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Judgment
K. Anantha Padmanabha Swamy, J
The present Application bearing IA No.994/2019 is filed seeking following reliefs:
a. To direct the 2nd Respondent to reclassify the debt owed by the Corporate Debtor to the Applicant as 'financial debt' and consequently include the Applicant in the CoC as a 'financial creditor'.
b. To direct the 2nd Respondent to admit the claim of the Applicant for an amount of Rs.66,58,01,020.16/-.
c. To direct the 2nd Respondent to return the scheduled equipment to a working condition after carrying out the necessary repairs and handover the same once done at a location specified by the Applicant at that time, at the cost of the Corporate Debtor.
d. To direct the 2nd Respondent to include the lease rental amount of Rs. 1,20,30,748.03/- per quarter from 29.08.2018 till the date of the handover of the scheduled equipment in the manner specified in relief (iii), as the Insolvency Resolution Process Costs ("CIRP costs") under Section 5(13) of the IBC r/w Regulation 31 of the CIRP Regulations, 2016.
e. In the alternative to reliefs (iii) and (iv) above, in the event that the 2nd Respondent is unable to deliver possession of the scheduled equipment in the manner specified in relief (iii) above, direct the 2nd Respondent to include the current market value of the scheduled equipment as CIRP costs (including the lease rental amount of Rs. 1,20,30,748.03/- per quarter from 29.08.2018 till the date of inclusion of the current market value of the scheduled equipment as CIRP costs).
Brief facts as stated by the Applicant are as under:-
a. That the Applicant sanctioned a financial lease of Rs.40,00,00,000/- to the Corporate Debtor in accordance with the sanction letter dated 30.07.2011. The Applicant and the Corporate Debtor entered into a lease agrebment dated 24.09.2011. As per the terms of the financial lease, the Applicant purchased certain equipment and thereafter leased the equipment to the Corporate Debtor for a fixed period from the lease commencement date.
b. That the Corporate Debtor was required to pay financial commitment charges from the date of payment made by the Applicant till the date of commencement of lease rentals (i.e., the date on which the scheduled equipment was received by the Corporate Debtor at the agreed site). After the lease commencement date, the Corporate Debtor was required to pay lease rentals to the Applicant.
c. That Clause 15 of the Lease Agreement provides that the Applicant would be entitled to terminate the Lease Agreement on the occurrence of an event of default. That the Corporate Debtor defaulted in payment of the financial commitment charges and the lease rental amounts and accordingly the Applicant terminated the lease upon the occurrence of an event of default vide its letter dated 27.10.2016..
d. That as per Clause 15 of the Lease Agreement the Applicant is entitled to two independent and distinct reliefs. Clause 15.2.2 provides that the Applicant would be entitled to take possession of the scheduled equipment from wherever the same is situated. Clause 15.2.3 provides that in addition to the right to take possession of the equipment, the Applicant would be entitled to recover the 'Lease Termination Price' from the Corporate Debtor. Clause 15.2.3(ii) provides that the Applicant shall also be entitled to sell or dispose off the equipment in any manner.
e. On the termination of the Lease Agreement vide letter dated 27.10.2016 the Applicant is entitled to:
i) Take possession of the scheduled equipment.
ii) The Lease Termination price.
f. That Applicant and the Corporate Debtor entered into a Memorandum of Understanding Cum Sale deed dated 28.03.2017 wherein the Applicant agreed to receive Rs.33,03,33,076/- in settlement of the dues payable by the Corporate Debtor. Clause 3 of the aforesaid agreement provided that if there is any default in payment of the settlement amount as per the schedule, the Applicant would be at liberty to take possession of the equipment and to exercise all rights under the Lease Agreement.
g. Admittedly, the Corporate Debtor defaulted in making payments as per the agreed schedule. Hence, the Applicant is at liberty to exercise all its rights under the Lease Agreement.
h. That the Applicant filed its proof of claim for an amount of Rs.66,58,04,020.16/- on 12.09.2018 with the RP. That the claim filed by the Applicant includes the lease termination price that the Applicant is entitled to as per the Lease Agreement. The claim amount includes the following:
Sl.No.
