TaxTMI 
TaxTMI 
2022 (5) TMI 875
X X X X Extracts X X X X
X X X X Extracts X X X X
....after referred to as the 'IBC") continues to be a fertile ground to spawn litigation. Born in the year 2016, the IBC this time around has given rise to the question as to whether the appellant would be a financial creditor and entitled to be so treated in the Corporate Insolvency Resolution Process (CIRP, in short) commenced against the corporate debtor under the 'IBC'. THE APPEALS CIVIL APPEAL NO.2222/2021 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. Hence the appeal. CIVIL APPEAL NOS.2367-2369 OF 2021 3. The appellant in 2222 of 2021 is the appellant in this case also. The appeal is filed against an interim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s.46,14,69,996.50, 10% stood paid. The lease deed further contemplated moratorium of 24 months from the date of allotment. Only the interest at 7% per annum compounded half yearly which accrued during the moratorium period shall be payable in equal half yearly instalments. The lease deed further contemplated payment of the balance 90% of the amount after expiry of the moratorium in 16 half yearly instalments along with interest as specifically set out. Relevant portions of the lease deed to be noticed read as follows: "And also, in consideration of the yearly lease rent hereby reserved and the covenants provisions* and agreement herein contained and on the part of the Lessee. to be respectively paid observed and performed, the Lessor doth hereby demise on lease to the lessee! that plot of land numbered as Group Housing Plot No.GH-5/B, Sector-137, In the NOIDA, Distt. Gautam Budh Nagar (U.P.) contained by measurement 22,565.77 Sq. mtrs. be the same a little more or less and bounded: On the North by : As per Site On the South by : As per Site On the East by : As per Site On the West by : As per Site And the said plot is more clear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r annual lease rent would be required to be paid for the balance lease* period. This option may be exercised at any time during the lease period provided the lessee has paid the earlier lease right due and lease rent already paid will not be considered* in One Time Lease Rent option. b) The Lessee shall be liable to pay all rates, taxes, charges and assessment leviable by whatever name called for every description in respect of the plot of land or building constructed thereon assessed or Imposed from time to time by the lessor or any Authority/ Government. In exceptional circumstances the time of deposit for the payment due may be extended by_the lessor. But in such case of extension of time an interest@ 14% p.a. compounded every half yearly shall be charged for the defaulted amount for such delayed period. In case lessee fails to pay the above charges it would be obligatory on the part or Its members/ sub lessee to pay proportional charges for the allotted areas. c) The Lessee shall use the allotted plot for construction of Group Housing, however, the lessee shall be entitled to a lot the dwelling unit on sublease basis to its allottee and also provide space for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Lessor). d) The Lessee shall submit list of individual allottees of flats within 6 months form the date of obtaining occupancy certificate. e) The Lessee shall have to execute tripartite sub lease in favour of the individual allottees for the developed flats/plots in the form and format as prescribed by the LESSOR. f) The Sub-Lessee undertakes to put to use the premises for the residential use of residential area only. g) The Lessee shall pay an amount of Rs. 1000/- towards processing fee and proportionate (pro-rate basis) transfer charges and lease rent as applicable at the time of transfer and shall also execute sub lease deed between Lessor, Lessee and proposed transferee (sub-Lessee). The Lessee/ Sub Lessee shall also endure adherence to the building regulations and directions of the Lessor. The Lessee as well as sub Lessee shall have to follow rules and regulations prescribed in respect of lease hold properties and shall have to pay the charges as per rules of the Lessor/Government of U.P. The transfer charges shall not be payable in case of transfer between son/daughter, husband/wife, mother/father and vice versa or between these s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion(s)/ Bank(s). As regards the case of mortgaging the land to any Financial Institution(s)/ Bank(s) to mortgage the said land to facilitate the housing loans of the final purchasers, N.O.C may be issued subject to such terms and conditions as may be decided by the LESSOR at the time of granting the permission. Provided that in the event of sale or foreclosure of the mortgaged/ charged property the LESSOR shall be entitled to claim and recover such percentage, as decided by the LESSOR of the unearned increase in values of properties in respect of the market value of the said land as first chare, having priority over the said mortgage charge, the decision of the LESSOR in respect of the market value of the said land shall be final and binding on all the parties concerned. The LESSOR'S right to the recovery of the unearned increase and the pre-emptive right to purchase the property as mentioned herein before shall apply equality to involuntary sale or transfer, be it bid or through execution of decree of insolvency/court." Transfer of plot is the next provision to notice and it reads as follows: "TRANSFER OF PLOT Without obtaining the completion....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e necessary or expedient for the purpose of searching for, working and obtaining removing and enjoying the same without providing or leaving any vertical support for the surface of the plot(s)/ flats or for the structure time being standing thereon provided always that the Lessor shall make reasonable compensation to the Lessee for all damages directly occasioned by exercise of the rights hereby reserved. The decision of the Chief Executive Office/ Lessor on the amount of such compensation shall be final and binding on the lessee/ sub-lessee." 10. The lessee is to maintain the premises. Under the head 'Maintenance', it is, inter alia, stated as follows: "5. The lessee/sub lessee shall make such arrangements as are necessary for the maintenance of the building and common services and * If the building Is not maintained properly. The Chief Executive Officer or any officer authorized by* Chief. Executive Officer of the Lessor will have power to get the maintenance done through the Lessor and recover the amount so spent from the lessee/sub lessee. The lessee/sub lessee will be individually and severally liable for payment of the maintenance amount. The rules/regulation of U....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vities in pursuance of executed lease deed, the deposits depending on the stages of payments will be refunded along with simple interest @ 4% p.a., if the delay in refund is more than one year from such date. 4. If the Lessee commits any act of omission on the demised premised resulting in nuisance, it shall be lawful for the lessor to ask the Lessee to remove the nuisance within a reasonable period falling which the LESSOR shall itself get the nuisance removed at the Lessee's cost and charge damages from the Lessee during the period of submission of nuisance. 5. Any dispute between the lessor and Lessee/ Sub-Lessee shall be subject to the territorial jurisdiction of the Civil Courts having jurisdiction over District Gautam Budh Nagar or the Courts designated by the Hon'ble High Court of Judicature at Allahabad. 6. The Lease Deed/ allotment will be governed by the provisions of the U.P. Industrial Area Development Act, 1978 (U.P. Act no. 6 of 1976) and by the rules and/ or regulations made or directions issued, under this act. 7. The lessor will monitor the implementation of the project. Applicants who do not have a firm commitment to implement t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....LAT proceeded to consider whether rewards incidental to ownership of the underlying asset were transferred. It is found that appellant put a condition that the lessee will be allowed to transfer/sell upto 49% of its shareholding, subject to the condition that the original shareholders indicated on the date of submission of the tender, shall continue to hold at least fifty-one per cent of the shareholding, till the temporary occupancy completion certificate is obtained of at least one phase. II. There is reference to a total premium of Rs.46 crores and the down payment of ten percent. So also, reference is made to half-yearly instalments to be paid between 2010 and 2020. The term of the lease is for ninety years. Reference is made to the clause reserving rights to all mine and minerals under the allotted plot, inter alia. Reliance is placed on ten percent of the amount paid towards premium being repeated, by referring to the same amount as lease rent. Lease rent and premium are used interchangeably. The option of paying the lease rent is referred to. The liability to pay taxes is adverted to. There is further reference to the following clause: "c) The Lessee shall use th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....required permission of the appellant to mortgage the plot. The priority of charge of the appellant was maintained. The use of the flat was limited to residential purpose only. Departure from the same would invite the wrath of cancellation. The appellant reserved the right to even remove the vertical support for the surface of the plots/flats with only liability to pay compensation and the right to determine which was lodged with the appellant and it was to be binding on the lessee/sub-lessee. The general power of cancellation is maintained. VI. Thereafter, we may notice the following: "21. Thus, the Appellant, even after creating the lease kept with itself all the rights to control and monitor the project which was to come up. The Appellant of course now has tried to say in the Appeal that it was "only exercising minor supervision over the land use" (see 9.12 of the Appeal), which we do not agree to. What we can see from the Lease Deed which we have just referred in brief, is that the acts which could be performed by the lessee, were fully controlled by the Appellant. The lessee, of course, had the liberty to construct and transfer the flats by way of sublease. The abov....