NOIDA stands in the shoes of an operational creditor


The resolution process for real estate companies is anything but simple, given the complexities involved and the plethora of parties with varied and conflicting interests. One such issue was whether local industrial development authorities, in particular the New Okhla Industrial Development Authority (“NOIDA”), should be classified as financial creditors or operational creditors, by virtue of the lease deeds they enter into with various corporate debtors.

The question has now finally been answered. The Hon’ble Supreme Court of India vide its judgment dated May 17, 2022, in the case of New Okhla Industrial Development Authority v. Anand Sonbhadra[1], has now declared that NOIDA is not a financial creditor and would be classified as an operational creditor under the Insolvency and Bankruptcy Code, 2016 (the “Code”). The issue involved in the Anand Sonbhadra (supra.) judgment was whether 90 year leases entered into between NOIDA and real estate companies give rise to a financial or operational debt in the event that corporate insolvency resolution proceedings are initiated against such real estate companies.

Arguments advanced by NOIDA

NOIDA’s claim to categorisation as a financial creditor rested primarily on the basis that a 90 year lease falls within the category of a “financial lease” under Section 5(8)(d) of the Code. A secondary argument advanced by NOIDA was that long-term leases granted by NOIDA to various real estate developers would also come under the purview of Section 5(8)(f) of the Code as they are akin to a transaction having the “commercial effect of borrowing”.

Decision of the Hon’ble Supreme Court

The various arguments advanced  by NOIDA were rejected by the Hon’ble Supreme Court for the following reasons:

(i) Disbursement of debt is an essential ingredient for creation of a financial debt

The Hon’ble Supreme Court held that the word ‘disbursed’, appearing in the opening paragraph Section 5(8) of the Code[2], implies that disbursal of debt is an essential pre-condition for a transaction to be classified as a ‘financial debt’. Since, in the case of a lease, there is no disbursement of any debt (loan) or any sums by the lessor (i.e. NOIDA) to the lessee (i.e. the corporate debtor), the same cannot give rise to a financial debt. The Hon’ble Supreme Court clarified that the definition of the term ‘transaction’ as appearing in Section 2(33) of the Code, cannot be used to expand the definition of a ‘financial’ debt, to include a promise to pay money by a debtor to the creditor. Further, NOIDA’s stand that the requirement of ‘disbursement’ was met because of the 10% upfront payment made by the corporate debtor to NOIDA was rejected by the Hon’ble Supreme Court since it is essential for the disbursement of monies to be from the financial creditor to the corporate debtor (and not the other way around).

(ii) NOIDA’s lease does not fulfil the ingredients of a ‘financial lease’ under Section 5(8)(d) of the Code

As per Section 5(8)(d) of the Code, a liability with respect to a lease which is deemed to be a finance or capital lease in accordance with the Indian Accounting Standards (in particular Indian Accounting Standard 116 (“IAS 116”)) would constitute a ‘financial debt’. Rules 61 to 67 of IAS 116 state that a finance lease is a lease that substantially transfers “all risk and rewards” incidental to ownership of an underlying asset.

Placing reliance on the aforesaid rules, the Hon’ble Supreme Court concluded that the leases which are granted by NOIDA do not substantially transfer all rewards incidental to ownership since: (a) NOIDA’s lease does not contemplate transfer of ownership of the underlying asset, i.e. the underlying land, at the end of the lease term; (b) allottees do not gain any ownership rights over the underlying land; (c) the buildings that are put up on the leased land do not constitute a part of the underlying asset; and (d) the lessee does not have the power to cancel the lease. The Hon’ble Supreme Court further analysed various situations and examples under different statutory rules, and concluded that there are no indicators pointing towards the transfer of rewards in leases that are granted by NOIDA. Furthermore, NOIDA’s contention that the leased land is shown as a sale in its balance sheet was also rejected by the Hon’ble Supreme Court, in light of the ownership rights remaining with NOIDA, by virtue of Sections 5, 7 and 9 of the Uttar Pradesh Apartment (Promotion of Construction, Ownership and Maintenance) Act, 2010.

(iii) NOIDA’s lease does not fall within the purview of Section 5 (8) (f) of the Code

One of the alternative approaches taken by NOIDA was that it should be treated as a financial creditor since the corporate debtor instead of borrowing monies from a bank to purchase land for development, is allowed to develop land for a 90 year lease by paying premium in installments to NOIDA. Section 5(8)(f) of the Code  states that a financial debt includes “any amount raised under any transaction, including any forward sale or purchase agreement, having the commercial effect of”. Therefore, as per NOIDA, its lease by virtue of allowing staggered payment of premium due had the “commercial effect of a borrowing” and fell within the ambit of Section 5(8)(f) of the Code.

NOIDA drew a corollary to the Pioneer Urban[3] case, wherein it was held that home buyers could be treated as financial creditors under Section 5(8)(f) of the Code. The Hon’ble Supreme Court rejected NOIDA’s argument, and concluded that since the corporate debtor did not raise any amounts from NOIDA, the question of whether NOIDA’s lease had the commercial effect of a borrowing did not arise. It was further clarified that the obligation incurred by the corporate debtor to pay lease rental and premium cannot be treated as an amount raised by the corporate debtor from NOIDA.

After determining that NOIDA cannot be classified as a financial creditor, the Hon’ble Supreme Court considered whether NOIDA would then qualify as an operational creditor, within the meaning of Section 5(21) of the Code. While recording the submission of the parties in the matter, the Hon’ble Supreme Court refrained from opining on the same, owing to the fact that both the National Company Law Tribunal and National Company Law Appellate Tribunal had proceeded on the basis that NOIDA was an operational creditor.


The Hon’ble Supreme Court has finally paved the way for successful resolution of real estate companies. Numerous resolution plans had been stalled by NOIDA at the stage of approval from the Adjudicating Authority, citing its qualification as a financial creditor. However, in light of the present judgment, one can expect faster and smoother resolution of real estate companies.

Media reports suggest that NOIDA is likely to carry the Judgment in review, failing which a request would be made to the Legislature to amend the Code to bestow financial creditor status on development authorities like itself if its review petition before the Hon’ble Supreme Court fails. It remains to be seen if such a request will be entertained.

[1] Civil Appeal No. 2222 of 2021

[2] Section 5 (8) of the Code defines the term ‘Financial Debt’

[3] Pioneer Urban Land and Infrastructure Ltd. & Anr. v. UOI & Ors., Writ Petition (C) No. 43 of 2019.