Particulars
Amount
1
Future Rentals
Rs.446,856,355.53
2
Residual Value
Rs.59,000,284.60
3
Gross Foreclosure Value (1+2)
Rs.505,856,640.13
4
GST @ 5%
Rs.25,292,832.01
5
Total Foreclosure Value including GST (3+4)
Rs.531,149,472.14
6
TCS @1%
Rs.5,311,494.72
7
Total Foreclosure Value (5+6)
Rs.536,460,966.86
8
Overdue Rentals till 29th Aug 2018
Rs. 108,276,732.30
9
ODC till 29th Aug 2018 including GST
Rs.21,066,321.00
10
Total Dues (7+8+9)
Rs.665,804,020.16
i. That the Applicant through its Letter dated 21.11.2018 requested RP for handing over of the scheduled equipment. The Applicant further requested that the lease rentals for the period when the scheduled equipment continues to remain in the possession of the Corporate Debtor should be treated as Insolvency Resolution Process Costs.
j. That the Resolution Professional sought for a legal opinion from its counsel on the admissibility of the claim of the Applicant. DSK legal issued its opinion on 30.11.2018. In the aforesaid opinion the fact that absolute ownership of the scheduled equipment vests with the Applicant and the fact that if the possession of the equipment is retained, the lease rentals would be included in the CIRP costs wais recognised. However, it was erroneously observed that if the entire claim of the Applicant is admitted then the scheduled equipment will be included in the pool of assets of the Corporate Debtor.
k. That in the 3rd Meeting of the Committee of Creditors held on 19.12.2018 it was observed that "As Tata Capital Financial Services Ltd have claimed the residual value in the claim filed which is treated as constructive delivery (transfer of ownership) of the underlying goods/assets against the claim filed".
l. That the Resolution Professional had admitted the claim of the Applicant to the extent of Rs.60,68,03,736.16/-. The Applicant through its letter dated 11.01.2019 to the Resolution Professional addressed in detail the issues raised in the legal opinion and the observation with respect to the alleged constructive delivery of the scheduled equipment. The Resolution Professional failed to take any action or to acknowledge the aforesaid letter of the Applicant.
m. That this Adjudicating Authority through its Order dated 17.07.2019 in IA No.115/2019 has expressly recognised that the ownership of the scheduled equipment vests with the Applicant and that there has not been any transfer of ownership to the Corporate Debtor.
n. That the Resolution Professional through its email dated 11.09.2019 reclassified the Applicant from a Financial Creditor to an Operational Creditor, purportedly on the basis of the order of this Adjudicating Authority dated 17.07.2019. As a result of the reclassification, the Applicant was held to be not a part of the CoC. The admitted claim amount was arbitrarily deducted to Rs. 12,73,69,756/- as Operational debt. The Resolution Professional called upon the Applicant to take possession of the asset within 7 days and to make arrangements for removal of the equipment and to bear the cost of the same. The Resolution Professional also informed to levy a charge of Rs. 1 Lakh per day if the Applicant failed to remove the equipment within the stipulated time.
o. That the Applicant replied to the aforesaid email on 18.09.2019 and brought to the notice of the RP that the reclassification of the Applicant as an Operational Creditor was erroneous and based on a misinterpretation of the order of the NCLT. The Applicant pointed out that the equipment is not in a working condition and that the railway tracks are damaged without which the equipment cannot be transferred.
p. That as per Clause 18 of the Lease Agreement, it is the Lessee's obligation to ensure that the equipment is handed over in the same operating order and condition as originally delivered to the lessee and at a place notified by the Lessor at the cost of the Lessee. The Applicant called upon the Resolution Professional to reconsider its stand. However, Resolution Professional through its email dated 05.10.2019 reiterated its earlier stand.
