2025 (9) TMI 879 - SC - IBC

Speculative investors barred from using Section 7 for debt recovery; admissions set aside, other remedies preserved

Mansi Brar Fernandes, Ashlesh Gupta And Anr., Sunita Agarwal Versus Shubha Sharma And Anr., Mansi Brar Fernandes And Anr., Ankit Goyat And Anr.

The SC held the applicants to be speculative investors and affirmed that speculative allottees cannot invoke Section 7 as a debt-recovery tool; the ... Entitlement of speculative investors from initiating proceedings under Section 7 of the IBC - applicability of Ordinance / Amendment Act introducing threshold requirements for filing of Section 7 IBC applications by allottees. Speculation in real estate and Pioneer Urban - HELD THAT:- This Court in Pioneer Urban Land and Infrastructure Ltd v. Union of India [2019 (8) TMI 532 - SUPREME COURT], while upholding the constitutional validity of the 2018 amendment recognising allottees as financial creditors, drew a crucial distinction between genuine homebuyers and speculative investors. It clarified that speculative investors cannot be permitted to misuse the Code as a debt recovery mechanism. The judgment struck a balance: ensuring representation of genuine homebuyers in the CoC, while shielding developers and projects from being derailed by investors who never intended to take possession - Pioneer Urban held that once a prima facie default is established under Section 7 of the Code, the burden shifts onto the developer to demonstrate that the applicant is a defaulter, or that the process has been invoked fraudulently, with malicious intent, or by a speculative investor. These safeguards were intended to prevent “trigger-happy” investors from destabilising projects or prematurely driving developers into insolvency. Criteria to identify speculative investors - HELD THAT:- In Jute Investment Co. Ltd v. CIT [1979 (10) TMI 4 - SUPREME COURT], this Court held that for a transaction to fall outside the ambit of “speculative” under the Income-tax Act, 1961, actual delivery of the commodity is essential. By analogy, where an allottee has no intention to take delivery of the unit, the arrangement assumes the character of a speculative transaction. Thus, the 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 - it must be clarified that 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. The findings of the NCLAT treating the appellants as speculative investors warrant no interference. Both impugned orders, setting aside admission of the Section 7 applications, stand affirmed. However, liberty is reserved to the appellants to pursue their remedies before appropriate fora in accordance with law. In such proceedings, the bar of limitation shall not apply, in line with settled jurisprudence of this Court. Applicability of Ordinance / Amendment Act to the facts of the present case - HELD THAT:- Section 7 IBC, as amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, enforced with effect from 28.12.2019, added a proviso to sub-section (1) before the explanation, providing a threshold limit for initiation of CIRP at the instance of allottees under a real estate project. It mandated that an application shall be filed jointly by not less than 100 allottees or not less than 10% of the total number of such allottees under the same real estate project, whichever is less. It further provided that where an application for initiating the CIRP against a corporate debtor had been filed by such financial creditors and had not been admitted by the adjudicating authority before. In the present case, the appellant filed a Section 7 application against the corporate debtor on 18.03.2019. On 28.12.2019, when the Ordinance was promulgated, the application was still pending before the Adjudicating Authority. However, arguments had already been heard and the matter reserved for orders on 04.12.2019. The order came to be passed on 02.01.2020, admitting the application without reference to the Ordinance. At that stage, the requirement introduced by the Ordinance had not been complied with by the appellant. Nevertheless, she subsequently complied with the said requirement in the appellate proceedings. In the present case, limitation was due to expire on 27.01.2020. Even if computation is reckoned from 02.01.2020 (the date of reopening of the NCLT after the winter recess), the limitation period would have run its course by 31.01.2020. Although the affidavits bear the date 27.01.2020, the undisputed position is that they were actually filed before the NCLAT only on 01.02.2020, by which time the limitation period had already lapsed. Consequently, the appellant had no option but to comply with the requirements of the Ordinance which had come into effect on 28.12.2019. However, it was incumbent upon the NCLT to take cognizance of the Ordinance and afford an opportunity to the appellant to meet its stipulations. Since no such opportunity was granted, the appellant had no occasion to comply before the NCLT. 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 deserves to be set aside to that effect. Right to shelter as a fundamental right - constitutional obligation of the state to protect homebuyers - HELD THAT:- While recent amendments and regulatory measures are welcome – and the Government merits commendation for undertaking proactive structural reforms – much remains to be done. It is imperative that RERA authorities are not reduced to toothless tigers. They must be equipped with adequate infrastructure, empowered tribunals, and effective enforcement mechanisms so that their orders are implemented swiftly, in letter and spirit. Only then can the constitutional promise of the Right to Shelter under Article 21 be meaningfully realized for homebuyers. The findings of the NCLAT holding the appellants (Mansi Brar Fernandes and Sunita Agarwal) to be speculative investors are affirmed. Consequently, both the impugned orders setting aside the admission of the Section 7 applications by the NCLT, also stand affirmed. However, the appellants are at liberty to pursue their remedies before the appropriate forum in accordance with law, and in such event, the bar of limitation shall not apply - Ordinance / Amendment Act is squarely applicable to the facts of the present case and to that extent, the first impugned order stands set aside. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the applicants who entered into buy-back / investment-style Memoranda of Understanding for residential units qualify as 'speculative investors' and are thereby disentitled from initiating proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC). 