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... all of the fair value of the asset, is also baseless. No material is brought to show as to what is and would be the fair value. With regard to right to cancel lease, it is reserved with the lessor but not the lessee. The Appellant argues that the question of cancellation of lease deed by lessee would not arise as lessee would build and transfer dwelling units. This is speculative and cannot be helpful in construing the document. Again, it is not that the right to land would get transferred to the flat purchasers (who are referred rather as sub-lessees). We do not find substance in the arguments being raised by the Appellant to bring the Lease Deed within the requirements of Indian Accounting Standards. We rather find substance in the submissions of the Respondent as recorded in the Chart reproduced supra." VII. Finally, we may further also notice paragraphs-29 and 30 at page 41 and 42 of impugned Order in C.A. No. 2222 of 2021. "29. In the present matter, there is no sale of land. It is lease, for premium /rent with almost all rights controlled by the Lessor. We have gone through the provisions of Section 5(8)(f) and also when we keep the above observations of the Hon'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 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-clause (a) to (h) of this clause;" 15. Section 3(11) defines the word 'debt'. It reads as: - "(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;" 16. Section 3(6) defines the word 'claim'. It reads as: - "(6) "claim" means- (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Joint Secretary-ex official. (e) The Managing Director, U.P. State Industrial Development Member Corporation-ex official. (f) Five members to be nominated by the State Government Member by notification. (g) Chief Executive Officer. Member Secretary (4) The headquarters of the Authority shall be at such place as may be notified by the State Government. (5) The procedure for the conduct of the meetings for the Authority shall be such as may be prescribed. (6) No act or proceedings of the Authority shall be invalid by reason of the existence of any vacancy in or defect in the constitution of the Authority." 22. Section 6 of the UPIAD deals with the functions of the Authority, which in this case is the appellant. Section 6 reads as follows: "FUNCTION OF THE AUTHORITY 6. (1) The object of the Authority shall be to secure the planned development of the industrial development area. (2) Without prejudice to the generality of the objects of the Authority, the Authority shall perform the following functions :- (b) to prepare a plan for the development of the industrial development area; (c) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the purpose of this sub-section, the expression "market value" means, the amount of- (a) consideration, in the case of sale; or (b) premium, in the case of lease; or c) the minimum value determined in accordance with the rules made under the Indian Stamp Act, 1899, whichever is more] 2) If the State Government considers it necessary or expedient in the public interest, it may, by a general or special order, exempt wholly or partly-any such transferee or occupier or any class thereof from the taxes levied under sub-section (1)." 26. Section 11A inserted with effect from 21.03.2016 empowers collection of tolls. Section 11B inserted likewise provides for levy of additional stamp duty. 27. Section 12 reads as follows: - "12. Applications of certain provisions of President's Act XI of 1973.-The provisions of Chapter VII and Sections 30, 32, 40, 41, 42, 43, 44, 45, 46, 47, 49, 50, 51, 53, and 58 of the Uttar Pradesh Urban Planning and Development Act, 1973, as re-enacted and modified by the Uttar Pradesh President's Act (Re-enactment with Modifications) Act, 1974, shall mutatis mutandis apply to the Authority with adaptation tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hip. (2) Notwithstanding anything to the contrary contained in any Uttar Pradesh Act, where an special investment region or industrial development area or any part thereof is specified to be an Industrial Township under the proviso to clause (1) of Article 243- Q of the Constitution of India, such industrial development area or part thereof, falling in a Municipality shall from the date of notification stand excluded from that Municipality area and all powers and functions performed with respect to such area shall be exercised or performed by the Authority. Explanation: -The expression "Municipality" shall have the meaning assigned to it in Part IX or Part IX-A of the Constitution of India.]" 30. Section 14 reads as follows: - "14. For feature for breach of conditions of transfer. -(1) In the case of non-payment of consideration money or any installment thereof on account of the transfer by the Authority of any site or building or in case of breach of any condition of such transfer or breach of any rules or regulations made under this Act, the Chief Executive Officer may resume the site or building so transferred and may further forfeit the whole or an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hority as that Government may deem necessary for the performance of the functions of the authority under this Act, and all grants, loans and advances, made shall be on such terms and conditions as the State Government may determine. (5) The Authority shall maintain a sinking fund for the repayment of moneys borrowed under sub-section (5), and shall pay every year into the sinking fund such sum as may be sufficient for repayment within the period fixed of all moneys so borrowed. (7) The sinking fund or any part thereof shall be applied in, or towards, the discharge of the loan for which such fund was created, and until such loan is wholly discharged it shall not be applied for any other purpose." 33. Section 21 provides that the authority shall prepare a budget in the form and at such time as the State Government may specify. 34. Section 22 provides that the authority is to maintain proper accounts. The accounts of the authority shall be subject to audit annually by the Examiner Local Fund Accounts. 35. Section 23 mandates that the authority shall prepare a report and submit it to the State Government in such form and on or before such date as specified by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ided for in any other provision of this Act, be recovered by the Authority as arrears of land revenue, and no suit shall lie in the Civil Court for recovery of such money." 38. Section 41 provides for directions being issued by the State Government for the administration of the Act being binding on the Authority. Under Section 42 of the UP 1973 Act, the Authority is to furnish return and other information to the Government. Section 43 deals with manner of service of notices, orders, and other documents. Section 44 deals with how public notices are to be made known. Section 45 mandates fixing of reasonable time in any notice, order, or document, unless time is otherwise fixed by the Act or Regulation. Section 47 proclaims that every member and every officer and other employee of the Authority shall be deemed to be a public servant within the meaning of Section 21 of the Indian Penal Code. Without sanction of the Chief Executive Officer of the Authority or any other officer authorised by him, there cannot be prosecution for any offence under the Act. Section 51 deals with power of delegation, both of the State Government and of the Authority and the Chief Executive Officer. Sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of consideration it can charge from the buyers from the lessee. The appellant cannot demand any share in the consideration received by the lessee. In other words, the lessee is free to appropriate the entire profits. This is crucial in appreciating whether the rewards incidental to ownership has been transferred to the lessee. He highlights the fact the appellant is an Authority constituted under a statute, namely the UPIAD. He took us through the provisions of Section 6 and 7 of the Act. He would contend that as the Authority is charged with the statutory duty to carry out planned development of the area and group housing being residential in nature and since the construction had to be carried out in accordance with the laws in force and the appellant was also charged with the duty to regulate the activity, all that has happened is that the lease deed contains provisions for the regulatory regime. This cannot detract from the transfer of rewards substantially to the lessee. he contends. 