New Okhla Industrial Development Authority vs Anand Sonbhadra

Insolvency and Bankruptcy Code, 2016: s. 5 (8) – Financial Debt – When an amount could be termed as such – The policy of law under IBC requires “Disbursement” leading to a debt along with interest – Interest, as such, is not a necessary requirement of s. 5(8), but the fact of disbursement from the creditor to the debtor is a necessity for looking a debt as financial debt, as contemplated by the said section – Such Disbursement has to be understood in terms of money which has been paid by the creditor and debtor. Insolvency and Bankruptcy Code, 2016: ss 5(8), 3(33) – Words ‘Transaction’ and ‘Disbursed’ – Distinguished – The word “transaction” includes transfer of assets, funds or goods and services from or to the corporate debtors – But imposing such a meaning of the word “Transaction” as inclusive in the word “Disbursed” will lead to unnecessary straining of the provision – Interpretation of the term Disbursed, as occurring u/s.5(8), should mean the payment of money, which flows to the debtor. Insolvency and Bankruptcy Code, 2016: ss 3(6), 5(8) – Words ‘Claim’ and ‘Debt’ – Claim, as defined u/s.3(6), may or may not be fixed, disputed or undisputed, secured or unsecured but it bears an indispensable element of “right to payment” – Claim cannot exists independent of the element of “right to payment” – The source of such “right to payment” can be either under a judgment or under any other circumstance – When claim is accompanied by liability it gives rise to debt – Debt, as defined under the Code includes financial as well as operational debt and the same appears to be intertwined with the definition of “claim” – Debt denotes a liability or obligation which relates to a claim.

Insolvency and Bankruptcy Code, 2016: s.5(8)(d) – Indian Accounting Standards – rr.61 to 67 – Financial Lease – Financial lease as such is not defined under IBC – s.5(8)(d) refers lease as inclusive of Financial lease as given under Indian Accounting Standards – r.62 declares that a lease is classified as a financial lease if it transfers, substantially, all the risks and rewards incidental to ownership of an underlying asset – As per r.63, what matters for a lease to be financial lease is its substance and not the form – In the instant case, the rights are transferred in favour of the allotees only by way of a sub-lease, and therefore there is no transfer of ownership of the underlying asset (plot) by the end of the lease terms – Further the criteria u/r.63 that the lease will be a financial lease even if the title is not transferred provided the lease term is for the major part of economic life – In the instant case the “principle of economic life of underlying asset” is inapposite as here the underlying asset is land and the economic life of the land is not limited as the land does not depreciate with the passage of time – In the instant case, there is no substantial transfer of risks and rewards incidental to ownership since the appellant (lessor) has reserved the right of cancellation of lease in larger public interest and therefore such appellant is not a financial lessor u/s.5(8)(d) of IBC.

Lessee and sub-lease – Rights and Limitations – Lessee can assign his rights as a lessee which amounts to assignment of his rights and, therefore, can create a sub-lease – But the creation of such sub-lease has limitation and it must conform to the terms of contract between the lessor and lessee.

Lessee and his right to Mortgage – Extent and Limitation – A lease may enable the lessee to mortgaged the leased property – But in cases where the mortgage by the lessee can be only with the prior permission of lessor, his rights are not absolute and is conditional upon the approval or denial by the lessor of the permission to make such mortgage.

Insolvency and Bankruptcy Code, 2016: s.5(8)(f) – Interpretation – “Financial Debt includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing” – Scope of – The phrase has a relevance as the same is residuary in nature – For this phrase to apply so as to enable a person for being termed as Financial Creditor, there has to be a raising of funds in a transaction which has a commercial effect – The first and foremost rule for making such phrase to apply there has to be “raising of funds” – The raising of funds can be by issuing bonds, notes, debentures or loan stock etc – In the instant case, the raising of funds was done by the lessee from the allottees and not by the appellants and hence the appellant is not entitled to the application of the said residuary provision and therefore he cannot avail the benefit of being called a “Financial Creditor” Dismissing the appeals, the Court

