Supreme Court Restricts Speculative Investors from Misusing IBC

The Supreme Court recently issued a landmark ruling stating that speculative participants driven by profit motives cannot misuse the Insolvency Bankruptcy Code (IBC) provisions. The court directed the Union Government to establish a revival fund to provide financing for stressed real estate projects undergoing insolvency proceedings. This decision aims to protect genuine homebuyers and ensure the integrity of the IBC framework.

The case, involving Mansi Brar Fernandes, a homebuyer who filed an application under Section 7 of the IBC, was initially admitted by the National Company Law Tribunal (NCLT). However, the National Company Law Appellate Tribunal (NCLAT) reversed this decision, labeling Fernandes as a “speculative investor” rather than a genuine homebuyer. The NCLAT set aside the admission of the Section 7 application, a decision that was further upheld by the Supreme Court.

Fernandes had entered into a Memorandum of Understanding (MoU) with Gayatri Infra Planner Pvt. Ltd. for the purchase of four flats in Greater Noida. She paid Rs. 35,00,000 as part consideration and the MoU included a buy-back clause exercisable solely at the discretion of the Corporate Debtor. Despite the MoU being extended twice, the flats were neither delivered, nor was the payment made. Post-dated cheques worth Rs. 1 crore provided by the Corporate Debtor were dishonored, leading Fernandes to initiate IBC proceedings and proceedings under the Negotiable Instruments Act, 1881.

The NCLT initially admitted the application, but the NCLAT overturned this decision, citing Fernandes as a speculative buyer. The appellants, including Fernandes, challenged the NCLAT's order, arguing that the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, did not apply to their case since their application was filed before the ordinance was promulgated. The Supreme Court, however, upheld the NCLAT's decision, emphasizing that speculative participants cannot misuse the IBC.

The court reiterated that while investors are integral to any industry and their interests warrant protection, the IBC is primarily designed to protect genuine homebuyers and facilitate the revival of sick companies. Speculative participants driven purely by profit motives have alternative remedies under consumer law, RERA, and civil courts.

The Supreme Court also highlighted the constitutional right to shelter, an integral part of the right to life under Article 21. This recognition places a duty on the state to ensure access to adequate housing, particularly for weaker sections. The court emphasized the social purpose embedded in housing as a fundamental right and the need to protect genuine homebuyers from collateral prejudice.

To address the issues in the real estate sector, the Insolvency and Bankruptcy Board of India (IBBI) has been directed to constitute a council in consultation with RERA authorities to frame specific guidelines for insolvency proceedings in real estate. These guidelines will include timelines for project-wise Corporate Insolvency Resolution Process (CIRP) and safeguards for allottees. The resolution of real estate insolvency should proceed on a project-specific basis to protect solvent projects and genuine homebuyers.

The Union Government has been advised to consider establishing a revival fund under the National Asset Reconstruction Company Limited (NARCL) or expanding the Sustainable Urban and Rural Access to Housing (SWAMIH) Fund. This fund will provide bridge financing for stressed projects undergoing CIRP, preventing the liquidation of viable projects and safeguarding homebuyer interests. The SWAMIH Fund, while commendable, must be utilized strictly for its intended purpose of last-mile financing.

The court's decision aims to restore faith in the regulatory and insolvency framework, deter speculative misuse, and ensure that the “dream home” of India’s citizens does not turn into a lifelong nightmare. The findings of the NCLAT, holding the appellants (Mansi Brar Fernandes and Sunita Agarwal) to be speculative investors, have been affirmed. However, the appellants are at liberty to pursue their remedies before the appropriate forum in accordance with the law, with the bar of limitation not applying.

Through these directions, the Supreme Court seeks to balance the interests of genuine homebuyers, investors, and the broader real estate sector. The decision is expected to bring stability and fairness to the insolvency process in the real estate domain.