41. As far as Section 5(8)(f) of the IBC is concerned it is pointed out that the said provision is a catch-all section and acts as a residuary reservoir, and what remains after what has been pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the IBC. He would submit that the amounts are to be paid back with interest. Therefore, on the whole, it must be treated as a case where, there is raising of funds by the lessee, which, has a commercial underpinning, as required under Section 5(8)(f) of the IBC. He would point out that the main provision, i.e., as contained in Section 5(8) contemplates a debt, which is disbursed. Various clauses, which are enumerated thereafter, need not contain the aspect of disbursement. Therefore, raising of funds, within the meaning of Section 5(8)(f), can be contemplated without actual disbursement. He would rely on the Judgement of this Court in Pioneer Urban Land and Infrastructure Limited and Another vs. Union of India (UOI) and Others (2019) 8 SCC 416. 42. Smt. Madhavi Divan, learned Additional Solicitor General, appears for NOIDA in the connected matter. She adopts the contentions of the learned Solicitor General appearing for the same party. However, the learned Additional Solicitor General, would make three-pronged submissions with regard to the appellant qualifying as a financial creditor. She would contend that the appellant would fall in the main provisions of Section 5(8). Ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n. By the staggered payments, after the initial payments of advance of ten percent and a moratorium freeing the funds of the corporate debtor clearly takes place. There is generation of funds by the mechanism provided in the lease and it plainly has the effect of borrowing and bringing into play the statutory mantra also, of commercial effect of borrowing. It works extremely well for the lessee, in fact, in comparison to how it would have fared, had it approached the bank or a financial institution. With regard to Section 5(8)(d), the learned Additional Solicitor General also emphasised upon the word 'deemed' to be financial lease with reference to the Indian Accounting Standards. It is her case that, in fact, in the accounts of the appellant, the transaction is reflected as a sale. This assumes significance as, under the Indian Accounting Standards, the dominant test is, whether, substantially, the risks and rewards incidental to ownership has been transferred. There cannot be a more eloquent fulfilment of this requirement than the very action of the appellant in treating the transaction as a sale in the balance-sheet, and what is more, for the years, much prior to the enactment o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment as to standards required under Section 133 of the Companies Act for which a penalty is provided. The lease in question does not countenance substantially the transfer of all the rewards. The Lessee in terms of clause 12 of other clauses is not permitted to assign leasehold interest. Restrictions are put even on the lessee's shareholding. The clause relating to mortgage would inter alia indicate apart from restriction otherwise that any unearned increase in the value of the lease premises will be at the disposal of the appellant. Therefore, the gains would enure to the appellant. There is no renewal of the lease. Support is drawn otherwise from the order of NCLAT. Reliance is placed on the following judgment of this Court in Mohd. Noor and Others v. Mohd. Ibrahim and Others (1994) 5 SCC 562 : "..The ownership concept does not accord with the status of a person who is paying the rent. A tenant under various legislations either urban or rural property, agricultural or otherwise, enjoys right of heritability and transferability. At the same time, he does not become owner of the property. Transfer of ownership is distinct and different from transfer of interest in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Section 5(8)(f) which is a general provision. The dues to the appellant qualify as statutory dues. Reliance is placed on Section 12 of the UPIAD which makes Section 40 of the U.P. Act. 1973 applicable. 47. Appellant under UPIAD is not permitted to carry out any activity which is of a financial nature and consequently any dues arising from disposal of land which are in the discharge of statutory duties, must be considered as statutory dues. In fact, NOIDA has been treated in a better manner than a financial creditor, having been given 41% share of its admitted claim. 48. It is contended that the risks and rewards incidental to ownership have not been transferred the leases not a finance lease. There has been no disbursement under the lease deed within the meaning of Section 5(8). The repercussions of NOIDA being declared as a financial creditor would be to frustrate the CIRP of the real estate corporate debtor. Having regard to its position as a public authority and the nature and transactions commercial wisdom of NOIDA would in fact compel the appellant to vote against all resolution plans proposed. The home buyers will be most adversely affected. Shri Devashish Bharuka, ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the appellants interests have been adequately and fairly addressed in the Resolution Plan. However, what is pointed out is that, as a matter of principle, it is vital, both from the point of view of the interest and rights of the appellant and also the object of the IBC itself, that the appellant must be treated as a financial creditor. By being a Member of the Committee of Creditors, the appellant would have the right to place its perspective. It would have the opportunity to persuade the other Members of the Committee of Creditors to either accept or reject or modify a Resolution Plan. The corporate debtor slipping into liquidation, is a matter, which would, undoubtedly, impact the appellant in a considerable manner. None of these aspects have been borne in mind by the NCLAT, it is complained of. CERTAIN MISCELLANEOUS OBJECTIONS 51. The argument of the respondent/intervenor that if the appellant is recognised as a financial creditor, since it claims itself to be a public authority and it holds the property as a trustee, it will not agree to any hair cut proposed by any resolution applicant does not appeal to us. The provisions in question cannot be construed on the basis of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 5(8), though such a line was not taken by the learned Solicitor General, who purported to appear for NOIDA in the main matter, we shall deal with the said submission. 53. The essential requirements to attract Section 5(8) are that there must be a debt along with interest, if any, which is disbursed against consideration for the time value of money. There can be no dispute that there is a debt in this case. Even the respondents would contend that it is actually a debt but an operational debt under Section 5(21). That interest is payable in connection with the debt, cannot be disputed, having regard to the terms of the lease deed. It is another matter that liability to pay interest is not an essential feature to attract Section 5(8), as held by this Court in Orator Marketing Private Limited v. Samtex Desinz Private Limited 2021 SCC Online SC 513. The next requirement is that there be disbursement. Disbursement is an indispensable requirement to constitute a debt, a financial debt, within the meaning of Section 5(8) and that disbursement must be from the creditor to debtor. Or is it that, our understanding is mistaken? Our understanding, in this regard, is sought to be shaken by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression "payment" is again an expression which is elastic enough to include "recompense", and includes repayment. For this purpose, see H.P. Housing & Urban Development Authority v. Ranjit Singh Rana [H.P. Housing & Urban Development Authority v. Ranjit Singh Rana, (2012) 4 SCC 505 : (2012) 2 SCC (Civ) 639] (at paras 13 and 14 therein), where Webster's Comprehensive Dictionary (International Edn.), Vol. 2 and Law Lexicon by P. Ramanatha Aiyar (2nd Edn., Reprint) are quoted." 