Real Estate Insolvency Resolution: Project-Specific Approach Protects Homebuyers

The Supreme Court has issued a landmark ruling that real estate insolvency resolutions under the Insolvency and Bankruptcy Code (IBC) should, as a rule, proceed on a project-specific basis rather than against the entire corporate debtor. This decision, made by a Bench of Justices JB Pardiwala and R Mahadevan, aims to protect solvent projects and genuine homebuyers from collateral prejudice.

The Court emphasized that this approach is essential to prevent solvent projects and genuine homebuyers from facing unnecessary prejudice. The judgment was delivered in a batch of four appeals against a verdict of the National Company Law Appellate Tribunal (NCLAT).

The Court also affirmed NCLAT’s findings that two appellants, Mansi Brar Fernandes and Sunita Agarwal, were speculative investors and thus, ineligible to trigger the Corporate Insolvency Resolution Process (CIRP). The case involved four consolidated appeals related to two real estate companies: Gayatri Infra Planner Private Limited and Antriksh Infratech Pvt. Ltd.

Mansi Brar Fernandes had entered into a Memorandum of Understanding dated April 6, 2016, paying Rs. 35 lakh for four flats with a buyback clause that would return Rs. 1 crore within 12 months at the developer's discretion. Sunita Agarwal had invested Rs. 25 lakh in July 2015 under an agreement providing assured returns of 25% per annum after 24 months, with a compulsory buyback clause and profit-sharing provisions. Both agreements repeatedly referred to the transactions as “investments” with guaranteed returns.

When the developers failed to honor their commitments, both appellants filed Section 7 applications under the IBC. The National Company Law Tribunal initially admitted these applications, but the National Company Law Appellate Tribunal reversed these decisions, classifying both appellants as speculative investors rather than genuine homebuyers. The matter thus reached the Supreme Court.

The Supreme Court affirmed NCLAT’s findings, establishing that both appellants fell within the category of speculative investors. The Court noted that Fernandes' agreement was, in substance, a buyback contract and not an agreement to sell flats, while Agarwal's arrangement contained a risk-free exit option, confirming that possession was never intended. The judgment emphasized that speculative investors cannot misuse the IBC as a debt recovery mechanism.

The Court outlined six non-exhaustive indicators for identifying speculative investors: - Agreements that substitute possession with buyback or refund options - Insistence on refund with high interest coupled with refusal to accept possession - Purchase of multiple units, especially in double digits - Special rights, preferential treatment, or unusual privileges to the allottee - Significant deviation from the RERA Model Agreement - Unrealistic interest rates and promises of 20-25% returns over short durations

The Court clarified that possession of a dwelling unit remains the sine qua non of a genuine homebuyer's intent. The judgment also reaffirmed housing as a fundamental right under Article 21, stating that a home is not merely a roof over one's head but a reflection of one's hopes and dreams, a safe space for a family, and a refuge from the worries of the world. The Court emphasized the State's constitutional obligation to protect homebuyers and ensure that developers are not permitted to defraud or exploit them.

Pertinently, the Court also issued significant directions to strengthen the IBC framework and for institutional reforms. The Court directed that vacancies in NCLT/NCLAT be filled “on a war footing” with dedicated IBC benches and additional strength. The Union Government must file a compliance report within three months on infrastructure upgrades.

The Court further directed that a committee chaired by a retired High Court judge should be constituted within three months to suggest reforms to infuse credibility into the real estate sector. The committee must include representatives from law and housing ministries, domain experts from NIUA, HUDCO's HSMI, IIMs, NLUs, and NITI Aayog. The committee must submit reform recommendations within six months.

States must ensure RERA authorities are adequately staffed with at least one legal expert or consumer advocate with proven real estate expertise on every RERA panel. “Failure to do so, resulting in miscarriage of justice, shall amount to an error unpardonable in law and may invite strict intervention by this Court,” the Court warned.

The Court also directed a comprehensive periodic performance audit of the SWAMIH Fund by the Comptroller and Auditor General, with reports to be placed in the public domain. “Every rupee must be utilized strictly for its intended purpose of last-mile financing,” the Court stated. For nascent projects where construction hasn't commenced, proceeds from allottees must be placed in escrow accounts and disbursed in phases aligned with project progress per RERA-sanctioned procedures.

The Court ruled that the 2019 IBC Amendment Ordinance requiring threshold compliance (100 allottees or 10% of total allottees) would apply to the present case based on the legal principle that “an act of the Court shall prejudice no one.” The Court found that while orders had been reserved before the ordinance's promulgation, the amendment was applicable since the petition was still pending when it came into effect.