NCLT Holds Financial Lease With Transfer Of Ownership & Interest For Default As “Financial Debt”, Admits GDA's Claim As “Financial Creditor”

The tribunal observed that a financial lease with the transfer of ownership at the end of the lease period and interest for default specified in the agreement falls within the definition of “financial debt” under Section 5(8)(d) of the Insolvency and Bankruptcy Code (IBC).

Brief Facts

In 2006, the Ghaziabad Development Authority (GDA), owner of a plot in Nehru Vikas Minar Commercial Complex, Ghaziabad, invited bids for its sale through a public auction. M/s Vridhi Merchant Pvt. Ltd. (now 'Celebration City Project Pvt. Ltd.') emerged as the highest bidder with a bid of ₹100 crores for developing a commercial complex. A registered Agreement to Sale was executed on 6.07.2007. A payment of ₹25 crores was to be made and the balance was payable in 16 quarterly instalments with 12% interest, with a penalty interest rate of 15% for default. The possession of the plot was handed over to the corporate debtor.

The Agreement allowed the Corporate Debtor to raise loans by mortgaging the property and entering into a tripartite agreement with GDA and financial institutions. The GDA agreed to the creation of a charge for loans proportional to the premium paid.

The Corporate Debtor repeatedly defaulted on payments. On 28.02.2018, the Corporate Debtor sought financial assistance from Sakshi Fincap to clear outstanding dues in 5 quarterly instalments. The GDA approved this request on 23.03.2018 but cancelled the permission on 18.03.2019 due to non-payment by the Corporate Debtor.

On 21.03.2022, the Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor. GDA filed a claim for ₹147.59 crores as a financial creditor on 13.04.2022. The Interim Resolution Professional rejected the claim in an email dated 18.04.2022, categorizing GDA as an 'operational creditor' instead of a 'financial creditor'.

Note: The Supreme Court in its judgment in G.NOIDA v. Prabhjit Singh Soni & Anr, held that G.NOIDA is a secured creditor.

Submissions

Counsel for GDA submitted that the Corporate Debtor had agreed to pay the outstanding balance along with 12% interest in 16 quarterly instalments, which increases to 15% in case of default. Further, the first charge on the property shall be of GDA, and the financial institution will only get the second charge. These terms and conditions of the registered agreement to sale dated 06.07.2007 satisfy the requirement of Section 5(8)(d) & (f) of the Code and make it clear that the said dues constitute a financial debt.
He further submitted that the nature of the agreement can also be construed as a hire-purchase contract under the Indian Accounting Standards (AS 19), which qualifies as a financial lease.

Counsel for the RP submitted that the Agreement to Sale entered between the GDA and Corporate Debtor is a pure lease, wherein the GDA has charged a 25% premium amount as advance and the balance 75% as lease rent with interest over a period of time. He relied upon the case of New Okhla Industrial Development Authority v. Anand Sonbhadra, where it was held that Development Authorities are operational creditors.

He further submitted that no element of disbursement of any amount to the Corporate Debtor was shown by GDA against the time value of money, therefore the prescription of Section 5(8) of the Code is not met. Therefore, the claim of GDA is plainly covered by the definition of operational debt under the Code.

Observations

The Tribunal observed that the reliance placed on New Okhla Industrial Development Authority v. Anand Sonbhadra to contend that the applicant is not a financial creditor as the dues of the applicant arise against the sums payable for the sale of property and not pursuant to any 'debt' which was disbursed to the Corporate Debtor was misplaced. It noted that the judgment above was based on a lease deed wherein Noida, the lessor, remained the owner of the lease till the end of the lease term, and the land reverted back to Noida after completion of the lease period. The Supreme Court had held that the lease deed entered into by Noida with the allottee Corporate Debtor is not a financial lease.

In this case, however, the Corporate Debtor executed the registered agreement to sale deed, wherein ownership of the land was transferred to the Corporate Debtor to the extent of 25% at the time of execution of the sale deed and ownership of the balance 75% was to be transferred to the Corporate Debtor proportionate to the premium paid by the second party.

The Tribunal held that the case was in the nature of a financial lease with transfer of ownership as specifically covered under Section 5(8)(d) of the Code. Further, the element of the time value of money as laid in Section 5(8) of the Code was present in the instant case also as there are specific clauses in the Agreement to Sale governing interest components (12% on the remaining 16 quarterly instalments and 15% in case of committing default in making the due payments).

The Tribunal observed that ingredients of Section 5(8)(d) of the code were applicable wherein it is a case of liability of CD, as is in the form a financial lease with the element of time value of money being incorporated in the agreement to sale itself and part transacted and balance defaulted with interest liability.

The Tribunal directed the RP to admit the claim of Applicant/GDA as a financial creditor. It allowed the application.

Case Title: M/s Jones Lang Lasalle Building Operations Pvt. Ltd. vs. M/s Celebration City Projects Pvt. Ltd.

Case Number: IA-3686/2022 in Company Petition No. (IB)- 652(PB)/2019

For the RP: Mr. Gaurav Mitra Adv., Mr. Pankaj Agarwal Adv., Mr. Shashwat Srivastava Adv. with Mr. Amit Agarwal RP in person

For the Applicant/GDA: Mr. Sanjeev Kumar Dubey Sr. Adv., Mr. Abhishek Chaudhary Adv., Mr. Zeeshan Ahmad Adv., Mr. Pradeep Kr. Singh (Add. Sec.)

Date of Judgment: 22.01.2025