HELD: 1. It is undoubtedly true that in the scheme of the IBC, Section 21 of the IBC contemplates the constitution of the Committee of Creditors. The Committee of Creditors is to consist of all financial creditors of the corporate debtor. It is the Committee of Creditors, which has power to appoint and replace the Interim Resolution Professional as the Resolution Professional. Under Section 27 of the IBC, the Committee of Creditors, which would consist of only the financial creditors, would have the right to replace a Resolution Professional. Under Section 28, the approval of the Committee of Creditors is mandatory in respect of various powers which need to be exercised by the Resolution Professional. Central to the IBC, and what would, in fact, constitute its very soul, is the idea of resurrecting an ailing corporate debtor. The means, contemplated, is the submission, consideration and approval of Resolution Plans to be given by Resolution Applicants. Here again, Section 30 contemplates that the Resolution Plan is to be initially scrutinised by the Resolution Professional, who is to present the Resolution Plan, which conforms to Section 30(2), to the Committee of Creditors. The Committee of Creditors may approve the Resolution Plan in the manner provided in Section 30(4). Regulation 38 of the Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, no doubt, provides for the mandatory contents of the Resolution Plan, which may be approved. The Plan must include the submission as to how the interests of stakeholders, including financial creditors and operational creditors, are to be dealt with. Regulation 38(1), inter alia in fact, contemplates that the Resolution Plan must provide that the amount payable to the operational creditors shall be paid in priority over the financial creditors. [Para 49][364-A-F]

2. The essential requirements to attract Section 5(8) are that there must be a debt along with interest, if any, which is disbursed against consideration for the time value of money. There can be no dispute that there is a debt in this case. Even the respondents would contend that it is actually a debt but an operational debt under Section 5(21). That interest is payable in connection with the debt, cannot be disputed, having regard to the terms of the lease deed. It is another matter that liability to pay interest is not an essential feature to attract Section 5(8). The next requirement is that there be disbursement. Disbursement is an indispensable requirement to constitute a debt, a financial debt, within the meaning of Section 5(8) and that disbursement must be from the creditor to debtor. [Para 53] [366-C-E]

Orator Marketing Private Limited v. Samtex Desinz Private Limited 2021 SCC Online SC 513 – relied on.