Counsel for the Respondent No.2/RP filed counter and written submissions inter-alia stating as under:-
a. That the present application is barred by principle of 'res judicata' enshrined under section 11 of the Code of Civil Procedure, 1908 and hence is liable to be dismissed in limine.
b. That the issues raised by the Applicant in the present Application have already been decided by this Adjudicating Authority vide order dated 17.07.2019 in I.A. No. 115 of 2019 in CP(IB)No.276/7/HDB/2018.
c. That the reliefs as are being sought by the Applicant in the present Application are to a large extent identical to the reliefs that were sought by the applicant in IA No. 115 of 2019 in CP(IB)No.276/7/HDB/2018.
d. The reliefs that are being sought in the present Application are as follows:
i. Reclassification of the debt owed to the Applicant under the Lease Agreement dated 24.09.2011 ('Lease Agreement') as 'financial debt';
ii. Admission of entire claim amount of Rs.66,58,04,020.16 as submitted by the Applicant;
iii. To return the Scheduled Equipment;
iv. To include the lease rental amount of Rs. 1,20,30,748.03 per quarter from 29.08.2018 till the date of handover in the CIRP Costs and pay as such;
e. All of these issues have already been adjudicated upon by this Adjudicating Authority vide order dated 17.07.2019.
f. That previously, in IA No. 115 of 2019, this Adjudicating Authority had passed the order dated 17.07.2019 whereby, in paragraph 8 and 9 of the said order, this I Adjudicating Authority had given a finding that the lease agreement between the Applicant and the Corporate Debtor under the Lease Agreement dated 24.09.2011, did not have the attributes of a 'financial lease.' Therefore, once it was declared by this Adjudicating Authority that the Lease Agreement did not have the attributes of a financial lease, the Applicant cannot contend that it is a 'financial creditor' or that its claim is a 'financial debt'.
g. In view of this finding, the only thing to do for the RP was to classify the Applicant's debt as an 'operational debt' in compliance with the order dated 17.07.2019 passed by this Adjudicating Authority.
h. In paragraph 7 of the order dated 17.07.2019, this Adjudicating Authority had directed the RP "to reconsider its decision with respect to the differential amount and to verify from the books of accounts of the Corporate Debtor to decide on the issue of admitting the same."
i. As a result of classification of Applicant's claim as 'operational debt', it was imperative that the amount towards the lease rentals outstanding until the insolvency commencement date (i.e. 29.08.2018) is admitted as 'operational debt'.
j. As per the order dated 17.07.2019, after verification of the documents, the RP admitted the claim of the Applicant as 'operational debt' after making adjustments of the following amounts that have already been paid by the Corporate Debtor to the Applicant:
i. Rs.5,90,00,284/- towards security deposit paid by the Corporate Debtor to Applicant in terms of clause 1.2.10 of the Lease Agreement. This was duly admitted by the Applicant in its letter dated 03.08.2016;
ii. Rs.5,00,00,000/- being the amount paid by the Corporate Debtor to the applicant under the Settlement Agreement dated 28.03.2017.
k. That the order dated 17.07.2019 is silent upon returning/handing over the Scheduled Equipment back to the Applicant. However, this Adjudicating Authority held that the Applicant has the ownership on the Scheduled Equipment and the Corporate Debtor does not have any right of ownership in the scheduled Equipment. Accordingly, the RP deemed it necessary to return/handover the Scheduled Equipment to the Applicant, to avoid any further cost on account of operational lease payment, when the asset was not actually being put to use during the CIRP.
l. That by its letter dated 21.11.2018, the Applicant made a request to the RP to permit it to remove the Scheduled Equipment from the premises of the Corporate Debtor, the cost of which was to be borne by the Applicant itself. Further, the said request was made by the Applicant fully knowing about the condition of the Scheduled Equipment and the deterioration in its value.
