New Okhla Industrial Development Authority Vs. Mr. Anand Sonbhadra - "A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit."

NCLAT (16.04.2021) in New Okhla Industrial Development Authority Vs. Mr. Anand Sonbhadra  [Company Appeal (AT) (Ins) No.1183 of 2019] held that;

• "Financial lease is a long-term lease on fixed assets, it may not be cancelled by either party. It is a source of long-term funds and serves as an alternative of long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and finance cost. 

• "A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit." 

• 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.

Excerpts of the Order;

# 1. This Appeal has been filed by the Appellant – New Okhla Industrial Development Authority (NOIDA - in short) against Respondent – Resolution Professional of Corporate Debtor – M/s. Shubhkamna Buildtech Pvt. Ltd. In the Corporate Insolvency Resolution Process (CIRP – in short) started against the Corporate Debtor, the Appellant a Statutory Authority filed Form ‘B’ as Operational Creditor for dues outstanding against lease of plot granted in favour of the Corporate Debtor which amount was of Rs. 99,32,55,183. The Representative of the Appellant even attended COC (Committee of Creditors) as Operational Creditor. Later, the Appellant filed claim in Form ‘C’ seeking status of NOIDA as Financial Creditor. As there was no response by the Resolution Professional (RP – in short), the Appellant entered into correspondence and even moved Adjudicating Authority (National Company Law Tribunal, New Delhi) which passed Orders on 26.07.2019 and sent matter to the Resolution Professional but still when the Appellant was not treated as Financial Creditor, Application CA 257/ND/2019 was filed claiming that RP had disobeyed earlier directions and that Appellant deserved to be treated as Financial Creditor and should be permitted to participate in COC with voting rights.

# 2. The matter was taken up before the Adjudicating Authority and the Adjudicating Authority after hearing both sides held that the lease deed concerned was not a financial lease as per the terms laid down under the guidelines of “Indian Accounting Standards”. Thus, the present Appeal.

# 10. The parties were heard. Both the sides referring to the lease deed and the Indian Accounting Standards, have tried to show how the lease deed fits into the requirement under the Indian Accounting Standards or does not fit in the same. The parties were asked to file charts in support of the submissions they were making. We will reproduce the charts one below each other which will give birds eye view of the rival claims.

# 13. Before discussing the Indian Accounting Standards and considering the arguments as submitted with regard to the requirements as can be seen from the respective charts, it would be appropriate to refer to Judgement in the matter of “Asea Brown Boveri Ltd. Versus Industrial Finance Corporation of India and Others” reported in (2004) 12 SCC 570 (SCC Online Web Edition) (copy is filed with Diary No.24100 by the Respondent). . . . .

# 14. The Hon’ble Supreme Court dealt with the issue as to what is a lease finance. Para – 13 to 17 of the Judgement of Hon’ble Supreme Court may be reproduced:-

• “13. What is a lease finance? According to Dictionary of Accounting & Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at p. 136) :

• "A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance sheet in the same way, as if they had been purchased and a loan had been taken out to enable this." (emphasis supplied)

• 14. In Lease Financing & Hire Purchase by Dr. J.C. Verma (4th Edn., 1999 at p.33), financial lease has been so defined: 

• "Financial lease is a long-term lease on fixed assets, it may not be cancelled by either party. It is a source of long-term funds and serves as an alternative of long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and finance cost. 

• Financial lease has been defined by International Accounting Standards Committee as ‘a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred’. Lessor is only a financier and is not interested in the assets. This is the reason that financial lease is known as full payout lease where contract is irrevocable for the primary lease period and the rentals payable during which period are supposed to be adequate to recover the total investment in the asset made by the lessor."         (emphasis supplied)

• 15. According to Lease Financing & Hire Purchase by Vinod Kothari (2nd Edn., 1986, at pp. 6 & 7), a finance lease, also called a capital lease, is nothing but a loan in disguise. It is only an exchange of money and does not result into creation of economic services other than that of intermediation. The learned author has quoted T.M. Clark, one of the most authentic writers on the subject who defines lease and operating lease in the undergoing words:

• "A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit." 

• * * *

• “ An operating lease is any other type of lease – that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non- cancellable period."

• 16. The features of the financial lease, according to the learned author are as under:

"1. The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself.

2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.

3. Therefore, the lessee bears the risk of obsolescence. 

4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non- cancellable by either party.

5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period.

6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation.

7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.

8. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest."

• 17. In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment 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.”

# 15. We proceed to refer to portions of the lease deed which would rather show that rewards incidental to ownership of the underlying asset which is land, were not transferred.

# 24. The argument of the Appellant trying to mix up transfer of ownership of the asset which is land with right to transfer flats to be constructed has no substance. Merely, because the lessee was given right to fix the price of the dwelling units to be constructed, that by itself is not sufficient to say that the lease of the land is a finance lease. The argument of the Appellant that lessee has an option to pay one time lease rent and that if such right was exercised lessee would not be required to pay further rent and that this shows that present value of the lease payment amounts to at least substantially 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.

# 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’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. We do not find substance in this argument.

# 30. We may record that we are not finding fault with the various terms and conditions in the Lease Deed. It is a Lease Deed from a development authority which has the object of developing the township and thus wants to control the manner in which the constructions of housing come up. That purpose is alright. However, such lease does not fit in with the requirements of Indian Accounting Standards which we have referred. Just to be part of COC, the lease of land between developing authority and the builders cannot be considered or treated as a financial lease.

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