How to Prove Financial Debt in a Section 7 Application Arising From a Lease
Whether a lease arrangement produces financial debt decides who may file under Section 7 of the Insolvency and Bankruptcy Code, 2016, who sits on the committee of creditors and where a claim ranks. Section 5(8)(d) answers the question by importing an accounting test into the statute, which means the characterisation is settled by the substance of the agreements rather than by what they are called. The NCLT Allahabad order of August 20, 2026 in Achhru Ram Jindal and Others v. M/s Zebyte Rental Planet Private Limited, which treated a cloud storage sale and leaseback as a finance lease, shows how that test is applied. This guide sets out the steps.
Step 1: Start With the Statutory Text, Not the Agreement Title
Section 5(8)(d) brings within financial debt
"the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed".
Two features follow. First, the clause is not limited to documents calling themselves finance leases; the deeming is done by the accounting standards. Second, the opening words of Section 5(8) still apply, so the debt must be disbursed against the consideration for the time value of money. Establish both, and do so in that order.
Step 2: Identify Every Agreement in the Arrangement
Structures of this kind are usually split across documents and counterparties. In the Zebyte matter the investors bought storage units from one company and leased them to another, and the seller was an associate of the lessee. Assemble the full set before analysing any one of them:
The acquisition document: How the claimant came to own the asset, from whom, and on what payment terms.
The leaseback or monetisation document: Term, rental, any guaranteed minimum return, and termination rights.
Any service, maintenance or buyback side letter: These often carry the clauses that decide where risk sits.
Group structure: Whether the counterparties are related. Assets circulating within one group is a strong indicator that the arrangement is a financing.
Step 3: Run the Risks and Rewards Test
Ind AS 116 classifies a lease as a finance lease where it transfers substantially all the risks and rewards incidental to ownership. Work through the clauses rather than the recitals:
Who maintains and insures the asset: An obligation on the supplier or the lessee to maintain, keep up and insure throughout the term means the burdens of ownership never moved to the claimant.
Who can use or access the asset: Where the owner on paper cannot access the asset or the data on it, and waives information rights over it, the rewards of ownership sit elsewhere.
Who bears residual value risk: If fluctuations in residual value accrue to the lessee, or cancellation losses are borne by the lessee, the classification tilts to a finance lease.
Whether the return is guaranteed: A guaranteed minimum monthly return, irrespective of the performance or utilisation of the asset, is the economic signature of lending.
Step 4: Compare the Lease Term With the Economic Life
A lease term covering the major part of the economic life of the underlying asset is a recognised indicator of a finance lease. Pin both figures to evidence. The economic life should come from something contemporaneous and independent of the pleading, such as the manufacturer's specification, the depreciation policy or the issuer's own promotional material. In the Zebyte matter the stated server life of ten years matched a fixed lease term of 120 months, and the agreements prevented early termination, which closed the point.
Step 5: Assemble the Debt and the Default
Characterisation is only half of a Section 7 application. Establish the debt and the default on the same record:
Quantum: A precise figure, with the computation shown, rather than a rounded claim.
Date of default: Identify the first missed payment and plead the default date it produces. In Zebyte, payments ceased after September 2024 and default was pleaded from October 31, 2024.
Threshold: The minimum default is one crore rupees, specified under the proviso to Section 4 by notification S.O. 1205(E) dated March 24, 2020. Where individual investors fall below it, a joint application is the route.
Records: Bank statements evidencing disbursement and receipt, the rental schedule, and correspondence acknowledging the arrears.
Step 6: File and Anticipate the Operating Lease Defence
An application under Section 7 is made by a financial creditor, alone or jointly. Under Section 7(5) the adjudicating authority must admit the application where it is satisfied that a default has occurred, the application is complete and no disciplinary proceeding is pending against the proposed resolution professional, and must otherwise reject it.
Expect the corporate debtor to argue that the claimant is an ordinary lessor and the arrears are an operational claim. Meet it with the clause analysis from Steps 3 and 4 rather than with the commercial narrative, and address the documents individually before showing why they must be read together.
Common Pitfalls to Avoid
Pleading the label: An agreement headed as a lease or a sale proves nothing. Section 5(8)(d) asks what the accounting standards deem it to be.
Analysing one document in isolation: Where a sale and a leaseback are linked, the arrangement has to be read as a whole. Filing on the leaseback alone invites the answer that the claimant simply bought an asset.
Leaving economic life unevidenced: Asserting the useful life of the asset without a source leaves the strongest limb of the test unsupported.
Ignoring the time value requirement: The opening words of Section 5(8) are not surplus. A liability that is not disbursed against the consideration for the time value of money does not become financial debt merely because a lease is involved.
Filing individually below the threshold: Investors holding small tickets should consider a joint application rather than filing separately and failing on quantum.
Overlooking the classification at claim stage: A resolution professional who admits such claims as operational changes the composition of the committee of creditors, and that is harder to unwind later than to get right at the outset.
Key Statutory Provisions
Section 4 of the IBC, 2016: Minimum amount of default, specified as one crore rupees by notification S.O. 1205(E) dated March 24, 2020.
Section 5(8) of the IBC, 2016: Definition of financial debt, requiring disbursement against the consideration for the time value of money.
Section 5(8)(d) of the IBC, 2016: Liability under a lease or hire purchase contract deemed a finance or capital lease under the Indian Accounting Standards.
Section 7 of the IBC, 2016: Initiation of the corporate insolvency resolution process by a financial creditor, and the admission or rejection obligation under Section 7(5).
Ind AS 116: Lease classification by transfer of substantially all the risks and rewards incidental to ownership, with the lease term covering the major part of the economic life of the asset as an indicator of a finance lease.
Sources and References
Cloud Storage Sale-and-Leaseback Qualifies As Financial Lease Under IBC: NCLT Allahabad
Insolvency and Bankruptcy Code, 2016, Sections 4, 5(8), 5(8)(d) and 7
Ind AS 116 on Leases
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.
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