m. The letter dated November 21, 2018 was already on record and was considered by this Adjudicating Authority while passing its order dated July 17, 2019. As such, the Applicant at this stage cannot seek a direction against the RP to 'return the Scheduled Equipment to working condition after carrying out the necessary repairs and handover the same once done at a location specified by the Applicant at that time, at the cost of the Corporate Debtor'.
n. That this Adjudicating Authority directed the RP to include the lease rentals payable by the Corporate Debtor to the Applicant during the period of CIRP, to the CIRP costs. The said direction was passed by this Adjudicating Authority considering the provisions of regulation 31(b) of the CIRP Regulations which provide for the amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(l)(d) of the Code.
o. That in compliance of the said order, the RP has already admitted an amount of Rs.4,74,86,445/- as CIRP costs towards the 'lease rentals' starting from 29.08.2018 till 11.09.2019 i.e., the day on which the RP called upon the Applicant to remove the Scheduled Equipment from the premises of the Corporate Debtor within 7 days from the date thereof. However, the Applicant failed to take delivery of the same. The Corporate Debtor cannot be held liable for any further 'lease rentals' post 11.09.2019. As an owner of the Scheduled Equipment, the Applicant has failed to exercise due diligence in taking delivery of the Scheduled Equipment and the Corporate Debtor cannot be made to pay for the same.
Reiterating the above, counsel for the Corporate Debtor prayed to dismiss the present Application.
Counsel for the Applicant filed its written submissions inter-alia stating as under:-
a. That the principle of res-judicata is not applicable to the present case. The Applicant has questioned the action of the 2nd Respondent in reclassifying the applicant as an Operational Creditor, reducing the claim amount and the manner in which the 2nd Respondent has asked the applicant to take delivery of the equipment and refused to include further lease amounts as CIRP costs. The aforesaid actions have been taken by the 2nd Respondent through its email dated 11.09.2019, after the passing of the order by the NCLT on 17.07.2019. Hence, there is no question of the application being barred by the principle of res-judicata.
b. That whether a lease is a financial lease or not has to be determined through the terms of the lease itself and not through the manner in which the lease rentals were paid or the manner in which the lease was terminated. The Lease Agreement entered into between the parties is clearly in the nature of a financial lease and the parties have themselves described it as a financial lease. In fact, the RP has also understood it to be a financial lease while admitting the claim of the Applicant.
c. That the Lease Agreement provides for transfer of all risks and rewards incidental to ownership in favour of the Lessee. The ownership of the asset need not be transferred unconditionally in case of a financial lease. The Lease Agreement provides that the Corporate Debtor would be free to utilize the equipment'for a period of 144 months (12 years) and provides for an option of purchase of the equipment at the end of the period, given that there is no default on the1 part of the Corporate Debtor.
d. That the observations of this Adjudicating Authority have been deliberately misinterpreted by the RP to prejudice the Applicant. The aforesaid observations do not discuss the nature of the Lease Agreement and no finding whatsoever has been recorded by this Adjudicating Authority that the Lease Agreement is not a financial lease. In fact, the question of whether the Lease Agreement is a financial lease or not was not before the NCLT and the NCLT was only dealing with the contention of the RP with respect to transfer of ownership of the asset. The NCLT has only made observations that even though the Lease was supposed to be for a period of 144 months the same was terminated prematurely due to default of the Corporate Debtor and hence the Corporate Debtor has not acquired the risk and rewards incidental to ownership. The observations of the NCLT are with respect to the default of the Corporate Debtor and cannot be used to determine the nature of the Lease Agreement which can only be determined by reference to the clauses of the Lease Agreement.
e. That the RP has reduced the admitted claim amount of the Applicant to Rs. 12,73,69,756/- claiming the sajme to be the outstanding lease rental amounts till the commencement of the Corporate Insolvency Resolution Process.
f. That as per the Lease agreement the Applicant is entitled to the Lease Termination Price. Clause 15.2.3 of the Lease Agreement provides that on termination of the Lease Agreement for default of the Corporate Debtor, the Lessor will be entitled to the Lease Termination Price which includes all the amount of lease rentals for the entire lease period, i.e., 12 years.