56. Thus, a debt is a liability or an obligation in respect of a right to payment. Irrespective of whether there is adjudication of the breach, if there is a breach of contract, it may give rise to a debt. In the context of Section 5(8), in Pioneer (supra), disbursement has been understood as money, which has been paid. In the context of the transaction involved in the said case, the homebuyers advanced sums to the builder, who would then utilise the amount towards the construction in the real estate project. That there must be a disbursement, was clearly present in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Section 5(8). What is relevant for the purpose of Section 5(8), has been clearly articulated and can be understood with reference to what is expressly provided. It is unnecessary to bring in the concept of transaction, as defined in Section 2(33), for appreciating its scope. A perusal of definition of the word 'debt', no doubt, reveals that it is closely intertwined with the definition of the word 'claim' in Section 3(6). The word 'transaction' is conspicuous by its absence in the definition of both the word 'claim' and the word 'debt'. We do hold that 'debt' means a liability or obligation, which relates to a claim. The claim or right to payment or remedy for breach of contract occasioning a right to payment must be due from any person. Now, if it is due from any person, it must be due to someone who would then be the creditor. Section 5(7) defines 'financial creditor' as person to whom a financial debt is due besides an assignee or transferee from such person. While it may be true that there would be the brooding omnipresence of a transaction, as defined, underlying a debt and claim as defined, it would be unnecessary and unreasonable to import in the concept of transfer of fund....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inancial lease' inevitably and indispensably involving the transformation of a lessee into the owner of the assets when the lease ends, is essentially captured whereas for purpose of IBC, Parliament has set out the definition which we will recapitulate here 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;" 58. The concept of a financial lease has engaged the attention of this court in a decision which has been applied by the NCLAT. In Asea Brown Boveri Ltd. v. Industrial Finance Corporation of India and Others (2004) 12 SCC 570 the appellant entered into a lease and finance agreement with the third respondent therein under which the subject matter of the lease was 57 cars. The third respondent became a notified party under a law under which the special court found that the transaction was only a lease and not a finance lease. In this context this court went on to hold as follows: "13. What is a lease finance? According to Dictionary of Accounting & Finance by R. Brockington (Pitm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the abovementioned expenses. The period of lease extends over and covers the entire life of the property for which it may remain useful divided either into one term or divided into two terms with clause for renewal. In either case, the lease is non-cancellable." 59. We shall take up Section 5(8)(d) of the IBC. The subject matter of Section 5(8)(d) is a lease or a hire-purchase contract. The matter does not end there. In other words, it is not any lease or a hire-purchase contract, which would entitle the lessor to be treated as the financial creditor. There must be a lease or hire-purchase contract, which is deemed as a finance or capital lease. The Law Giver has not left the courts free to place, its interpretation on the words 'finance or capital lease'. The Legislature has contemplated the finance or a capital lease, which is deemed as such a lease under the Indian Accounting Standards. It could also be deemed as a financial or a capital lease under any other accounting standards as may be prescribed. The word 'prescribed' has been defined in Section 3(26) as meaning prescribed under Rul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e culled out is that it is the bounden duty of the court to ascertain for what purpose the legal fiction has been created. It is also the duty of the court to imagine the fiction with all real consequences and instances unless prohibited from doing so. That apart, the use of the term "deemed" has to be read in its context and further, the fullest logical purpose and import are to be understood. It is because in modern legislation, the term "deemed" has been used for manifold purposes. The object of the legislature has to be kept in mind." 61. It is apposite, at this juncture, to advert to the Indian Accounting Standards relevant to our inquiry. 62. The Rules, which are relevant in regard to the specification of a lease as a financial lease are set down as Rules 61 to 67 of Indian Accounting Standards [for short "IAS"]. They have been made under Section 133 of the Companies Act, 2018. "Classification of leases (paragraphs B53-B58) 61 A lessor shall classify each of its leases as either an operating lease or a finance lease. 62 A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e lessor does not transfer substantially all such risks and rewards. 66 Lease classification is made at the inception date and is reassessed only if there is a lease modification. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the underlying asset), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes. Finance leases Recognition and measurement 67 At the commencement date, a lessor shall recognise assets held under a finance lease in its balance sheet and present them as a receivable at an amount equal to the net investment in the lease." 63. The analysis of the said criteria in the context of the lease in question, would yield the following results. Under Rule 61, the lessor is obliged to classify each of its leases as an operating lease or a finance lease. In Civil Appeal No. 2222 of 2021, there is no case for the appellant-NOIDA, that it has been classified as finance lease. As far as the other Civil Appeal filed by the very same Authority, i.e., NOIDA is concerned, Smt. Madhavi Diwan, sought to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to develop or construct a building. 66. A lease of immovable property is defined in Section 105 of the Transfer of Property Act, inter alia, as a transfer of a right to enjoy such property. The property, which is leased, under the lease is the plot of land. Section 105 speaks about the terms on which the lease takes place. The right to enjoy the leased property and the terms, on which it is to be enjoyed, must be distinguished from the property, which is the subject matter of lease. The subject matter of the lease is such property. It is such property, viz., immovable property, in the case of a lease of an immovable property, which can be treated as the underlying asset, for the purpose of the Rules made under Section 133 of the Companies Act, 2013. The contention of the appellant that the underlying asset is also the right to develop or construct a building on the leased land, does not appear to be tenable. The very contention contains an irreconcilable contradiction. On the one hand, the land is correctly described as the leased land. The right to develop or construct a building on the leased land, cannot be treated as the underlying asset. In fact, there is no case that the b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dent No..1 in C.A.No.2367-2369 of 2021. The sub-lease, no doubt, is entered into between the appellant as Lessor and one M/s. Cloud 9 Projects Pvt. Ltd., the Lessee in the said lease and the sub-lessee. The sub-lease dated 12.11.2018 would show that the land admeasuring 40087 sq.mtr. bearing Plot NO.GH-02 was the subject matter of the lease. The lease was, as in the facts of this case, for a period of 90 years. The lease was entered into with the lessee in the said case on 17.06.2009. 70. It is indicated in the sub-lease that the lessee has the right to allot to its applicants, the dwelling units including the undivided proportionate share in the land, inter-alia. It is further provided that the sub-lessee will observe the covenants, terms and conditions, laid down in the original lease. Thereafter, it is provided that in consideration of the amount paid, which included the cost of super structure and the undivided proportionate share in the land underneath the building paid by the sub-lessee to the lessee the lessee sells, transfers, and conveys to the sub-lessee the dwelling unit with proportionate right, inter-alia, in the land underneath the building. It is next provided tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... A perusal of the same would reveal that in keeping with the lease deed and the provisions of Section 9 of the U.P. Apartment Owners Act, it is that the sub-lease deed is executed. The sub-lessee or the allottee pays the cost of the structure and the undivided proportionate interest in the land. The transfer to him is described as a sale and conveyance. There is simultaneous sub-lease also in regard to the unidentified title to the proportionate land. The sub-lease appears to effect a sale of the dwelling unit. However, certain conditions appear to militate against an absolute transfer. They include the condition that the sub-lessee cannot mortgage the dwelling unit for securing any loan at any stage except with prior written permission of the lessor. The use of the dwelling unit being limited to residential purpose is perhaps another feature which is unique. The power of the lessor to re-enter the dwelling unit, which is described in condition 27 as the 'demised' dwelling unit, after determining the sub-lease and also the power to re-allot the same to any person are clearly inconsistent with a completed sale. This is apart from condition 21 which we had extracted which oblige....