Noida dues not financial debt under IBC – Supreme Court

INTRODUCTION

In a significant judgment pronounced in a batch of appeals on 17 May 2022 titled New Okhla Industrial Development Authority v. Anand Sonbhadra, Civil Appeal No. 2222 of 2021, the Supreme Court (SC), declared that New Okhla Industrial Development Authority (Noida) is an operational creditor (OC) and not a financial creditor (FC) for the purposes of a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code 2016 (Code).

The pronouncement comes in relation to real estate companies undergoing CIRP (Corporate Debtor) where Noida had provided land under lease agreements/deeds (Lease Deed), and outstanding dues of lease premium or lease rentals under the Lease Deed were claimed by Noida as financial debt. The claim of Noida was based on two grounds, one that the Lease Deed was a ‘finance lease’ as per Indian Accoounting Standards (IAS), and alternatively, the Lease Deed entailed a transaction having ‘commercial effect of borrowing’.

The National Company Law Appellate Tribunal (NCLAT)  took a view that Noida was an OC. Aggrieved by the decision of NCLAT, Noida approached the SC in appeal.

CASE OF NOIDA

Noida argued that there was transfer of risks and rewards akin to ownership under the Lease Deed and therefore it is a finance lease as per IAS. The lessee in fact is given the benefit of ownership under the Lease Deed in as much as it is free to fix the amount of consideration from buyers and appropriate entire profits thereof and the transaction is recognised as ‘sale’ in the books of Noida. Noida only regulates the lessee as per the provisions of Uttar Pradesh Industrial Area Development Act, 1973.

Further, Noida as a custodian/trustee of public properties and monies ought to have a say in the committee of creditors. Noida’s position is comparable to a bank as the Lease Deed stipulates only payment of 10% of the lease premium upfront and the remaining amount is to be paid over 16 half yearly instalments along with interest. Thus, the Lease Deed effectively leads to raising of funds by the Corporate Debtor on reasonable terms. This leads to a transaction having commercial effect of borrowing. Noida raised an argument that ‘disbursal’ under Section 5(8) of the Code can mean the flow of funds from debtor to creditor and also the other way round.

Noida is also similarly placed as homebuyers who are not traditionally FCs but finance the builder by payment of advance and staggered payment of installments.

FINDINGS

Whether Noida falls within the definiton of a “financial creditor” under Section 5(8) of the Code

Can Noida be equated to homebuyers

Whether Lease Deed is a Finance Lease?

Status of Noida as an OC

CONCLUSION:

This provides a much needed relief to stakeholders involved in several real estate projects whose CIRPs have been stalled by authorities like Noida on account of their demand to be classified as a FC. In fact, this will also be beneficial for homebuyers as affected CIRPs would be concluded expeditiously. 

The flip side of this judgment is that Noida has in essence been declared as the owner of the land, which gives it the right to cancel a Lease Deed. If Noida was in fact to cancel a lease deed with a real estate company or developer, further litigation may not be ruled out. A via media could be that potential resolution applicants could offer Noida pay outs akin to FCs.

-     Prateek Kumar (Partner), Raveena Rai (Principal Associate) and Smriti Nair (Associate)

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