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NCLT Allahabad Bench Rules Cloud Storage Leaseback Arrangement Is Under IBC
The has delivered a significant ruling, holding that a involving cloud storage units qualifies as a " " under Section 5(8)(d) of the Insolvency and Bankruptcy Code (IBC), 2016. The bench, comprising Judicial Member Praveen Gupta and Technical Member Ashish Verma, admitted a Section 7 petition filed by 26 financial creditors against M/s Zebyte Rental Planet Private Limited, thereby initiating the against the company.
A Novel Investment Structure Unravels
The case revolved around an investment model where the applicants—ranging from individuals to partnership firms—purchased cloud storage "particles" (each of one terabyte) from M/s Vuenow Marketing Services Limited (VMSL) under an Asset Sale and Partner Programme Agreement (ASA). Simultaneously, they entered into an Asset Monetising Program Agreement (AMPA) with Zebyte Rental Planet, the corporate debtor, leasing these particles back to the company for a fixed term of 120 months. In return, Zebyte was contractually bound to pay monthly rentals, offering minimum guaranteed returns to the investors.
The arrangement operated smoothly until , after which Zebyte defaulted on its monthly payments. The first default was recorded on , prompting the financial creditors to file the insolvency application on . Despite multiple notices and even a newspaper publication, the corporate debtor failed to appear or file any response, leading to an .
Arguments: Substance Over Form
The financial creditors argued that the ASA and AMPA were not standalone contracts but inseparable parts of a single composite sale-and-leaseback transaction. They contended that the liability arising from the lease fell squarely within the definition of " " under Section 5(8)(d) of the IBC, which includes liabilities under a lease treated as a under Indian Accounting Standards.
Relying on Ind AS 116 (Leases), the creditors highlighted that the lease term (120 months) covered the major part of the asset's economic life (10 years), satisfying paragraph 63(c). They further pointed to clauses transferring risks and rewards: under Clause 8 of the ASA, VMSL (an associate of Zebyte) bore all maintenance, upkeep, and insurance costs, while Clause 9 of the AMPA waived the applicants' rights to access the particles or any data stored on them, effectively granting Zebyte full operational control. This, they argued, demonstrated that substantially all risks and rewards incidental to ownership had been transferred to the corporate debtor.
Legal Analysis: Applying Ind AS 116
The NCLT carefully examined the definitions under the IBC and Ind AS 116. classifies a lease as a if it transfers substantially all risks and rewards incidental to ownership. Paragraph 63 provides indicators, including when the lease term is for the major part of the asset's economic life.
The tribunal found that the ASA and AMPA, read together, satisfied these criteria. The lease term was coterminous with the 10-year serviceable life of the cloud particles, and the risk of maintenance lay with VMSL, while the rewards (exclusive use and data management) were enjoyed by Zebyte. Consequently, the arrangement constituted a , and the unpaid rentals amounted to a under Section 5(8)(d).
Key Observations
The tribunal emphasized the , stating:
"In view of the foregoing discussion, we are of the considered opinion that ASA and AMPA together fall under the definition of a '
' in terms of
... Therefore, it can be said that the ASA and AMPA, being a
as explained above, is covered within clause (d) of subsection (8) of Section 5 of IBC, 2016 and therefore, constitutes a
in terms of IBC."
It further noted that the default amount of ₹1,63,99,544.77 exceeded the threshold limit of ₹1 crore, and the application was filed within the three-year limitation period.
Decision and Implications
The NCLT admitted the Section 7 petition and ordered the initiation of CIRP against Zebyte Rental Planet Private Limited. A under Section 14 of the IBC was declared, prohibiting any legal proceedings or asset transfers by the corporate debtor. The tribunal appointed Mr. Dharmendra Kumar Bhasin as the and directed the suspended board of directors to hand over all records, passwords, and access to government portals.
The ruling clarifies that innovative investment structures involving digital assets, such as cloud storage, can be treated as financial leases under the IBC, providing a pathway for investors to seek insolvency remedies when such arrangements default. The case is scheduled for further proceedings on .