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it for any loan except with the prior consent of the lessor, the power of re-entry of the lessor and to re-allot the "sold dwelling unit" to any other person and the obligation of the lessee/sub lessee to surrender the land after demolishing the super structure on the expiry of the period of lease. 73. The lease before us is stated to be for a period of 90 years. The lease is intended and structured to attain the objective of putting up residential structures as part of the planned development of the area. The constructed area or the flats can be transferred to the allottees by the Lessee on the strength of tripartite sub-leases. This is borne out by the terms of the sub-lease produced before this court. This is also clear from the provisions of the clause before us which contemplate the execution of a sub-lease. There is no provision for renewal. The parties have clearly contemplated that the terms of the sub-lease will be in the form and format as provided by the Lessor (appellant). It is accordingly that the clause in the lease actually contemplates inter alia that the construction be completed within 7 years from the date of execution of the lease deed with a maximum extensi....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., no doubt, to transfer the allotted plot after sub-division into smaller plots and to transfer the plots so sub-divided. This is subject to two conditions. This is permitted only for a period of two months from the date of execution of the agreement namely till 30.09.2010. This can be only done if the lessor permits it by prior approval. More importantly, the sub-plots which can be so transferred, cannot be less than 20000 sq. meters. As we have noticed this will appear to be a standard clause and we have noticed that the lease in the case of M/s Cloud 9 which we have adverted to, consisted of about 40000 square meters. We do note that the lease deed in civil appeal no. 2367-69 of 2021 is for a plot of 69998.73 square metres. Also, therein the minimum size of the sub divided plot is not less than 10,000 square metres. But the other conditions including prior approval remains the same. Further provisions under the heading 'transfer of plot' deal with only cases of individual flat/plot being transferrable subject to the various conditions, the most pertinent being that it contemplates essentially a sub-lease. We do not think that we can permit the matter to be appreciated on the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e term. There is also no option to purchase with the lessee. The payment of ten percent of the premium, in the first place, does not represent substantially all of the fair value of the underlying asset. The lease is for a period of ninety years. At the end of ninety years, there is, in fact, no provision for renewal of the lease. The amount of the premium paid cannot be linked with the fair value of the land. The relationship between the appellant and the lessee, was to remain throughout as lessor and lessee. It may not be possible to even find that the total premium and the rent would represent substantially all of fair value of the underlying asset. 78. The fifth example in Rule 63 is clearly inapplicable as it is not the appellant's case that the underlying asset is of such a specialised nature that the lessee could only use it without major modification. Therefore, as far as Rule 63 is concerned, to sum-up, none of the situations mentioned in Rule 63 are present in the instant lease. 79. Rule 64 continues with situations, which, individually or in combination, would also lead to a lease being classified as a finance lease. The first situation is power reserved with the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., if other features of the lease do not persuade the Court to conclude that the lease transfers substantially all the risks and rewards incidental to ownership, it is to be classified as an operating lease. It would not be a financial lease. In this case, the position obtaining is the converse situation. None of the features in Rules 63 and 64, advance the case of the appellant that the lease in question is a financial lease. No doubt, a perusal of Rule 65 does give an impression that the most important criteria is that the lease must effect, substantially, the transfer of all the risks and the rewards incidental to ownership. The example, which is given in Rule 65, is based on transfer of ownership at the end of the lease for a payment, which is equal to the fair value at the time of transfer and which is variable. The other example furnished is variable lease payment, as a result of which, the lessor does not substantially transfer all the risks and the rewards. 83. Rule 66 provides that the classification of the lease must be made at the inception date, for which, there is no claim made by the appellants. Reclassification is permitted only, if there is a modification of the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... subject matter of his ownership. It consists in a complex of rights, all of which are rights in rem, being good against all the world and not merely against specific person(a). Though in certain situations some of these rights may be absent, the normal case of ownership can be expected to exhibit the following incidents(b)." 87. Thereafter, the following are treated as the rights associated with ownership. An owner of a property will have the right to possess the thing which he owns, it is stated. Secondly, the second principle is described as follows: - "Secondly, the owner normally has the right to use and enjoy the thing owned: the right to manage it, i.e., the right to decide how it shall be used; and the right to the income from it. Whereas the right to possess is a right in the strict sense, these rights are in fact liberties: the owner has a liberty to use the thing, i.e., he is under no duty not to use it, in contrast with others who are under a duty not to use or interfere with it." 88. The third right is described as follows: - "Thirdly the owner has the right to consume, destroy or alienate the thing. The rights to consume and destroy are straigh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d, we must also remind ourselves that to constitute a lease, a financial lease, it is not indispensable that the ownership is in all cases transferred from the lessor to the lessee. However, we have noticed the example hereinbefore wherein the said concept is declared. That is, it is relevant when the lease term is for the major part of the economic life. Undoubtedly, ordinarily a financial lease would be a lease which is born as a lease but ends as a sale. The lease does involve transfer of ownership from the previous owner, namely the lessor to the lessee. In this context, Parliament has defined financial lease in two enactments through Amendment Act no. 44/2016 as hereinbefore noticed. 92. We may at once bear in mind two concepts, in the overarching principle. The two concepts are "substantially" and "all". In other words, substantially all the risks and rewards incidental to ownership must be transferred under the lease. While we do agree with the appellants that an element of flexibility is allowed by the presence of the concept 'substantially', at the same time, it cannot be a case where predominantly all the risks and rewards incidental to ownership are not transferred. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be exercised over a transferred life-insurance policy so that the policy's proceeds will be included in a decedent's gross estate for estate-tax purposes. The incidents of ownership include the rights to change the policy's beneficiaries and to borrow against, assign, and cancel the policy." (Emphasis supplied) 99. In State of Orissa and Another V. M/S. Chakobhai Ghelabhai and Company, AIR 1961 SC 284 one of the questions which arose was whether under Section 29 of the Orissa Sales Tax Act, 1947, the State had power to provide for fee on the memorandum of appeals and applications in revision. Section 29 of the said Act inter alia provided for the power to make rules providing for the procedure and other matters including fees incidental to the disposal of appeals and applications for revision and for review under Section 23. While dealing with the scope of the word "incidental", this Court held as follows: - "The fees imposed are not taxes at all; they come within the expression "other matters (including fees) incidental to the disposal of appeals and applications for revision etc. We are unable to agree with the High Court that the word 'incidental' has reference to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1. The proper interpretation in the context of the word "incidental" is not that it is subordinate to an absolute, as it is sought to be made out. In M/s. Shroff and Co. v. Municipal Corpn. of Greater Bombay and Another, 1989 Supp 1 SCC 347 this Court reiterated the view that the expression incidental means 'necessary' in certain contexts which does not mean a matter of causal nature only. 102. In the context of the provision in question, the expression "incidental to" would mean arising out of or otherwise connected with. In other words, the risks and rewards must flow out of ownership. The rewards must be those arising out of ownership. This in fact is central to understanding the concept of a finance lease. 