Insolvency and Bankruptcy Code, 2016 – s.7 – NCLAT set aside the NCLT’s order and reversed the admission of the application filed u/s.7 by the appellants, holding that they were “speculative investors” and not genuine homebuyers/financial creditors – Appellants, if fall within the category of “speculative investors” disentitling them from initiating proceedings u/s.7:
Held: 1.1 Yes – In C.A No. 3826 of 2020, the MoU executed reveals that possession was never contemplated – The agreement stipulated a buyback whereby Rs.35 lakhs invested would be returned with an additional Rs.65 lakhs as premium within 12 months – Though four apartments were notionally “allotted”, the appellant paid only Rs.35 lakhs with no provision for the balance – Instead, the corporate debtor issued post-dated cheques of Rs.1 crore, which were repeatedly dishonoured – Successive extensions of the MoU were granted without justification, and the appellant invoked proceedings u/s.138, N.I. Act for recovery. [Para 18.5]
1.2 Thus, the appellant’s true interest lay in assured returns, not possession – The MoU was in substance a buyback contract, not an agreement to sell flats – By the standard in Pioneer Urban case, the appellant was a speculative investor, disentitling her from invoking s.7. [Para 18.5]
1.3 Further, in C.A. No. 3903 of 2022, the MoU provided for an investment of Rs.25 lakhs per unit with assured returns of 25% per annum after 24 months – It contained a compulsory buyback clause and provisions for profit-sharing over and above guaranteed returns – The repeated use of the term “investment” coupled with a risk-free exit option, confirms that possession was never intended – While the NCLT admitted the appellant’s s.7 application ex parte, the NCLAT correctly reversed the order – A homebuyer cannot simultaneously demand refund with guaranteed returns while retaining the option to refuse possession. [Para 18.6]
1.4 On the facts and law, both the appellants are speculative investors – Their claims are in the nature of recovery, not insolvency resolution – Findings of the NCLAT treating the appellants as speculative investors upheld – Both impugned orders, setting aside admission of the s.7 applications, affirmed. [Paras 18.7, 18.8] Insolvency and Bankruptcy Code, 2016 – Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 – IBC (Amendment) Act, 2020 – Appellants in C.A. No. 540 of 2021 and C.A. No. 5495 of 2025 assailed the first impugned order passed by NCLAT on the limited ground of non-compliance with the 2019 Ordinance, promulgated on 28.12.2019 – Appellants stated that the s.7 petition under the IBC filed by Respondent No.1 on 02.01.2020, was reserved on 04.12.2019, i.e., prior to the promulgation of the Ordinance – As on 28.12.2019, the application was still pending consideration – Thus, the Ordinance and the subsequent Amendment Act squarely applied to the proceedings and the failure of Respondent No.1 to satisfy the threshold requirement mandated under the Ordinance was fatal to the maintainability of the petition – NCLAT held that the Ordinance (later enacted as Amendment Act, 2020) was inapplicable to the present case: Held: Once orders were reserved, the appellant could not have complied with the Ordinance until pronouncement – To insist otherwise would be to compel the appellant to perform an impossibility contrary to the maxim lex non cogit ad impossibilia – The outcome on grounds of equity should be determined as on the date the order was reserved, and no subsequent legislative or administrative change should prejudice the parties – Where orders were already reserved prior to the promulgation of the Ordinance, the requirement cannot be retrospectively enforced so as to defeat vested rights – The subsequent compliance by the appellant during appellate proceedings sufficiently cures the defect, and the act of the Court must not prejudice the litigant – Therefore, the finding of the NCLAT in respect of the inapplicability of the Ordinance/Amendment Act to the facts of the present case requires interference, and the first impugned order is set aside to that effect – Ordinance/Amendment Act is squarely applicable to the facts of the present case. [Paras 19.6, 19.7] Directions by Supreme Court – In the larger interests of bona fide homebuyers and the stability of the real estate sector – Insolvency and Bankruptcy Code, 2016 – Real Estate (Regulation and Development) Act, 2016 (RERA) – Right to shelter, an integral part of the right to life u/Art.21 of the Constitution of India – Constitutional obligation of the state to protect homebuyers:
Held: 1.1 Vacancies in NCLT / NCLAT shall be filled on a war footing – Dedicated IBC benches with additional strength should be constituted – Services of retired judges may be utilized on ad hoc basis until regular appointments are mad – This Court is cognizant of the fact that similar directions have been issued in the past, including in Pioneer Urban case, but no effective step has been taken on the ground. [Para 21.2]
1.2 The Union Government shall, within three months, file a compliance report on measures taken to upgrade NCLT/NCLAT infrastructure nationwide – The recent closure of Chandigarh NCLT and portions of Delhi NCLT due to water seepage in the Courtrooms and Chambers of Members underscores the urgency of robust infrastructural support. [Para 21.2]
1.3 Within three months, a Committee chaired by a retired High Court Judge shall be constituted, with representatives from the Ministry of law, Ministry of Housing, domain experts in Real Estate, Finance and IBC from NIUA, HUDCO’s HSMI, IIMs, NLUs, and NITI Aayog, as well as two eminent industry representatives – The Committee shall suggest commercially viable systemic reforms for cleansing and infusing credibility into the real estate sector – NITI Aayog/ NIUA shall provide research and secretarial support – The Committee shall submit its report within six months of its constitution. [Para 21.2]
1.4 States shall ensure that RERA authorities are adequately staffed with infrastructure, experts, and resource – At least one member of every RERA must be a legal expert or consumer advocate with proven expertise in real estate field – RERAs must conduct thorough diligence before granting approval to any project – 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. [Para 21.2]