g. That the Adjudicating Authority in its order dated 17.07.2019 had specifically noted that the RP had already admitted a sum of Rs.60,68,03,736.16/- out of the claim of Rs.66,58,04,020.16/- and directed the RP to reconsider its decision with respect to the differential amount. The direction of the NCLT to reconsider is only with respect to the differential amount of 5 Crores and cannot be the basis for the arbitrary reduction of the claim amount to Rs. 12,73,69,756/-.
h. That the liability to return the equipment rests solely with the Lessee and it is clear from the presentation of L&T to the CoC that the equipment is not in a workable condition and as the railway tracks are damaged the equipment cannot be shifted till the necessary repair works are carried out. The RP has not disputed the above factual position. The Lease Agreement obligates the RP to return the equipment in a 'workable condition' The RP is contractually bound to carry out the necessary repairs before handing over the equipment.
i. That the action of the RP is unilaterally seeking to impose a penalty of Rs. 1 Lakh per day if the Applicant does not remove the equipment within seven days is high-handed and smacks of arbitrariness and mala-fides. The RP does not have the authority to impose a penalty on the Applicant.
j. That the RP cannot unilaterally decide to stop, inclusion of lease rentals in the CIRP costs on the pretext that it had offered to return the equipment. Therefore, the Applicant is entitled to inclusion of lease rentals as CIRP costs till the equipment is delivered to the Applicant in accordance with Clause 18 of the Lease Agreement.
Reiterating the above, counsel for the Applicant prayed to allow the Application as prayed for.
Heard both the sides and perused the record.
With regards to reclassification of the debt of the Applicant and in relation to the admission of the claim of the Applicant herein, it has already been dealt in depth by this Adjudicating Authority and Adjudicated upon by this Adjudicating Authority vide IA No. 115/2019 dated 17.07.2019, wherein it is held as under:-
:.....
It is a fact that from the claim made by the Applicant for a sum of Rs.66,58,04,020.16/- sum of Rs. 60,68,03,736.16/- has been admitted by the Resolution Professional and the differential amount, as per the contention of Resolution Professional, has been paid by Corporate Debtor as security deposit. However, from the copy of the letter dated 24.09.2011 filed along with the requested to be adjusted in each tranche of disbursement by Tata Capital Ltd. In view of the same, this Adjudicating Authority deems it fit to direct the Resolution Professional to reconsider its decision with respect to the differential amount and to verify from the books of accounts of the Corporate Debtor to decide on the issue of admitting the same.
With regard to inclusion of the scheduled equipments in the pool of Assets of the Corporate Debtor the Resolution Professional has relied on the Indian Accounting Standards ("Ind AS 17") that defines a finance lease as a lease which transfers substantially "all the risks and rewards" incidental to ownership of an asset. Title may or may not eventually be transferred. Disputes with respect to finance lease arise when there are two possible interpretation as to whether all the risks and rewards have been transferred. It is relevant to quote the following observations of Hon'ble Apex Court in this regard:
In Association of Leasing and Financial Services Company v. Union of India, the Supreme Court observed that in case of finance lease the lessee could use the asset for its entire economic life and thereby, acquires the risks and rewards incidental to the ownership of such assets.
Further, in Asea Brown Boveri Ltd v. Industrial Finance Corporation, the Supreme Court, while distinguishing a finance lease and an operating lease, held:
"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 disguised way of purchasing the asset with the help of a loan."
