Cloud Storage Sale-and-Leaseback Qualifies As Financial Lease Under IBC: NCLT Allahabad

The National Company Law Tribunal, Allahabad Bench has held that a sale-and-leaseback arrangement created through two linked agreements constituted a “financial lease” under the Insolvency and Bankruptcy Code, 2016.

The arrangement involved applicants first purchasing cloud storage units from Vuenow Marketing Services Limited (VMSL) and then leasing the same units to Zebyte Rental Planet Private Limited for 10 years in return for monthly payments.

The court observed, “In view of the foregoing discussion, we are of the considered opinion that ASA and AMPA together fall under the definition of a 'financial lease' in terms of paragraph 62 of IND AS 116. i.e. 'substantially transfers all risk and rewards' and paragraph 63 (c) of IND AS 116. i.e., the lease term is for the major part of the economic life of the underlying asset even if title is not transferred. Therefore, it can be said that the ASA and AMPA, being a financial lease as explained above, is covered within clause (d) of subsection (8) of Section 5 of IBC, 2016 and therefore, constitutes a financial debt in terms of IBC.”

The coram comprising Judicial Member Praveen Gupta and Technical Member Ashish Verma made the ruling while admitting a Section 7 insolvency application against Zebyte.

The case involved 26 applicants who purchased one-terabyte cloud storage units, described as “Particles”, from VMSL. Under the Asset Sale and Partner Programme Agreement (ASA), they made one-time payments towards the purchase of the units.

They then entered into the Asset Monetizing Program Agreement (AMPA), under which the particles were leased to Zebyte. Zebyte was required to make monthly rental payments for the serviceable life of the particles, for up to 120 months or 10 years. The arrangement offered minimum guaranteed returns to the applicants.

The applicants argued that the ASA and AMPA were linked parts of a single sale-and-leaseback transaction. They claimed that the liability arising from the lease amounted to financial debt under the IBC.

The tribunal examined the arrangement under Ind AS 116, the accounting standard dealing with leases. Under the standard, a lease is a financial lease when it substantially transfers the risks and rewards associated with ownership.

A lease term covering the major part of an asset's economic life is also an indicator of a financial lease.

On the risks associated with the cloud storage particles, the court noted that Clause 8 of the ASA required VMSL to bear their maintenance, upkeep and insurance during the lease period. The court also noted that VMSL was an associate company of Zebyte.

The court then considered the rewards associated with ownership. Clause 9 of the AMPA prevented the applicants from accessing the particles or information about the data stored in them. They also waived their rights to information about the content hosted on the particles.

The court observed that the applicants had therefore given up their rights over the underlying assets, while the rewards from the cloud storage particles were to be enjoyed by Zebyte.

The 10-year lease period also supported the classification. Clause 7 of the ASA fixed the lease tenure at 120 months, while Clause 8 of the AMPA provided for a 10-year term and prevented termination before its expiry.

The investment brochure stated that the server life of the cloud storage particles was 10 years. The court therefore found that the lease covered the major part of the assets' economic life and satisfied paragraph 63(c) of Ind AS 116.

Section 5(8)(d) of the IBC includes a liability arising from a lease or hire-purchase contract treated as a finance or capital lease under the applicable accounting standards within the definition of financial debt. Since the court found that the ASA and AMPA together constituted a financial lease, it held that the liability arising from the arrangement constituted financial debt.

Zebyte stopped making the monthly rental payments after September 2024, with October 31, 2024 recorded as the first date of default. The applicants claimed ₹1,63,99,544.77 in outstanding dues.

The tribunal found that the debt was above the applicable ₹1 crore threshold and that the default was established. It admitted the Section 7 application and ordered commencement of the Corporate Insolvency Resolution Process against Zebyte.

The tribunal also appointed Dharmendra Kumar Bhasin as the Interim Resolution Professional.