103. An argument is raised that paragraphs 15A to 17 of the Indian Accounting Standards (in IND AS) 17, it becomes evident that finance leases are contemplated in respect of lands. We may notice paragraphs 15A to 17, which read as follows: - "15A. When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately in accordance with paragraphs 7-13. In determining whether th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Therefore, we cannot treat the subject matter of the lease, as containing both land and building elements. We have already noticed, while dealing with Rule 63(b) that the case of the appellant before the NCLAT, was only that, apart from the land, the right to develop or construct the building, is the underlying asset. It is not the case of the appellant that the buildings, which are to be put up by the lessee, are also the subject matter of the lease. In fact, it is, no doubt, true that the lease actually contemplates that, as regards the build-up area/plot or land, the transfer to the allottee is to be made only by way of a sub-lease. The sub-lease of the land in favour of the apartment owners, is also contemplated under Section 9 of the Uttar Pradesh Apartment Owners Act, 2010. The lease, indeed, does contemplate the execution of a tripartite sub-lease. The form and the format are to be dictated to by the lessor. The sub-lease can be executed subject to the fulfilment of certain conditions, which we have already adverted to. This is, indeed, a case where the lease is of the plot and the interest or the right to enjoy the lease is by way of construction of residential buildings on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed again with the expiry of the term of the lease which is predicated with reference to the end of the lease. In other words, it would be the value of an asset predicated with reference to the end of the useful life of the asset [see in this regard definition of residual value in para 77] at the expiry of the term of the lease. The lease in question contemplates a period of 90 years. The lease is only of the land. 108. We may now turn to the provisions of the lease and the contentions in the context of Section(5)(8)(d). Undoubtedly, the lessee is put in possession of the land. Call it a right or a reward incidental to ownership, possession, or the right to possession has been transferred to the lessee. The lessee is entitled to hold the plot. The lease further proclaims that the lessee shall use the allotted plot for the purpose indicated. Possession being in the context of a lease does not partake of a liberty to not use as would be the case of an owner. In fact, the manner of the use is stipulated. Non-use even entails penalty and even cancellation. In fact, things could not be clearer when Clause 13 under 'other clauses' is borne in mind. The said clause unequivocablly declar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ey which the lessee would have deposited would stand forfeited. Therefore, while it may be that this clause is to enable the proper and successful implementation of the objective of the appellant which is tasked with the planned development of the area and the use of the property for the laudable purpose of construction of group housing, it cannot detract from our finding that there is a prohibition on assignment of the right within the meaning of a contract which is contrary under Section 108. Jurisprudentially, a right which is the soul of ownership and which is clearly incidental or arising out of ownership is denied to the lessee, that is, the right to transfer the leasehold right. 111. Undoubtedly, in law, generally the lessee can assign his rights as a lessee which amounts to assignment of his right. A lessee may create a sub-lease. A lessee can also create a mortgage. All of these rights vest with a lessee, subject to a contract to the contrary. In the lease in question what is prohibited in Clause 12 under other clauses is the right to assign his rights as lessee. Any reward which the lessee could have obtained if it wished to absolutely assign its right, is clearly deni....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... permitted to mortgage the land. However, the mortgage can be effected only with prior permission of the lessor. The right to mortgage which flows as an incident of ownership is one of the bundle of rights which vests with an owner. It is undoubtedly a lesser right and the owner would be possessed of the residual right. However, it is one of the many rights which is incidental to ownership but there is no absolute right to create a mortgage. 114. The requirement of prior permission to create a mortgage would mean that the permission may be forthcoming or it can be denied. If there is a denial of the right to create a mortgage, then it would impliedly mean that to the said extent the right to raise funds for the purpose of financing the investment is impaired. Depending on whether or not the right is permitted actually the rewards incidental to ownership is transferred. In other words, if we were to imagine that the lessee stood in the shoes of an owner of the property, he would be in a position to create a mortgage, raise funds as he chose and deal with the property in the manner, he felt advised to. The clause relating to mortgage, in fact, indicates that the purpose contemplat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch it could make thereunder. The lease further indicates that there will be no permission to part transfer of plot. In this regard, it must be noticed that what is permitted under the lease is the creation of a sub-lease of the dwelling units to the allottee. No doubt there would be a sub-lease over the plot as well. The lease goes on to state that the lessee shall not be entitled to complete transaction for sale, transfer, assign or otherwise part with the possession of whole or part of any of the buildings constructed thereon, before making payment in terms of the schedule under the lease. Though it is described as sale, transfer, assignment or otherwise as all of it relates to the building which is constructed on the underlying leased property. We must not lose sight of the fact that the subject matter of the lease is the plot described as plot no. GH-05/B Sec.137, Noida consisting of 22565.77 square metres. What is essentially and in reality permitted apparently is the creation of only the sub-lease. Undoubtedly by the lessee the transfer of the built-up area is permitted subject to payment of transfer charges in terms of the policy. The lessor is given an absolute right to rej....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch the said property can be used. The other aspects, which even limit the rights and therefore, dampen the prospect of profit, have been adverted to. 117. Though the rules under the Uttar Pradesh Ownership of Flat Act, 1975 is referred to in the lease as noticed by us earlier, the Uttar Pradesh Apartments (Promotion of Construction, Ownership and Maintenance) Act, 2010 (hereinafter referred to as 'the UP 2010 Act', for short) repealed the 1975 Act. The UP Act 2010 came into force on 21.07.2010. The lease deed, in this case, came to be executed on 30.07.2010. We notice that in the UP 2010 Act, Section 2 provides that the Act applies to all buildings having four or more apartments in any building constructed or converted into apartment and land attached to the apartment whether freehold or held on lease excluding shopping malls and multiplexes. Section 3 defines common areas and facilities as including the land on which the building is located and all easements, rights and appurtenances belonging to the land and building. Section 5(1) declares that every person to whom any apartment is sold or otherwise transferred by the promotor, shall, subject to the provisions of the Act, be e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lding has been constructed on such land by the lessee or by any other person authorised by him or claiming through him, such lessee shall grant in respect of the land as many subleases as there are apartments in such building and shall execute separate