The Supreme Court held that a society or Resident Welfare Association of homebuyers has no locus standi to intervene in insolvency proceedings against a real estate developer, as it is neither a creditor nor an authorised representative of allottees.
NEW DELHI: The Supreme Court determined that a society or Resident Welfare Association (RWA) of homebuyers lacks legal standing to intervene in insolvency proceedings initiated against a real estate developer, as it does not qualify as a creditor or an authorized representative of the allottees in the real estate project.
A Bench comprising Justices JB Pardiwala and R. Mahadevan stated:
“A society or Resident Welfare Association, not being a creditor in its own right and not recognised as an authorised representative of allottees under the IBC, has no locus standi to intervene in proceedings arising out a Section 7 petition.”
Factual Background Of the Case
This case concerned the insolvency process against the real estate developer Takshashila Heights India Private Limited, which had borrowed Rs 70 crore in 2018 from ECL Finance Limited for a residential-cum-commercial project named “Takshashila Elegna” in Ahmedabad.
Subsequently, the debt was assigned to Edelweiss Asset Reconstruction Company Ltd. (EARCL), which initiated recovery actions under the SARFAESI Act and before the Debt Recovery Tribunal. In 2023, the parties entered into a Restructuring-cum-One Time Settlement (OTS) agreement for ₹55 crores. After partial payment and further defaults, the settlement was canceled and insolvency proceedings were launched.
In November 2024, the National Company Law Tribunal (NCLT) in Ahmedabad dismissed the insolvency application, arguing that the insolvency law was being misused as a recovery tool and that the project’s completion status could harm homebuyers.
EARCL thereafter filed a Section 7 IBC application before the NCLT. The NCLT dismissed the petition, holding that IBC was being misused as a recovery tool and that CIRP would prejudice homebuyers. On appeal, the NCLAT reversed the order and admitted CIRP, while rejecting the intervention application filed by Elegna Co-operative Housing Society, representing homebuyers. This led to appeals before the Supreme Court.
LEGAL ISSUES:
The two questions that arise for consideration, are as follows:
- Whether the NCLAT was correct in admitting Corporate Debtor into the Corporate Insolvency Resolution Process?
- Whether the NCLAT was correct in rejecting the Intervention application filed by the Society?
ANALYSIS OF THE COURT
The Supreme Court interpreted the legislative framework of the Insolvency and Bankruptcy Code, 2016 (IBC), tracing the doctrinal development of Section 7 proceedings and evaluating the competing stakes of financial creditors, corporate debtors, and homebuyers.
1. Ambit of Section 7 Proceedings
The Court reiterated that an application under Section 7 of the IBC is premised on a creditor-initiated, trigger-based mechanism, where the existence of a financial debt and occurrence of default are the only determinative factors. Referring to the settled law in Innoventive Industries Ltd. v. ICICI Bank and E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd., the Court reaffirmed that once these twin conditions are satisfied, the Adjudicating Authority is statutorily bound to admit the application.
The Court disapproved the approach adopted by the NCLT, which had declined admission by considering factors such as near completion of the project, financial viability, and the possible adverse impact on homebuyers. It held that while such considerations may assume relevance during the resolution phase, they are beyond the limited scope of inquiry contemplated at the admission stage, which is designed to be summary, objective, and time efficient.
2) Limited Exception under Vidarbha Industries
Dealing with the corporate debtor’s reliance on Vidarbha Industries Power Ltd. v. Axis Bank Ltd., the Court clarified that the decision does not vest the Adjudicating Authority with broad discretion to reject a Section 7 application despite an admitted default. The Court described Vidarbha Industries as an exceptional ruling confined to its peculiar facts, applicable only where the corporate debtor holds a crystallised, legally enforceable claim capable of fully offsetting the debt in question.
Placing reliance on M. Suresh Kumar Reddy v. Canara Bank, the Court emphasised that Vidarbha does not override or weaken the ratio laid down in Innoventive Industries and E.S. Krishnamurthy.
3. Distinction between Insolvency and Recovery Mechanisms
The Court also addressed the allegation that the financial creditor had misused the IBC as a recovery instrument by pursuing remedies simultaneously under the SARFAESI Act and before the Debt Recovery Tribunal. Rejecting this submission, the Court held that the existence or pendency of parallel recovery proceedings does not preclude the initiation of CIRP, provided the statutory conditions under Section 7 are fulfilled.
