2026 (1) TMI 902 - SC - IBC

Admission of corporate debtor into CIRP based on established financial debt and default; homebuyers' society lacked locus to challenge

Dominant issue 1 - Admission under Section 7: The SC held that admission requires inquiry limited to existence of financial debt and default; here debt ... Admission to Corporate Insolvency Resolution Process (CIRP) under Section 7 - Mandatory inquiry limited to existence of financial debt and occurrence of default - Discretionary exception to admission where narrow and exceptional circumstances exist - Stakeholder locus standi and representative participation in insolvency proceedings - Inherent powers of the Appellate Tribunal under Rule 11 - Authorised representative mechanism for homebuyers under Section 21(6A) read with Regulation 16A - Protection of possession and post-admission consequences under Regulation 4E of CIRP Regulations - Moratorium and overriding effect of the Code under Section 14 and Section 238 - Abuse of process and mala fide invocation under Section 65 - right to participate in the proceedings before NCLT or NCLAT - violation of principles of natural justice - Admission of the Corporate Debtor into CIRP - HELD THAT:- The default, according to the Corporate Debtor, was not wilful but occurred due to EARCL’s refusal to issue provisional No Objection Certificate, which allegedly frustrated further sale of remaining units. Such conduct, it is contended, disentitles EARCL from invoking Section 7 of the Code. The existence of a financial debt owed to EARCL is undisputed. Persistent defaults stand admitted and are conclusively established on record, including breach of the restructuring agreement and failure to pay instalments within the stipulated cure period. The restructuring arrangement failed due to non-payment by the Corporate Debtor, thereby triggering an express event of default under its terms. The Corporate Debtor admittedly possesses no adjudicated or realisable claim exceeding the amount in default. Its reliance on business viability, unsold inventory, project status, or anticipated receivables does not constitute “good reasons” in law to defer or deny admission of CIRP. The NCLAT rejected the plea of mala fide invocation, observing that acceptance of such argument would render lenders effectively remediless. It also rejected the contention that the Corporate Debtor’s alleged viability could excuse non-payment of admitted dues, noting that financial distress was manifest from the continuing and acknowledged defaults. The debt and default having been conclusively established, and the narrow exception carved out in Vidarbha Industries [2022 (7) TMI 581 - SUPREME COURT] being clearly inapplicable, the NCLAT was fully justified in admitting the Corporate Debtor into the CIRP. The NCLT’s refusal was contrary to the settled law and the statutory mandate of Section 7. Accordingly, the impugned judgment admitting the Corporate Debtor into the CIRP does not suffer from any legal infirmity. Whether a society or association of homebuyers possesses locus standi to intervene in proceedings under Section 7 of the Code, either at the admission stage or at the appellate stage. - HELD THAT:- The issue of locus at the Section 7 stage is no longer res integra. In GLAS Trust Company, this Court held that while there is no rigid requirement restricting the right to appeal only to the applicant creditor and the corporate debtor, such latitude applies when proceedings are in rem post-admission of CIRP. At the pre-admission stage, proceedings under Section 7 remain in personam, and neither the Adjudicating Authority nor the Appellate Authority is required to hear other creditors, much less unrelated third parties. When proceedings are in personam, no right of audience inheres in persons who are strangers to the debt and default forming the basis of the application. The appellant Society is neither a financial nor an operational creditor. It is a maintenance society not constituted for insolvency representation. No documentary proof of registration, collective authorisation, or general body resolution has been produced. Membership is automatic and mandatory, negating consensual representation. Reliance on compulsory membership to claim representational authority on behalf of allottees is nothing but a brutm fulmen. Notably, the intervention application was filed only at the appellate stage and not before the NCLT. The Society is not a party to the financial transaction forming the substratum of the Section 7 application. Hence, no statutory right of appeal inheres in the appellant. While the NCLAT’s distinction between completed and uncompleted towers may be overbroad and untenable, the ultimate conclusion on absence of locus standi rests on sound legal footing. Permitting such intervention would undermine the expeditious and structured insolvency framework envisaged under the Code. The plea of violation of principles of natural justice is equally untenable. It is settled that such violation cannot be alleged in the absence of demonstrable prejudice, particularly where no foundational right of participation exists. Accordingly, in the instant case, in the absence of any foundational right to participate in the proceedings before NCLT or NCLAT, the appellant society cannot claim a vested right to be heard at the appellate stage, for such right flows from the statute and is not a matter of right. Issues: (i) Whether the NCLAT was correct in admitting the Corporate Debtor into the Corporate Insolvency Resolution Process under Section 7 of the IBC; (ii) Whether the NCLAT was correct in rejecting the intervention application filed by the Society.Issue (i): Whether admission into CIRP was permissible where a financial debt and default were established and where the corporate debtor relied on project viability, alleged creditor misconduct and alternative recovery avenues to resist admission under Section 7.Analysis: The statutory test for admission under Section 7 is satisfied by existence of a financial debt and occurrence of default. Precedents establish that once default is shown, admission is mandatory unless an application is incomplete or a narrow exceptional factual matrix under Vidarbha Industries applies. Considerations of project viability, stakeholder prejudice or parallel recovery proceedings are generally extraneous at the threshold; allegations of mala fide invocation require specific pleading and proof under Section 65. The Adjudicating Authority must verify default from records or evidence but is not empowered to substitute commercial or feasibility judgments reserved for the Committee of Creditors.Conclusion: Admission into CIRP was correctly ordered because financial debt and default were established and no exceptional facts were shown to justify withholding admission. The NCLAT's admission of the Section 7 petition is sustained.Issue (ii): Whether a maintenance society representing a subset of allottees has locus standi to intervene at the pre-admission or appellate stage in proceedings under Section 7.Analysis: The IBC confers participatory rights on statutorily defined persons. Individual allottees are financial creditors by Explanation to Section 5(8)(f) but a separate juridical entity such as a society does not acquire creditor status merely by representation unless it itself is a creditor or is statutorily authorised as an authorised representative. Proceedings are in personam pre-admission and only become in rem post-admission, at which stage authorised representative mechanisms apply. Inherent powers under Rule 11 cannot be used to create substitute statutory participatory rights where the Code prescribes an exhaustive scheme. No foundational documentary proof was produced to establish the society's representative authority or creditor status and no demonstrable prejudice was shown that would warrant exceptional intervention.Conclusion: The Society lacked locus standi to intervene in the Section 7 proceedings and the NCLAT was justified in rejecting the intervention application.Final Conclusion: The appeals are dismissed; the admission of the Corporate Debtor into CIRP and the rejection of the Society's intervention are upheld. The decision reaffirms that Section 7 admission follows established debt-and-default requirements and that participatory rights are determined by the statutory framework of the IBC.Ratio Decidendi: Where a financial creditor demonstrates existence of a financial debt and occurrence of default, the adjudicating authority must admit a Section 7 petition unless the application is incomplete or exceptionally supported facts displace the mandatory admission rule; a society or association not itself a creditor and not statutorily authorised has no locus to intervene at the pre-admission stage.