NCLT: Financial Lease With Ownership Transfer And Interest On Delayed Payments Qualifies As Financial Debt

NCLT: Financial Lease With Ownership Transfer And Interest On Delayed Payments Qualifies As Financial Debt

The National Company Law Tribunal (NCLT), Delhi, recently ruled in favor of the Ghaziabad Development Authority (GDA), recognizing it as a financial creditor in the Corporate Insolvency Resolution Process (CIRP) of Celebration City Projects Pvt Ltd (formerly Vridhi Merchant Pvt. Ltd.). The ruling came in the case of Ghaziabad Development Authority v. Amit Agarwal.

The tribunal found that the agreement between GDA and the corporate debtor, executed on July 6, 2007, for the sale of land in Ghaziabad’s Nehru Vikas Minar Commercial Complex, met the criteria for "financial debt" under Section 5(8)(d) of the Insolvency and Bankruptcy Code (IBC). The agreement included a financial lease with a transfer of ownership at the end of the lease term, along with interest provisions for delayed payments.

The NCLT bench, comprising President Justice (retd) Ramalingam Sudhakar and Technical Member Avinash Srivastava, observed, “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.”

The dispute stemmed from a sale agreement where GDA sold the land for ₹100 crores, with ₹25 crores paid upfront and the remaining balance to be paid in 16 quarterly installments, along with interest rates of 12% for regular payments and 15% for defaults. When the corporate debtor defaulted on payments, GDA filed a claim for ₹147.59 crores during the CIRP. The Interim Resolution Professional (IRP) initially classified GDA's claim as operational debt, prompting GDA to challenge the classification in the NCLT.

GDA’s counsel argued that the dues, including interest, qualified as financial debt under Section 5(8) of the IBC. They distinguished the case from the Supreme Court’s judgment in Anuj Jain (IRP) for JP Infratech Ltd. v. Axis Bank Ltd., asserting that the debt was related to sale consideration and not a loan agreement. On the other hand, the IRP’s counsel contended that the agreement should be classified as a lease, with the remaining balance treated as lease rent, citing the Supreme Court ruling in New Okhla Industrial Development Authority v. Anand Sonbhadra.

The NCLT, however, sided with GDA, noting that the agreement explicitly included provisions for interest on delayed payments, indicating that the transaction involved the “consideration for the time value of money.” This aligned with the definition of financial debt under Section 5(8)(d), which includes liabilities arising from financial leases under Indian Accounting Standards.

Rejecting the IRP’s contention, the tribunal stated, “The present case is 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 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 components (12% on the remaining 16 quarterly installments and 15% in case of committing default in making the due payments). This specific clause makes the present case different on facts.”

The NCLT also found evidence of acknowledgment of dues by the corporate debtor, including proposals to surrender part of the land to resolve the matter. As a result, the tribunal ruled that GDA’s dues were financial debt and ordered that GDA be included in the committee of creditors formed during the CIRP.