3. A debt is a liability or an obligation in respect of a right to payment. Irrespective of whether there is adjudication of the breach, if there is a breach of contract, it may give rise to a debt. In the context of Section 5(8), in Pioneer, disbursement has been understood as money, which has been paid. In the context of the transaction involved in the said case, the homebuyers advanced sums to the builder, who would then utilise the amount towards the construction in the real estate project. That there must be a disbursement, was clearly present in the mind of the Court, is clear from the fact that it has expressly proceeded on the basis that when the money was paid by the homebuyer to the builder, the amount disbursed was no longer with the homebuyer. The homebuyer was paying lesser sums by way of installments than he would have to pay for the ultimate price of the flat/apartment. The Court went on to hold that the expression ‘borrow’ was wide enough to include the advance by the homebuyer to the real estate developer for the temporary use. Both parties had commercial interests, which was further found. But what is relevant is to attract Section 5(8), on its plain terms, is disbursement. While, it may be true that the word ‘transaction’ includes transfer of assets, funds or goods and services from or to the corporate debtor, in the context of the principal provisions of Section 5(8) of the IBC, to import the definition of ‘transaction’ in Section 3(33), involving the need to expand the word ‘disbursement’, to include a promise to pay money by a debtor to the creditor, will be uncalled for straining of the provisions. ‘Disbursement’, within the meaning of Section 5(8), is the payment of money, which flows to the debtor. In the word ‘claim’, as defined in Section 3(6), right to payment is one of the components. The golden thread that runs through the word ‘claim’, is the right to payment. The right to payment may arise from a Judgement. It may or may not be fixed. It may be disputed or undisputed. It may be legal or equitable. It may be secured or unsecured, but what is indispensable is, there must be a right to payment. Similarly, in cases of breach of contract, under any law in force, if it gives rise to a right to payment, irrespective of whether it is reduced to a Judgment or fixed or matured or unmatured, disputed or undisputed, secured or unsecured, as long as there is a right to payment, a claim arises. When there is a claim and, in regard to such a claim, there is a liability or obligation, which is due from any person, it gives rise to a debt. A debt includes a financial debt and an operational debt. It is after defining the word ‘debt’ with reference to the existence of a right to payment in the broadest terms, as defined in the term ‘claim’ and including the word ‘financial debt’ within the expression ‘debt’, the word financial debt, in turn, is elaborately defined in Section 5(8). What is relevant for the purpose of Section 5(8), has been clearly articulated and can be understood with reference to what is expressly provided. It is unnecessary to bring in the concept of transaction, as defined in Section 2(33), for appreciating its scope. A perusal of definition of the word ‘debt’, no doubt, reveals that it is closely intertwined with the definition of the word ‘claim’ in Section 3(6). The word ‘transaction’ is conspicuous by its absence in the definition of both the word ‘claim’ and the word ‘debt’. Therefore it is held that ‘debt’ means a liability or obligation, which relates to a claim. The claim or right to payment or remedy for breach of contract occasioning a right to payment must be due from any person. Now, if it is due from any person, it must be due to someone who would then be the creditor. Section 5(7) defines ‘financial creditor’ as person to whom a financial debt is due besides an assignee or transferee from such person. While it may be true that there would be the brooding omnipresence of a transaction, as defined, underlying a debt and claim as defined, it would be unnecessary and unreasonable to import in the concept of transfer of funds, from or to a corporate debtor, to glean the meaning of disbursement in Section 5(8), at least, in the facts of the instant case. The Court is of the view that, in the lease in question, there has been no disbursement of any debt (loan) or any sums by the appellant to the lessee. The appellant would, therefore, not be a financial creditor within the ambit of Section 5(8). [Para 56][367-H; 368-A-H; 369-A-F]

Pioneer Urban Land and Infrastructure Limited and Another v. Union of India (UOI) and Others (2019) 8 SCC 416 : [2019] 10 SCR 381 – relied on.

4. The Rules, which are relevant in regard to the specification of a lease as a financial lease are set down as Rules

61 to 67 of Indian Accounting Standards [for short “IAS”]. They have been made under Section 133 of the Companies Act, 2018. Rule 62, the sheet anchor of the appellant, declares that a lease is classified as a financial lease if it transfers, substantially, all the risks and rewards incidental to ownership of an underlying asset. Moving on to Rule 63, it undoubtedly, declares that what matters is not the form but the substance. Thereafter, under the examples of situations, either individually or in combination, which would lead to a lease being classified as a finance lease, certain situations have been depicted. As far as the first situation is concerned, it would involve a lease, where, there is a transfer of ownership of an underlying asset to the lessee by the end of the lease term. There is no case for the appellants that the lease contemplates transfer of ownership of the underlying asset. The underlying asset is the land. In fact, the case of the appellant would appear to be also that there is no transfer of ownership because by the end of lease term third party rights would have been created over the dwelling unit/ built up space/ plot constructed by the Lessee. It is also the further case set up that the Lessee alone brings third parties on to the property and gets paid by such parties. It will be relevant to notice that the so called third parties do not get ownership rights as such. The rights are transferred in favour of the allotees of dwelling units /built up space/ plot only by way of a sub-lease. Therefore, there is no transfer of the ownership of the underlying asset by the end of the lease term. The third criteria in Rule 63 is, where the lease term is for the major part of the economic life of the underlying asset, even if the title is not transferred. The definition of ‘economic life’, as provided in Indian Accounting Standards The lease in question is for a period of ninety years. In regard to land, the underlying asset, ‘the principle of economic life of underlying asset’, is inapposite. The economic life of land is not limited. The principle in the said situation is predicated with reference to measuring the economic life of an asset. More importantly, it speaks of the major part of the economic life of the asset. Both these concepts are inapposite and even inapplicable with regard to land. Land does not depreciate with the passage of time. Ordinarily, the price of land would only increase, unlike other assets. [Paras 62, 64, 68][373-F-G; 375-G-H; 376-A-D; 377-C-G]

Asea Brown Boveri Ltd. v. Industrial Finance

Corporation of India and Others (2004) 12 SCC 570 : [2004] 5 Suppl. SCR 671 – relied on.

