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CS Professional · Insolvency and Bankruptcy - Law and Practice · Debt Recovery and Securitization

Kiran Auto Ltd leased a machine to Rao Engineering under an agreement under which Rao pays fixed instalments for five years and becomes owner of the machine on paying an agreed residual amount at the end. Which description fits this arrangement under the Act's definitions?

It is a financial lease. The Act describes it as a lease of a tangible asset with periodic payments, under which the lessee becomes the owner at the end of the term or on paying the agreed residual amount. Rao's ownership on paying the residual amount matches this.

  1. AA financial lease, because the lessee becomes owner on payment of the agreed residual amountCorrect
  2. BAn operating lease, because the lessor keeps title during the term
  3. CA mortgage of immovable property
  4. DA debt security listed under SEBI regulations

Explanation

The Act defines financial lease as a lease of a tangible asset, other than a negotiable instrument or document, transferring the lessor's right for a certain time against periodic payments, where the lessee becomes owner at expiry or on payment of the agreed residual amount. The facts match exactly. The operating lease option is not a defined term here and ownership passing defeats it.

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