The judgment stated,
“The Code does not prohibit a financial creditor from invoking CIRP merely because recovery proceedings under the SARFAESI Act or before the DRT are pending or have been initiated. Section 238 accords overriding effect to the Code, and upon admission, the moratorium under Section 14 stays all such proceedings,”
Citing Kotak Mahindra Bank Ltd. v. A. Balakrishnan and Tottempudi Salalith v. SBI, the Court reiterated that default is the foundational trigger for insolvency, and the outcome of recovery actions may itself constitute a fresh cause of action under the IBC. It further clarified that allegations of abuse of process must be specifically established under Section 65 of the Code, and the mere invocation of multiple legal remedies does not, by itself, demonstrate mala fide intent.
4. Viability and the Domain of Commercial Wisdom
The Supreme Court unequivocally held that issues relating to the feasibility, revival, or commercial sustainability of the corporate debtor fall squarely within the jurisdiction of the Committee of Creditors (CoC). Such matters cannot be examined at the admission stage. Reiterating the doctrine of non-justiciability of the CoC’s commercial decisions, the Court referred to K. Sashidhar v. Indian Overseas Bank and Essar Steel v. Satish Kumar Gupta.
The Court cautioned that permitting NCLTs to reject Section 7 applications on perceived notions of viability would dilute the core objective of the IBC, which is to ensure a swift, predictable, and creditor-driven insolvency resolution process.
5. Protection of Homebuyers under the IBC
Recognising the legitimate concerns of homebuyers in real estate insolvencies, the Court observed that the IBC has progressively strengthened their position by conferring upon them the status of financial creditors. Their interests, the Court noted, are statutorily protected through representation in the CoC via authorised representatives.
The Court asserted,
“The interests of homebuyers are undoubtedly of paramount importance. However, such interests must be protected strictly within the legal framework,”
However, the Court warned against converting the admission stage into a forum for equitable balancing among stakeholders. It held that introducing such discretion at the threshold would undermine legal certainty and expose the insolvency process to subjective and inconsistent adjudication.
6. Standing of the Housing Society
On the question of intervention, the Court distinguished between individual allottees recognised as financial creditors and a co-operative housing society seeking to participate in appellate proceedings. Relying on GLAS Trust Company LLC v. BYJU Raveendran, the Court held that Section 7 proceedings, prior to admission, are essentially in personam, involving only parties to the debt-default relationship.
As the housing society was neither a contracting party nor a stakeholder recognised under the IBC, it was held to lack the requisite locus standi. The Court emphasised that participatory rights under the Code are structured and institutional in nature, and cannot be expanded through ad hoc interventions.
Final Decisions Of The cou
The Court noted that RWAs are generally formed for managing common facilities and cannot litigate on behalf of allottees or claim representative authority in judicial forums (including those responsible for insolvency-related matters) without specific legal recognition or valid authorization.
The Court elaborated.
“Any contrary interpretation would impermissibly enlarge the statutory definition of ‘financial creditor’, encroach upon individual rights of allottees, and create an extra-statutory layer of representation. It would also enable errant corporate debtors to obstruct and delay insolvency proceedings under the guise of purported collective interests,”
The Court dismissed the NCLT’s reasoning, which had refused to admit insolvency proceedings due to potential harm to homebuyers, and reiterated that the initial inquiry in insolvency cases is solely to assess whether a default in debt payment exists.
It emphasized that at the admission stage, insolvency proceedings are primarily between corporate debtors and their creditors, without the inclusion of third parties such as homebuyers’ societies who have no right to be heard at this stage.
Moreover, it noted that a homebuyers’ society cannot claim the right to be heard at the appellate level without a foundational entitlement to participate in the proceedings before the NCLT or NCLAT. The Court also clarified that insolvency proceedings cannot be rejected solely because lenders are pursuing recovery actions under other laws, such as the SARFAESI Act or before the Debts Recovery Tribunal.
It held that the insolvency framework allows a financial creditor to seek insolvency remedies alongside other recovery processes and that pending actions do not bar the initiation of insolvency proceedings. While expressing disapproval of creditors engaging in parallel remedies, the Court clarified that such actions are not inherently unlawful and do not invalidate insolvency proceedings.
Any overlapping issues are resolved once insolvency is initiated, as the statutory moratorium halts all recovery actions, the Court observed.
The Court dismissed the appeals and upheld the NCLAT’s decision in this matter.
Elegana, the homebuyers’ society, was represented by Senior Advocate Madhavi Divan, along with Advocates Purti Gupta, Arjun Sheth, Rishabh Shah, and Pooja Aggarwal.
EARCL was represented by Senior Advocate P. Nagesh, supported by Advocates Abhishek Agarwal, Atul Sharma, Renuka Iyer, Aditya Vashith, and Anmol Bansal.
Takshashila Heights (developer) was represented by Senior Advocate Nikhil Goel, along with Advocates Heena George and Sunidhi Sah.
Case Title: Elegana Co-op Housing and Commercial Society Vs Edleweiss Asset Reconstruction Company Limited
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