5. Undoubtedly, in law, generally the lessee can assign his rights as a lessee which amounts to assignment of his right. A lessee may create a sub- lease. A lessee can also create a mortgage. All of these rights vest with a lessee, subject to a contract to the contrary. In the lease in question what is prohibited in Clause 12 under other clauses is the right to assign his rights as lessee. Any reward which the lessee could have obtained if it wished to absolutely assign its right, is clearly denied by virtue of the provision in the lease which acts as a contract to the contrary. [Para 111][395-E-G]

6. As far as the right to mortgage is concerned the lessee is indeed permitted to mortgage the land. However, the mortgage can be effected only with prior permission of the lessor. The right to mortgage which flows as an incident of ownership is one of the bundle of rights which vests with an owner. It is undoubtedly a lesser right and the owner would be possessed of the residual right. However, it is one of the many rights which is incidental to ownership but there is no absolute right to create a mortgage. The requirement of prior permission to create a mortgage would mean that the permission may be forthcoming or it can be denied. If there is a denial of the right to create a mortgage, then it would impliedly mean that to the said extent the right to raise funds for the purpose of financing the investment is impaired. Depending on whether or not the right is permitted actually the rewards incidental to ownership is transferred. The clause relating to mortgage, in fact, indicates that the purpose contemplated, is that the mortgage can only be for the purpose of raising loan or for the purpose of financing the lessee’s investment in the project. This in turn is to be on receipt of the payment by the allottee or on receipt of assurance of payment by the bank or under any other suitable arrangement. In this regard, the lease contemplated a mutual settlement amongst the lessor, the developer and the financial institution/bank. It clearly constitutes a foray into the right of a person ‘if an owner’ to deal with the property including the right to create a mortgage. The suitable arrangement in mutual settlement contemplates the lessor giving its consent to the terms of the mortgage. It includes the right of the lessor to prevail upon, in regard to the terms of the mortgage. Its object may be lofty and in keeping with its role as a statutory authority but its impact on the true interpretation of the lease and as to whether it involves transfer of rewards incidental to ownership is another matter. The terms and conditions of the NOC which is contemplated as necessary for mortgaging the land to facilitate housing loans of final purchaser will be as decided by the lessor. Still further it may be noticed that under the proviso if there is a sale or a foreclosure of the mortgaged property, the lessor is given the right to such percentage of the unearned increase in value as will be decided by the lessor. [Paras 113, 114][396-F-H; 397-A-E]

7. Section 5(8) defines ‘financial debt’ as meaning ‘a debt along with interest, if any, which is disbursed against the consideration of time value of money’. Thereafter, Clauses (a) to

