Financial lease with ownership transfer, interest on delayed payments qualifies as financial debt: NCLT

The National Company Law Tribunal (NCLT), Delhi recently upheld the status of the Ghaziabad Development Authority (GDA) as a financial creditor in a corporate insolvency resolution process (CIRP) of Celebration City Projects Pvt Ltd [Ghaziabad Development Authority Vs Amit Agarwal]..The tribunal ruled that a financial lease with transfer of ownership (at the end of the lease term) along with interest provisions linked to delayed payments, as outlined in the agreement, meet the criteria for "financial debt" under Section 5(8)(d) of the Insolvency and Bankruptcy Code (IBC).A coram of NCLT comprising President Justice (retd) Ramalingam Sudhakar and Technical Member Avinash Srivastava held, "It is rightly contended by Ld. Sr. Counsel for GDA that the liability arises on the part of the Corporate Debtor in respect of the sale agreement which is in the nature of a financial lease under the Indian Accounting Standard as explained supra.".The dispute arose from an agreement executed on July 6, 2007, where GDA sold a plot of land in Ghaziabad’s Nehru Vikas Minar Commercial Complex to Vridhi Merchant Pvt. Ltd. (now Celebration City Project Pvt. Ltd.), the corporate debtor (CD), for ₹100 crores. While ₹25 crores were paid upfront, the remaining amount was to be paid in 16 quarterly installments, with interest provisions of 12 per cent for regular installments and 15 per cent for defaults. After defaults occurred, GDA filed a claim for ₹147.59 crores during the CIRP of the corporate debtor. The Interim Resolution Professional (IRP) rejected GDA's claim that it was owed a financial debt, and instead classified the dues as being an operational debt. This prompted GDA to move the NCLT seeking classification as a financial creditor (whose repayment is prioritised over operational creditors under the IBC). .The GDA’s legal counsel argued that the outstanding dues, along with interest, constituted a financial debt as per Section 5(8) of the IBC. They argued that the Supreme Court judgment in Anuj Jain (IRP) for JP Infratech Ltd. v. Axis Bank Ltd., was not applicable to this case, as the debt involved here was related to the sale consideration and was not a loan agreement.In contrast, the counsel for the IRP argued that the agreement should be classified as a lease agreement, with the premium paid upfront and the remaining balance treated as lease rent. The IRP further relied on the judgment of the Supreme Court in New Okhla Industrial Development Authority v. Anand Sonbhadra, where development authorities were categorized as operational creditors..The NCLT noted that the agreement, in this case, explicitly included provisions for interest on delayed payments, indicating that the transaction involved "consideration for the time value of money." This aligned with the statutory definition of financial debt under Section 5(8)(d), which includes liabilities arising from agreements deemed as financial leases under Indian Accounting Standards. Rejecting the IRP’s contention, the NCLT held, “The present case is in the nature of financial lease with transfer of ownership as specifically covered under Section 5(8)(d) of the code. Further the element of time value of money as laid in Section 5(8) of the code is present in the instant case also as there are specific clauses in the Agreement to Sale dated 06.07.2007 governing interest component (12% on the remaining 16 quarterly instalments and 15% in case of committing default in making the due payments). This specific clause makes the present case different on facts.”.Additionally, the tribunal found that there was evidence of acknowledgment of dues by the corporate debtor, including proposals to surrender a part of the land to resolve the matter.Based on these findings, the NCLT ruled in favour of GDA and the dues owed to it to be in the nature of a financial debt. Accordingly, GDA was also ordered to be included in the committee of creditors formed as part of the CIRP. .GDA was represented by Senior Advocate Sanjeev Kumar Dubey with Advocates Abhishek Chaudhary and Zeeshan Ahmad. The IRP was represented by Advocates Gaurav Mitra, Pankaj Agarwal and Shashwat Srivastava. .[Read Judgment]