deeds of sub lease in respect of such land in favour of each apartment owner before handing over the possession of apartment in such building to him. The lessor shall be duty bound to supply the plans and other legal documents to the lessee. Provided that no sublease in respect of any land shall be granted except on the same terms and conditions on which the lease in respect of the land has been granted by the lessor and no additional terms and conditions shall be imposed by the lessee except with the previous approval of the lessor. (2) Where the lessee has any reason to suspect that there had been any breach of the terms and conditions of the sublease referred to in subsection (1), he may himself inspect the land on which the building containing the concerned apartment has been constructed, or may authorise one or more persons to inspect such land and make a report as to whether there had been any breach of the terms and c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e served under subsection (3) or in accordance with the decision of the District Court or a higher court on appeal, no further action shall be taken by the lessee for the breach of the terms and conditions of the sublease in respect of the land in relation to which payment of such composition fees has been realised. (7) If the defaulting apartment owner omits or fails to refrain from committing any breach of the terms and conditions of the sublease in respect of the land or, as the case may be, omits or fails to pay the composition fees in lieu thereof- (i) in accordance with the notice issued by the lessee under subsection (3); or (ii) where the finding of the lessee or the person authorised to inspect the land about any breach of the terms and conditions of any sublease in respect of the land or the amount of composition fees specified in the notice issued by the lessee are altered by the District Court on appeal or by any higher court on further appeal, in accordance with the decision of the District Court or such higher court, as the case may be; the lessee shall be entitled,- (a) where no appeal has been preferred under subsection (4), withi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder subsection (7), the lessee by whom such ejectment has been made may make a fresh allotment of the concerned apartment to any other person on such terms and conditions as he may think fit. (11) Where any lessee omits or fails to take any action either in accordance with the provisions of subsection (2) or subsection (3) or subsection (7) the lessor may, in the first instance, require the lessee by a notice in writing to take action against the defaulting apartment owner under subsection (2) or subsection (3) or, as the case may be, under subsection (7), within a period of ninety days from the date of service of such notice, and in the event of the omission or failure of the lessee to do so within such period, the lessor may himself take action as contained in subsection (2) or subsection (3) or subsection (7), and the provisions of subsection (4) to subsection (6) and subsection (8) to subsection (10), shall, as far as may apply to any action taken by him as if such action had been taken by the lessee. (12) For the removal of doubts, it is hereby declared that no work in any apartment by the owner thereof shall be deemed to be a breach of the terms of the subl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble to the transfer and succession of an immovable property. Also since Section 9 contemplates sub-lease over the land, there cannot be claims of enlargement over the same vide either Section 5 or Section 7. The case of sale if it relates to land in the balance sheet projected by the appellant represented by Ms. Madhavi Divan cannot but be rejected. 121. We have noticed that the lessee has no power to cancel the lease. However, cancellation of lease deed under various contingencies is permitted to the lessor. They include allotment obtained through misrepresentation/ suppression of material facts inter alia violation of directions issued or rules and the regulations framed by the lessee or any other statutory authority, default on the part of the lessee on the terms and conditions of registration/ allotment lease. The provisions provide for the extent to which the premium can be forfeited in the event of cancellation among the other clauses. This is apart from the earlier reference to the power to cancel in specified contingencies. It is relevant to notice that the lessor is clothed with an absolute power to make additions/ alterations or modifications in the terms of the lease ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l 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'. 123. 'Transaction', as defined in Section 3(33), would, undoubtedly, include an agreement or arrangement in writing or the transfer of funds. The transfer of funds may take place from a corporate debtor. A transfer can also take place when there is transfer of funds to the debtor. A transfer may include a transfer of assets in writing again from or to the corporate debtor. The definition of the word 'debt' in Section 3(11) is intertwined with the definition of the word 'claim' in Section 3(6). The impact of these provisions has been considered by this Court in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others (2019) 8 SCC 416. It may be profitable to advert to the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ditor. It would be apposite to refer to the following observations: "75. And now to the precise language of Section 5(8)(f). First and foremost, the sub-clause does appear to be a residuary provision which is "catch all" in nature. This is clear from the words "any amount" and "any other transaction" which means that amounts that are "raised" under "transactions" not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. The expression "transaction" is defined by Section 3(33) of the Code as follows: 3. (33) "transaction" includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor; As correctly argued by the learned Additional Solicitor General, the expression "any other transaction" would include an arrangement in writing for the transfer of funds to the corporate debtor and would thus clearly include the kind of financing arrangement by allottees to real estate developers when they pay instalments at various stages of construction, so that they themselves then fund the project either partially or completely. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he lender. The expression "borrow" is wide enough to include an advance given by the homebuyers to a real estate developer for "temporary use" i.e. for use in the construction project so long as it is intended by the agreement to give "something equivalent" to money back to the homebuyers. The "something equivalent" in these matters is obviously the flat/apartment. Also of importance is the expression "commercial effect". "Commercial" would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is "raised" under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the "commercial effect" of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have "commercial" interests in the same-the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., including residential purposes, has a long-term perspective and interest in the lease property like a conventional financial creditor who would do deep and due diligence and undertake careful and elaborate study before entering into a transaction. The appellant also has a binding stake or interest in the transaction. What is involved is public money. The land, which is subject matter of the lease, came to vest with the appellant on the strength of acquisition of land after payment of huge amounts as compensation. The said amount would represent the cost of the land. It is such land, which is the subject matter of the lease. When the appellants have such an interest, as described earlier, excluding the appellant from the decision-making process itself by not including it in the Committee of Creditors, is described as illegal and a manifest absurdity. 