, 2018 "amendments were made which deem allottees of real estate projects to be Financial Creditors so that they may trigger the IBC under Section 7 against real estate developers". In that context, various Writ Petitions were filed before the Hon'ble Supreme Court and the Hon'ble Supreme Court considered the constitutional ....
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....rom 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 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. 31. We do not find any substance in the Appeal. The Appeal is dismissed. No Orders as to costs. ============= Document 1 TRUE COPY ANNEXURE-8 ANALYSIS OF THE FACTORS UNDER THE INDIAN ACCOUNTING STANDARDS VIS-À-VIS THE PROVISIONS OF THE LEASE DEED: The following table shows the factors which have been enshrined under the AS 116 of the Indian Accounting Standards and their co-relation with the terms of the Lease Deed: PARAS OF THE INDIAN ACCOUNTING STANDARDS Under Para 63: (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 tha....
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....eed, the leased land on which the project has been constructed, shall be of no value to the lessor. This is because, once the third-party rights have been created over the dwelling units/built up space/Plots, the economic life and value of the asset will have been exhausted. It should however be borne in mind that it is the Lessee who decides what is to be constructed, what is the price for the constructed dwelling units/built up space/Plots and to whom the dwelling units/built up space/Plots will be sold to. As on the inception date, under Clause (II) (a) (v) of the Lease Deed(p.67 of the appeal), the Lessee has the option to pay a One-time Lease Rent equivalent to Lease rent for 11 years at the rate of 1% of the premium of the plot per year. If the Lessee exercises this method of payment, then the Lessee does not have to pay the lease rent any further. Similarly, the premium amount which the lessee ought to pay under the Lease Deed signifies the minimum price payable by the Lessee to acquire rights for development and construction on the Leased Land. By acquiring the right to constr....
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....estion of continuing the lease after Lessee transfers the rights under the Lease Deed, doesn't arise. 16 Document 4 ') BEFORE THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL, AT NEW DELHI APPELLATE JURISDICTION 1 APPEAL No. 1183 of 2019 IN THE MATTER OF: NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. Appellant MR. ANAND SONBHADRA (RESOLUTION PROFESSIONAL) ....Respondent Comparative chart of the Indian Accounting Standards and the Lease Deed Dated 30.07.2010 Srl No. Indian Accounting Standards 1. 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 financial lease are: The lease transfers ownership of the underlying asset to the lessee by the end of the lease term (See Clause 63 (a) @Pg 157 of the Appeal paper book] 2. 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 ....
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....forward any calculation which substantiates/ corroborates its claim that the net present value is equal to fair value of underlying asset. (ii) Furthermore, the yearly lease rental of Rs. 46,00,000/- (Forty Six Lakhs only) as has been specified in the Lease Deed cannot be equated to the fair value of the underlying asset. The underlying asset in not of a special nature as the concerned plot is bare land which can be utilised by any Developer. Therefore, the development on the said land is not specific to only the needs of the Corporate Debtor. The present Lease Deed has NO provision in the Lease Deed whereby the Lessee can cancel the Lease Deed. In fact it is apposite to note that, on the contrary, the rights to cancel the Lease Deed vest solely and exclusively with the Lessor. [See Pg 76 of the Appeal paper book] Gains or losses from all the fluctuations in the fair value of the residual does not accrue to the Lessee. It has specifically been provided in the Lease Deed that the unearned increase 2 Document 6 of the sales proceeds at the end of the lease. [Clause 64 (b) @ Pg 158 of the....
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....the right to all mine and minerals, claims, washing goods, earth oil, quarries in over and 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 same without providing or leaving any vertical support for the surface of the residential plot or foe any building for the time 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 decision of the Lessor will be final and binding on the lessees. [See Pg 67 of the Appeal Paper Book] the The Lessor reserves the right to all mines, minerals, coals, washing gold, earths oils, 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 and obtaining removing and enjo....
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....fer 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. [See Pg 68- 69 of the Appeal Paper book] 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 fulfilment of the following conditions: a) The Lease Deed of plot has been executed and the Lessee has made the payment according to the schedule in the lease deed of the plot, interest and one time lease rent. 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 building cell, NOIDA. 6 Document 10 d) The lessee shall submit list of individual allotee of flats within 6 months from the date of obtaining occupancy certificate. e) The Lessee shall have to execute sub lease in favour of the individual allottee for the developed flat....
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....inal and binding on all the parties concerned. The Lessors right to recovery of the unearned increase and the pre- emptive right to purchase the property as mentioned herein before shall apply equally to involuntary sale or transfer, be it bid or through execution of decree of insolvency/count. [See Pg 72 and 73 of the Appeal paper book] (v) Moreover, even during term of tenancy the Lessor can terminate the lease. Various clauses provide for such termination as illustrated below: 8 Document 12 Misuse, Additions, Alterations Ete: The Lessee shall not use flat for any purpose other than for residential purpose. Incase of violation of conditions specified in the lease deed, allotment shall be liable to be cancelled and possession of the premises along with structure thereon if any shall be resumed by the lessor (Authority). The lessee will not make any alteration or additions to the said building or other erections for the time being on the demised premises, erect or permit to erect any new building on the demised premises without the prior written I consent of the Lessor and in cas....
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....et alone transferring ownership after the lease deed to the Lessee, infact, even during the subsistence of the lease period itself, the Lessors can cancel the Lease Deed as per its own accord. (vi) It also apposite to highlight at this juncture, that the Lease Deed further imposes strict obligations upon the Lessee to maintain the concerned plot of land. Incase such obligations are not complied with by the Lessee, the Lease Deed stipulates that it shall be liable to incur penalties as the Chief Executive Officer may deem fit. Therefore, it is pertinent to highlight and note herein, that if substantial transfer of ownership had accrued to the Lessee, it would be the discretion of the Lessee as to whether it chose to maintain the concerned Plot or not. However, in the present case the owner i.e. the Lessor has made it an imperative obligation for the Lessee to maintain the property, failure of which shall lead to penal consequences. The following clause illustrates the aforementioned: Maintenance: 1. The Lessee at his own expenses will take permission for sewage. Electricity....