(i) deal with transactions which are included as financial debt. It is, thereafter, that Clause (f) provides that a financial debt includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. To further simplify the concept, in Section 5(8)(f), it would be appropriate to eclipse the words ‘includes any forward sale or purchase agreement’, and then, the provision would read as ‘any amount raised any other transaction having commercial effect of a borrowing’. The word ‘transaction’ has been defined in Section 2(33) to include ‘an agreement or arrangement in writing for the transfer of an asset, or funds, goods or services from or to the corporate debtor. At this very juncture, it may noticed that ‘operational debt’ has been defined in Section 5(21), which means ‘a claim in respect of provision of goods or services including employment’. Operational debt also means a debt in respect of payment of dues arising under any law for the time being in force and payable to any Local Authority, inter alia. ‘Operational creditor’ is defined in Section 2(20) as meaning ‘a person to whom operational debt is owed and includes any person to whom such debt has been legally assigned or transferred’. Under Section 5(8)(f), the words used, inter alia, are ‘any amount raised under any other transaction’. In our quest for similar words, namely, any amount raised, it may be discovered that similar words are used namely ‘any amount raised’ specifically in clauses 5(8)(b) and 5(8)(c). It may noticed that, in fact, Section 5(8)(a) specifically deals with money borrowed against the payment of interest. It has already been found that under the main provision an interest free loan has been held by this Court to entitle the unpaid creditor to describe himself as a financial creditor. The words ‘any amount raised pursuing to any note purchase facility or issue of bonds, notes, debentures, loans stocks’ are followed by the words or by any similar instrument. Since, Part II of the IBC deals with resolution and liquidation for corporate persons and the definition of financial debt is found in Section 5(8) falling under Part II, it may be born in mind that Section 3(8) defines corporate debtor as a corporate person who owes a debt to any person. The word corporate person has in turn been defined under Section 3(7) as a company under the Companies Act as defined in Section 2(20) of the Companies Act, 2013, a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 or any other person incorporated with limited liability but under any law for the time being in force but will not include any financial service provider. In fact, a perusal of Part III of IBC which deals with Insolvency Resolution for individuals and partnership firms will show that it does not contain the concept of financial debt as indicated in Section 5(8). Section 5(8)(c) comprehensively refers to raising of any amount based on note purchase facility, issue of bonds, notes, debentures, loan stock or any similar instrument. Thus, what is contemplated is ordinarily the corporate debtor raises funds by issuing bonds, notes, debentures or loan stock which are well known instruments usually used by corporate bodies to generate funds for its needs. These instruments are ordinarily transferable. [Paras 122, 132][406-E-H; 417-E-H; 418-A-C]

State of Orissa v. State of A.P. (2006) 9 SCC 591 – relied on.

8. In the present case it cannot be hold that the lessee has raised any amounts from the appellant. The question, therefore, of considering the last limb of Section 5(8)(f), namely, whether it has commercial effect of a borrowing could not arise. But it can be safely said that the obligation incurred by the lessee to pay the rental and the premium cannot be treated as an amount raised by the lessee from the appellant. [Para 138][421-F-G] State of Tamil Nadu v. Binny Ltd., Madras (1980) Suppl. SCC 686; State of Orissa and Another v. M/s. Chakobhai Ghelabhai and Company AIR 1961 SC 284 : [1961]

1 SCR 719; Jaypee Infratech Limited v. Axis Bank Limited and Others (2020) 8 SCC 401; Swiss Ribbons Private Limited and Another v. Union of India and Others (2019) 4 SCC 17 : [2019] 3 SCR 535; Mohd. Noor and Others v. Mohd. Ibrahim and Others (1994)

5 SCC 562 : [1994] 1 Suppl. SCR 790; Aneeta Hada v. Godfather Travels and Tours Private Limited (2012)

5 SCC 661 : [2012] 5 SCR 503; M/s. Shroff and Co. v. Municipal Corpn. of Greater Bombay and Another (1989) 1 Suppl. SCC 347 : [1988] 2 Suppl. SCR 406; Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others (2019) 8 SCC

416 : [2019] 10 SCR 381; Union of India and Others v. R.C. Jain and Others (1981) 2 SCC 308 : [1981]

2 SCR 854; New Okhla Industrial Development

Authority v. Chief Commissioner of Income Tax and Others (2018) 9 SCC 351 : [2018] 7 SCR 781; Haryana v. Haryana Housing Board Employees’ Union and

Others (1996) 1 SC 95 : [1995] 4 Suppl. SCR 533; Commissioner of Income Tax, Lucknow v. U.P. Forest Corporation (1998) 3 SCC 530 : [1998] 2 SCR 22; in Re: Rogers Pyatt Shellac Co. v. The Secretary of State for India in Council AIR 1925 Calcutta; The

Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai and Co., Bombay AIR 1950 SC 134 : [1950] SCR 335 – referred to.