1.5 Since real estate is the second largest sector in IBC proceedings, IBBI , in consultation with RERA authorities, shall constitute a council to frame specific guidelines for insolvency proceedings in real estate, including timelines for project-wise CIRP, and safeguards for allottees. [Para 21.2]
1.6 Resolution of real estate insolvency should, as a rule, proceed on a project-specific basis rather than the entire corporate debtor, unless circumstances justify otherwise – This would protect solvent projects and genuine homebuyers from collateral prejudice – IBBI shall also devise a mechanism to enable handover of possession to willing allottees where substantial units in a project are complete. [Para 21.2]
1.7 The Union Government shall consider establishing a revival fund under NARCL or expanding the SWAMIH Fund, to provide bridge financing for stressed projects undergoing CIRP, thereby preventing liquidation of viable projects and safeguarding homebuyer interests – SWAMIH Fund is a commendable initiative; however, being a large fund involving public money, every rupee must be utilised strictly for its intended purpose of last-mile financing – To prevent misuse, directed that a comprehensive periodic performance audit by the CAG be carried out, with reports placed in the public domain in a form comprehensible even to laypersons. [Para 21.2]
1.8 Regulations shall ensure meaningful representation of allottees in the CoC through authorized representatives, with safeguards against conflicts of interest. [Para 21.2]
1.9 At the admission stage of s.7 petitions filed by allottees, NCLTs must record a prima facie finding on whether the applicant is a genuine homebuyer or speculative investor – This would prevent unnecessary admissions and reduce docket burden. [Para 21.2]
1.10 The Government shall prioritize e-filing, video-conferencing, and dedicated case management systems for IBC matters, in view of the heavy caseload before NCLTs. [Para 21.2]
1.11 Every residential real estate transaction for new housing projects shall be registered with local revenue authorities upon payment of at least 20% of the property cost by buyer/allottee – Further, to protect senior citizens and bona fide homebuyers, contracts that significantly deviate from the Model RERA Agreement to Sell, or that incorporate returns/buyback clauses where the allottee is over the age of 50, must be supported by an affidavit sworn before the competent Revenue Authority, certifying that the allottee understands the attendant risks. [Para 21.2]
1.12 In projects at nascent stages, such as where land is yet to be acquired or construction has not commenced, proceeds from allottees shall be placed in an escrow account and disbursed in phases aligned with project progress, as per a RERA-sanctioned SOP – Every RERA shall devise such SOPs within six months from today. [Para 21.2]
Insolvency and Bankruptcy Code, 2016 – Suggestions by Supreme Court – To the Union Government, for future reform – To protect the interests of genuine homebuyers; the economy at large and fortify safeguards for bona fide homebuyers – Real Estate (Regulation and Development) Act, 2016 (RERA). [Para 21.2]
Insolvency and Bankruptcy Code, 2016 – Distinction between speculative investors and genuine homebuyers – Role of speculative investors in residential real estate – Speculative investors cannot misuse the remedial framework of the Insolvency and Bankruptcy Code:
Held: While investors are integral to any industry and their interests warrant protection, speculative participants driven purely by profit motives cannot be permitted to misuse the Insolvency and Bankruptcy Code, which is a remedial framework conceived for revival and the protection of sick companies and, in the case of real estate, genuine homebuyers – Such investors have alternative remedies under consumer law or RERA and even recourse to Civil Courts in appropriate cases – To admit speculative claims into insolvency proceedings would dilute the intelligible differentia underlying the legislative scheme, destabilize the residential real estate sector, and erode the social purpose embedded in housing as a fundamental right. [Para 21]
Words and Phrases – “Speculation” and “Speculator” – Definition – Discussed. [Para 18.4]
Insolvency and Bankruptcy Code, 2016 – Objectives of the IBC – Legislative recognition of homebuyers – Safeguards introduced against speculative misuse – Discussed. [Paras 5 - 5.4] Insolvency and Bankruptcy Code, 2016 – Criteria to identify speculative investors – Determination of whether an allottee is a speculative investor, must be holistic, having regard to the terms of the agreement, the allotment letter, the payment terms, and the overall conduct of the allottee: Held: Criteria to identify speculative investors (i) expectation of unusually high profits; and (ii) activity in the nature of business or trade – Non-exhaustive indicators include: (1) If the agreement substitutes possession with a buyback or refund option, or any other special arrangement, the allottee is likely a speculative investor –
(2) Insistence on refund with high interest, coupled with refusal to accept possession would indicate speculation – (3) Purchase of multiple units, especially in double digits, shall invite greater scrutiny, though it is not conclusive – If the terms of the agreement provide for possession or refund in the event of failure to give possession alone, this factor may not be held against the allottee –
(4) Special rights, preferential treatment, or unusual privileges to the allottee would signal investment intent – (5) Deviation from the RERA Model Agreement shall be a crucial indicator as to the nature of the transaction-the greater the departure, the greater the likelihood of speculation – (6) Unrealistic interest rates and promises of 20-25% returns over a short duration are indicative of speculation – However, the distinction between speculative investors and genuine homebuyers is relevant only at the stage of initiation of CIRP – Such allottees are not barred from filing claims for the principal amount invested, or from pursuing remedies before other fora in accordance with law. [Paras 18.4.4, 18.4.5, 18.4.6]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Divya Pandey. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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