Summary
The Supreme Court upheld NCLAT orders setting aside the admission of Section 7 IBC applications by two allottees, holding that both were speculative investors whose agreements were in substance buy-back or assured-return arrangements rather than purchases of homes, and laid down indicative criteria for identifying speculative investors. It set aside the NCLAT's finding that the 2019 Ordinance threshold for allottee applications did not apply, holding that compliance during appeal cured the defect because an act of the court must prejudice no one. Treating timely possession of a home as part of the right to shelter under Article 21, it issued systemic directions for the real estate and insolvency framework.
Issues
- Whether allottees under MoUs containing buy-back clauses and assured returns are speculative investors disentitled from initiating CIRP under Section 7 of the IBC, and what criteria identify such investors.
- Whether the threshold requirement for allottee applications introduced by the IBC (Amendment) Ordinance, 2019 / Amendment Act, 2020 applied to a Section 7 application reserved for orders before the Ordinance and admitted after it, and whether later compliance in appeal cured the defect.
- Whether an NCLAT decision whose operation has been made subject to an interim order of the Supreme Court can still be relied upon for its reasoning.
Provisions considered
- Section 5(8)(f) and its Explanation, Insolvency and Bankruptcy Code, 2016Amounts raised from an allottee under a real estate project are deemed to have the commercial effect of a borrowing, making allottees financial creditors. Following Pioneer Urban, this protection is meant for genuine homebuyers, and a speculative investor seeking refund or profit without intending to take possession cannot use it to trigger CIRP. (¶¶ 5.1, 18.3, 18.4.3, 18.5, 18.7)
- Section 7(1), second and third provisos (inserted w.e.f. 28.12.2019), Insolvency and Bankruptcy Code, 2016An allottee application must be filed jointly by at least 100 allottees or 10% of allottees of the same project, whichever is less, and pending unadmitted applications must be modified to comply within thirty days or be deemed withdrawn. The requirement applied, but where orders were reserved before the Ordinance and the NCLT admitted the application without giving an opportunity to comply, compliance during the appeal sufficed. (¶¶ 19, 19.1, 19.3, 19.4, 19.7)
- Section 65, Insolvency and Bankruptcy Code, 2016Relying on Pioneer Urban, the Court noted that once an allottee makes out a prima facie default, the developer may show under Section 65 that the process was invoked fraudulently or maliciously, for instance by a speculative investor wishing to exit, rather than for resolution of insolvency. (¶¶ 18.3.2, 18.3.3)
- Article 21, Constitution of IndiaThe right to shelter is part of the right to life, and the right to secure, peaceful and timely possession of one's home is a facet of it. This casts a duty on the State to build and enforce a framework protecting homebuyers and curbing speculation, which grounded the Court's systemic directions. (¶¶ 15.1, 20, 20.3, 20.4, 20.5, 22)
Held
- Whether an allottee is a speculative investor depends on the facts and must be judged holistically from the agreement, allotment letter, payment terms and conduct; possession of the dwelling unit is the sine qua non of a genuine homebuyer. An allottee who from the outset does not intend to take possession, or later abandons that intent and seeks only refund or profit, is a speculative investor. (¶¶ 18.1, 18.4, 18.4.3, 18.4.4)
- Non-exhaustive indicators of speculation are: an agreement substituting possession with buy-back, refund or special arrangements; insistence on refund with high interest while refusing possession; purchase of multiple units (inviting scrutiny but not conclusive); special rights or privileges; deviation from the RERA model agreement; and unrealistic promised returns of the order of 20 to 25% over a short period. (¶ 18.4.5)
- The distinction between speculative investors and genuine homebuyers matters only at the stage of initiating CIRP; speculative investors may still file claims for the principal invested and pursue remedies before other fora such as consumer forums, RERA or civil courts. (¶¶ 18.4.7, 18.8, 21)
- An MoU under which an investment of Rs.35 lakhs for four notional units was to be bought back within 12 months for Rs.1 crore, secured by post-dated cheques and enforced through Section 138 NI Act proceedings, and an MoU providing for a 25% annual assured return with a buy-back, were in substance investment contracts. Both appellants were speculative investors who could not trigger CIRP, and the NCLAT's orders setting aside admission were affirmed. (¶¶ 18.5, 18.6, 18.7, 18.8)
- An interim order of the Supreme Court suspends enforcement of a decision between the parties but does not efface its reasoning, so the NCLAT could rely on the reasoning of its earlier decision. (¶ 18.6.1)
- The NCLAT erred in treating the 2019 Ordinance as inapplicable on the strength of a later status quo order made after the application had already been admitted. Where the NCLT reserved orders before the Ordinance and admitted the application without considering it or giving the applicant an opportunity to comply, the failure was an act of the court; under actus curiae neminem gravabit and lex non cogit ad impossibilia no party can be prejudiced by it, and the applicant's later procurement of the consent of 10% of allottees during the appeal cured the defect, the requirement being procedural. (¶¶ 19.2, 19.3, 19.4, 19.5, 19.6, 19.7)
- RERA is the primary forum for homebuyers' grievances, the IBC is a collective remedy of last resort aimed at reviving viable projects and not a debt-recovery mechanism, and consumer forums should confine themselves to individual service deficiencies. (¶¶ 15.2, 21)
- To protect homebuyers, the Court directed, among other things: filling NCLT/NCLAT vacancies and upgrading their infrastructure with a compliance report in three months; an expert committee chaired by a retired High Court judge to recommend reforms of the real estate sector; adequately staffed RERAs; IBBI guidelines for real estate insolvency, generally project-wise; a prima facie finding by the NCLT at admission on whether an allottee is genuine or speculative; registration of new-project transactions after 20% payment; and escrow of allottees' money in nascent projects. (¶¶ 21.2, 23)
Result
Appeals disposed of; NCLAT findings that both appellants were speculative investors and the orders setting aside admission of their Section 7 applications affirmed, with liberty to pursue other remedies free of the bar of limitation; NCLAT finding on inapplicability of the 2019 Ordinance set aside; systemic directions issued and judgment to be circulated to the Cabinet Secretary and State Chief Secretaries; no costs.