2. Whether the Ordinance / Amendment Act that introduced a threshold requirement (joint filing by not less than 100 allottees or 10% of allottees) for initiation of CIRP by allottees in a real estate project was applicable to pending Section 7 proceedings where orders had been reserved prior to promulgation, and if non-compliance could be cured subsequently in appellate proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification as 'Speculative Investors' Legal framework: The IBC and the definition of 'financial creditor' (including allottees under Section 5(8)(f) as amended) must be read with the object of the Code - revival and restructuring, not a recovery mechanism for speculative investment contracts. RERA and consumer fora remain parallel remedies for individual grievances. Precedent treatment: The Court follows and applies the distinction drawn in Pioneer Urban Land & Infrastructure Ltd v. Union of India between genuine homebuyers and speculative investors, and reiterates that speculative investors cannot misuse the Code to trigger CIRP. The reasoning in Pioneer Urban (para 56) shifting burden after prima facie default is adopted. Interpretation and reasoning: The determination is fact-sensitive and contextual. Indicative factors include nature and terms of the contract, number of units, presence of assured returns or buy-back clauses, stage of project completion, and existence of alternative arrangements in lieu of possession. Possession is treated as the sine qua non of genuine homebuyer intent. Contracts that substitute possession with assured returns, buyback/refund options, unrealistic guaranteed yields, preferential contractual rights, or significant deviations from RERA model agreement point strongly to speculation. The Court draws on commercial notions of 'speculation' (expectation of unusually large profits; business/trade activity) and analogies from older precedents requiring actual delivery to avoid classification as speculative. Ratio vs. Obiter: The formulation of non-exhaustive indicators and the holding that possession is essential to genuine homebuyer status constitute ratio as applied to admissions under Section 7; discussion on sectoral harms and policy forms part of ratio guiding interpretation. Historical/cautionary references to broader social policy and housing as a right are obiterate contextual reinforcement but align with statutory objectives. Conclusions: On the facts examined, where agreements were structured as buyback/investment contracts (e.g., modest upfront payment coupled with guaranteed/high returns or compulsory buyback and absence of intention or steps to take possession), the applicants were found to be speculative investors. Such applicants are disentitled to initiate CIRP under Section 7; their claims are characterized as recovery claims amenable to other fora. The Court affirms appellate findings that the subject applicants were speculative investors and upholds setting aside of NCLT admission orders. Liberty is preserved to pursue alternative remedies and limitation is held not to bar such claims in appropriate proceedings. Issue 2 - Applicability of the Ordinance / Amendment Act to Pending Proceedings Legal framework: The Ordinance / Amendment Act inserted a proviso to Section 7(1) requiring joint filing by a threshold number of allottees (100 or 10%) for initiation of CIRP against a real estate project, and contained a transitional provision dealing with pending filings not admitted before commencement. Precedent treatment: The Court examines coordinate Bench decisions and interim orders in related proceedings but distinguishes their factual matrix. It accepts Manish Kumar (constitutional validity upheld) but clarifies that applicability depends on the stage of proceedings when the legislative change occurred. The Court invokes established doctrines concerning judicial acts producing prejudice (Actus Curiae Neminem Gravabit) and equitable principles (lex non cogit ad impossibilia). Interpretation and reasoning: Application of the amendment to pending matters depends on feasibility of compliance and the stage of proceedings at the time of promulgation. Where arguments were heard and orders reserved prior to promulgation, parties could not reasonably be expected to comply with a subsequently introduced procedural requirement before admission. The adjudicating authority has a duty to take judicial notice of intervening legislative changes and, where necessary, afford opportunity to comply before admission. The Court reasons that failure of a Tribunal to account for a legislative change in reserved judgment should not prejudice a litigant; subsequent compliance during appellate proceedings can cure the defect if no substantive prejudice arises to the other side. The doctrine that the act of the Court should not injure suitors is applied to neutralize prejudice caused by reserving orders prior to legislative amendment. Ratio vs. Obiter: The holding that the Amendment applies generally and its constitutional validity is upheld is ratio; the rule that where orders were reserved before promulgation, retrospective enforcement of the threshold to defeat vested rights is impermissible and that subsequent compliance in appellate proceedings may cure the defect is ratio in the present facts. Broader policy directions and administrative prescriptions are obiterate insofar as they suggest systemic reforms beyond adjudication of the specific appeals, though some measures are framed as directions in exercise of jurisdiction. Conclusions: The Ordinance / Amendment Act is applicable to Section 7 applications generally. However, where proceedings were at a reserved-order stage prior to promulgation, the threshold requirement cannot be retroactively enforced to prejudice a party; appellate cure of compliance is permissible where no substantive prejudice results. Accordingly, the Court sets aside the portion of the first impugned order that held the Ordinance inapplicable and recognizes that subsequent satisfaction of the threshold in appellate proceedings can validate the petition, applying the doctrine that an act of the Court shall prejudice no one. Ancillary Doctrinal and Practical Conclusions The IBC's objectives (revival, maximisation of value, protection of employment and stakeholders) guide restrictive application against speculative misuse. RERA remains the primary forum for homebuyer grievances; IBC is last resort. At admission stage, Tribunals must record a prima facie finding whether an applicant is a genuine homebuyer or a speculative investor to prevent needless CIRP admissions. Speculative investors are not barred from claiming principal amounts in other fora. Final Disposition as to Issues Both determinations stand: (i) the subject applicants are speculative investors and hence incompetent to initiate CIRP under Section 7 - admission orders are rightly set aside; (ii) the Ordinance / Amendment Act applies, but where orders were reserved prior to promulgation, the requirement cannot be retrospectively enforced to the prejudice of a party and may be cured by subsequent compliance in appellate proceedings - the NCLAT's contrary conclusion on applicability is set aside to that extent.