In the case in hand, it is observed that the lease Agreement was entered into between the Applicant and Corporate Debtor on 24.09.2011 but the lease, for the period of 144 months, took effect only from 04.05.2016, the date on which the scheduled equipments were installed at the agreed site. Therefore, the equipments could have been used by the Corporate Debtor only from 04.05.2016. Further, termination notice dated 27.10.2016 was issued by the Applicant terminating the lease for the occurrence of an event of default by Corporate Debtor. Hence, it observed that the lessee has not used the leased assets substantially the whole of its useful life and, therefore, has not acquired the risks and rewards incidental to the ownership of the leased assets. This Adjudicating Authority, therefore, finds that the factors observed by Hon'ble Supreme Court stated supra are not met with in the instant case as facts in the present case are otherwise and this Adjudicating Authority finds, that inclusion of the leased assets (scheduled equipments) in the pool of assets of the Corporate Debtor by the Resolution Professional as inappropriate. Thus, the scheduled equipments cannot be construed as the assets of the CD as contended by Resolution Professional and the scheduled equipments are in fact owned by the Applicant herein."
On perusal of the Order, it is observed that this Adjudicating Authority has directed the RP to reconsider the decision only to the extent of the differential amount, such being the case, the reduction of the claim of the Applicant from Rs.60,68,03,736.16/- to Rs. 12,73,69,756/- on the pretext of the order of this Adjudicating Authority is unfair and such reduction does not hold good in the eyes of Law.
Further in relation to the reclassification of the debt from Financial debt to Operational debt on the pretext of order of this Adjudicating Authority in para 8 86 9 of its judgement also does not hold any good as there is no any specific finding regarding classification of debt in the above referred order.
With regards to other prayers, this Adjudicating Authority observes that the equipment of the Applicant herein is lying in the premises of the Corporate Debtor and that the RP vide its letter dated 19.09.2019, has requested the Applicant to remove the Equipments from its premises and also indicated that it would charge a penalty of Rs. 1 lakh per day. Further it is not in dispute that the equipment is not in Workable condition' and the railway track is damaged, because of which the said Equipment could not be transferred to the Applicant.
The Applicant relied on the Clause 18 of the Lease Agreement, wherein it is stated that it would be the Lessee's obligation to ensure that the equipment is handed over in the same operating order and condition as originally delivered to the lessee and at a place notified by the Lessor at the cost of the Lessee. However, the Applicant herein itself has waived Clause 18 vide its letter dated 21.11.2018, written to the RP wherein it has made a request to permit Applicant to remove the Equipment from the premises of the Corporate Debtor, the cost of which was to be borne by the Applicant itself. Therefore, the applicant cannot insist on execution of Clause 18 in its original form.
Considering these facts and circumstances, this Adjudicating Authority, to put to rest the controversy surrounding this issue, hereby directs the RP to get the railway track repaired as soon as possible for transportation of Equipment in 'as is' condition. However, minor repair only, if any, required for smooth transportation of the Equipment, may be carried out. The cost for repair of Railway track shall be borne by the Corporate Debtor but the cost of removal and transportation of the impugned Equipment will be borne by the Applicant as proposed by it in its letter dated 21.11.2018.
This Adjudicating Authority further directs RP not to charge any penalty for keeping the equipment in the premises of the Corporate Debtor as the same is exorbitant and arbitrary.
In relation to the lease rentals during the CIRP, this Adjudicating Authority observes that the Applicant herein was willing to take out its Equipments from the premises of the Corporate Debtor as indicated by its letter dated 21.11.2018. However, due to some circumstances including disrepair of the railway track, it was unable to do so. Thus, the Applicant alone cannot be said to be in default for non-removal of the Equipment. Further, till the time equipment is lying in the premises of the Corporate Debtor, it is deemed to be used by the Corporate Debtor, as held at para 11 of the Order of this Adjudicating Authority vide IA No.115/2019 in CP(IB)No.276/7/HDB/2018 dated 17.07.2019. Therefore, this Adjudicating Authority deems it proper to direct the RP to include such amounts as CIRP costs towards the 'lease rentals' for the period starting from 29.08.2018 i.e., date of initiation of CIRP, till the date the railway tracks are made ready by the RP for removal of the Equipment from the premises of the Corporate Debtor by the Applicant.
Accordingly, Application bearing IA No. 994/2019 stands disposed of.