2021 (4) TMI 1081 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - lease deed - financial lease as per the terms laid down under the guidelines of Indian Accounting Standards or not - HELD THAT - Reliance placed in the case of ASEA BROWN BOVERI LTD. VERSUS INDUSTRIAL FINANCE CORPN. OF INDIA 2004 (10) TMI 325 - SUPREME COURT . This matter of Asea Brown related to lease finance agreement dated 4th December 1990 with Respondent No.3 of that matter pursuant to which the Appellant took 56 cars under the lease finance from Respondent No.3 in that matter. Subsequently Respondent No.3 became notified party under Section 3(2) of the Special Courts (Trial of Offences Relating to Transactions in Securities) Act 1992 due to certain illegal transactions covering period between 1.4.1991 and 6.6.1992. The transaction dated 4th December 1990 was not referable to the concerned period. The Central Government appointed Respondent No.1 of that matter under Section 3(1) of 1992 Act over properties belonging to Respondent No.3. Under Section 5(8)(d) we are concerned with Indian Accounting Standards. With this in view if para 63 of the Indian Accounting Standards (referred supra) is perused the present lease deed does not have any Clause of transfer of ownership of the underlying asset (which is land) (and not flats harped on by Appellant) to the lessee or flat buyers who would be sub-lessees at the end of the lease term - Material is Para 62 of Accounting Standards (referred supra) which states that a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Paragraphs 63 and 64 records the factors or indicators which individually or in combination are required to be seen if it is a financial lease. The Respondent has in comparative chart filed referred to various clauses to forcefully put on record that the present lease deed is not a finance lease. Even without referring to them when we keep in view the guiding factor if the lease transfers substantially all the risks and rewards incidental to ownership we find that the present lease deed hopelessly fails in this regard. 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 above discussion shows that while risks and liabilities were transferred to the lessee the rewards incidental to ownership were not transferred. There is no Clause of transfer of ownership at the end of lease term - when we have gone through the Lease Deed keeping 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. 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 ble Supreme Court of India we are unable to persuade ourselves to accept the submission that when land is leased out if premium is fixed and instalments are given it should be treated as a financial lease. There are no substance in this arguement. Appeal dismissed.

Summary

Issues Involved:
1. Whether the lease deed qualifies as a financial lease under Indian Accounting Standards.
2. Whether the transaction has the "commercial effect of borrowing" under Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 (IBC).
3. Whether the Adjudicating Authority erred by not providing adequate reasons for its decision.

Issue-wise Detailed Analysis:

1. Whether the lease deed qualifies as a financial lease under Indian Accounting Standards:

The Appellant, New Okhla Industrial Development Authority (NOIDA), claimed that the lease deed dated 30th July 2010, executed with the Corporate Debtor, M/s. Shubhkamna Buildtech Pvt. Ltd., was a financial lease under the Indian Accounting Standards and thus constituted a financial debt under Section 5(8)(d) of the IBC. The Appellant argued that the lease transferred substantially all the risks and rewards incidental to ownership of the land to the Corporate Debtor, making it a financial lease. The Appellant cited various clauses from the Indian Accounting Standards, including paragraphs 61 to 67, which outline the criteria for classifying a lease as a financial lease.

The Respondent, the Resolution Professional, countered that the lease deed did not meet the criteria for a financial lease. The Adjudicating Authority agreed with the Respondent, stating that the lease deed did not qualify as a financial lease under the Indian Accounting Standards. The Tribunal examined the lease deed and found that it heavily favored the Appellant, retaining significant control and rewards while transferring risks to the Corporate Debtor. The Tribunal noted that the lease deed lacked essential features of a financial lease, such as the transfer of ownership at the end of the lease term or a bargain purchase option. The Tribunal concluded that the lease deed did not transfer "substantially all the risks and rewards incidental to ownership" and thus could not be classified as a financial lease.

2. Whether the transaction has the "commercial effect of borrowing" under Section 5(8)(f) of the IBC:

The Appellant alternatively argued that the transaction had the "commercial effect of borrowing" under Section 5(8)(f) of the IBC. The Appellant claimed that the payment of upfront lease premium in installments, along with interest, represented a financial facility akin to borrowing. The Tribunal rejected this argument, stating that the lease deed did not involve a disbursement of money and that the payment of premium in installments could not be construed as a financial debt. The Tribunal referred to the judgment in "Pioneer Urban Land and Infrastructure Limited and Another Versus Union of India and Others" (2019) 8 SCC 416, where the Supreme Court discussed the "commercial effect of borrowing" in the context of real estate transactions. The Tribunal found that the lease of land, even with premium payments in installments, did not meet the criteria for a financial debt under Section 5(8)(f).

3. Whether the Adjudicating Authority erred by not providing adequate reasons for its decision:

The Appellant contended that the Adjudicating Authority failed to provide adequate reasons for its decision. The Tribunal acknowledged that the Adjudicating Authority did not record detailed reasons but found that this omission did not warrant interference with the order. The Tribunal noted that the Adjudicating Authority had considered the relevant arguments and evidence before concluding that the lease deed was not a financial lease.

Conclusion:

The Tribunal dismissed the appeal, concluding that the lease deed did not qualify as a financial lease under the Indian Accounting Standards and that the transaction did not have the "commercial effect of borrowing" under Section 5(8)(f) of the IBC. The Tribunal also found that the Adjudicating Authority's failure to provide detailed reasons did not affect the validity of its decision. The appeal was dismissed with no orders as to costs.