127. Per contra, apart from pointing out that this Court is being asked to overturn the concurrent findings rendered by the NCLT and NCLAT, the prevarication in the stand of the appellant is emphasised. Apart from the fact that originally appellant claimed as operational creditor in Form B and filed the Form-C later, declaring it a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... consideration for the "time value of money", meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee "disburses" money in the form of advance payments made towards construction of the real estate project. We were shown the Dictionary of Banking Terms (2nd Edn.) by Thomas P. Fitch in which "time value for money" was defined thus: "present value: today's value of a payment or a stream of payment amount due and payable at some specified future date, discounted by a compound interest rate of DISCOUNT RATE. Also called the time value of money. Today's value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in DISCOUNTED CASH FLOW analysis." (Emphasis supplied) That this is against consideration for the time value of money is also clear as the money that is "disbursed" is no longer with the allottee, but, as has just been stated, is with the real estate developer who is legally obliged to give money's equivalent back to the allottee, having used it in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it is clear that Section 5(8) seems to owe its genesis to the definition of "financial indebtedness" that is contained for the purposes of investment grade agreements. Shri Venugopal argued that even insofar as derivative transactions are concerned, it is clear that money alone is given against consideration for time value of money and a transaction which is a pure sale agreement between "borrowers" and "lender" cannot possibly be said to fit within any of the categories mentioned in Section 5(8). He relied strongly on the passage in Slaughter and May's book which is extracted hereinbelow: "Any amount raised having the "commercial effect of a borrowing" A wide range of transactions can be caught by Para (f), including for example forward purchases and sales of currency and repo agreements. Conditional and credit sale arrangements could also be covered here as could certain redeemable shares. The precise scope of this limb can be uncertain. Ideally, from the borrower's perspective, if there are additional categories of debt which should be included in "financial indebtedness", these should be described specifically and this catch-all paragraph, del....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s" and "includes" is concerned, as it ignores earlier precedents of larger and coordinate Benches and is out of sync with later decisions on the same point. Equally, Dr Singhvi's argument that clauses (a) to (i) of Section 5(8) of the Code must all necessarily reflect the fact that a financial debt can only be a debt which is disbursed against the consideration for the time value of money, and which permeates clauses (a) to (i), cannot be accepted as a matter of statutory interpretation, as the expression "and includes" speaks of subject-matters which may not necessarily be reflected in the main part of the definition." 130. It is, therefore, the case of the appellant that it is not the law that in order that a creditor is found entitled to be treated as a financial creditor under any of the inclusionary clauses, he must also satisfy the requirements in the main provision. In other words, the concept of disbursement of the debt to be found in Section 5(8), is not to be rigorously insisted upon in appreciating the scope of Section 5(8)(f). 131. The stand of the respondents, on the other hand, is the decision of this Court in Anuj Jain, Interim Resolution Professional for J....
X X X X Extracts X X X X
X X X X Extracts X X X X
....In our quest for similar words, namely, any amount raised, we discover that similar words are used namely 'any amount raised' specifically in clauses 5(8)(b) and 5(8)(c). We may notice that, in fact, Section 5(8)(a) specifically deals with money borrowed against the payment of interest. We have already found that under the main provision an interest free loan has been held by this Court to entitle the unpaid creditor to describe himself as a financial creditor. The words 'any amount raised pursuing to any note purchase facility or issue of bonds, notes, debentures, loans stocks' are followed by the words or by any similar instrument. Since, Part II of the IBC deals with resolution and liquidation for corporate persons and the definition of financial debt is found in Section 5(8) falling under Part II, we may bear in mind that Section 3(8) defines corporate debtor as a corporate person who owes a debt to any person. The word corporate person has in turn been defined under Section 3(7) as a company under the Companies Act as defined in Section 2(20) of the Companies Act, 2013, a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 or any other perso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not further explore the scope of the said clause 5(8)(c) except to notice that the word similar instrument would indicate instruments similar to the instruments which are specifically enumerated. It is unnecessary for us to expound the different types of instruments which answer the description of similar instruments and we need only notice that the golden thread that runs through the specific instruments is that they all contain an acknowledgement of debt. They are debt instruments ordinarily issued by corporate bodies. They also are transferable in the market and the holder can indeed bring an action on the same even if he is not the person who has made the initial disbursement of funds to the corporate debtor. A glance at another immediate neighbour which is the immediate predecessor of Section 5(8)(f), throws some light on the mind of the Law-Giver. Section 5(8)(e) deals with receivables sold or discounted other than any receivable sold on non-recourse basis. It will be noted that the receivables are treated as current assets. Ordinarily, they represent the value of goods or services for which the creditor can expect payment within a short time, ordinarily, during the balance p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on in which case it partakes of a benefit. The words used in Section 5(8)(g) appear to suggest that the law giver has contemplated any derivative transaction, in connection with the protection of the benefit from fluctuation in the rate or price. There appears to be an intricate and complex web of transactions which can take place under a derivative transaction. The important aspect is, however, a debt in the context of its mention as a financial debt. 134. While there may be again a brooding omnipresence of a disbursement at some level as between the parties very often in such transactions referred to as counter parties, there may not be a disbursement. It is clear that the law-giver has provided for calculation purposes, the market value of the transaction for determining the value of the derivative transaction. We are making these observations only to indicate that the device of the definition of the clause which employs the word 'means', followed by certain elements, and thereafter, ending with an inclusionary clause, providing for various distinct categories would indicate that for invoking the specified categories, there may not be a need for the presence of all the elemen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... incurred by the lessee to pay the rental and the premium cannot be treated as an amount raised by the lessee from the appellant. It may be noticed that it is reasonably possible to find that the lessee has raised this amount which it had to pay to the appellant from some other sources. 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). We would think that the concept of disbursement as present in the main provision appears to be mandatory in Section 5(8)(f). The purport of Section 5(8)(f) is to provide for an exhaustive catch-all provision. 139. One of the contentions raised on behalf of the respondent that, since the Law Giver has referred to lease in Section 5(8)(d) of the IBC and defined 'financial lease', as limited only to finance lease and capital lease, deemed, as such, under the Indian Accounting Standards, no recourse can be made by the appellants to Section 5(8)(f), which is a residuary provision. On the other hand, the appellant, while agreeing that all cases of fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther from its own sources or by availing financial facilities from others. It is vital to notice that as far as the amount saved by the corporate debtor, to pay the amounts to the appellant, there would be a financial debt incurred by the lessor to its lender. The acceptance of the appellants argument would involve that for the said amount the possibility of two financial creditors being present. This is unacceptable. In fact, the provision relating to limited power of mortgaging, available to the lessee, is for the purpose of financing the construction of the flats over the leasehold property. While, under the lease, the lessee may have incurred debt towards third party, which may be a financial debt. We are of the view that we would be placing a wholly strained and unreasonable interpretation on Section 5(8)(f), if we were to hold that lessee has raised funds from the lessor (appellant) under the lease in question. Merely granting a moratorium, followed by the staggered payment in sixteen half-yearly installments of the balance of premium, cannot possibly lead to the conclusion that the respondent has raised the funds, under the lease, from the appellant. 141. We may notice th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ew 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 Others (1996) 1 SC 95 and Commissioner of Income Tax, Lucknow v. U.P. Forest Corporation 1998) 3 SCC 530, 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. 143. 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....