Summary
The Supreme Court upheld the NCLAT's admission of a real estate developer into CIRP on a Section 7 IBC petition by an asset reconstruction company, holding that once financial debt and default are established, project viability, unsold inventory and parallel SARFAESI/DRT recovery are no grounds to refuse admission. It also upheld rejection of a homebuyers' maintenance society's intervention for want of locus at the pre-admission stage, and issued prospective directions to Committees of Creditors in real estate CIRPs.
Issues
- Whether the NCLAT was right in admitting the corporate debtor into CIRP under Section 7 of the IBC, despite pleas of project viability, a self-induced default and recovery-oriented invocation by the financial creditor.
- Whether a co-operative housing society of homebuyers had locus standi to intervene in appellate proceedings arising from a Section 7 petition before admission.
Provisions considered
- Section 7(5)(a), Insolvency and Bankruptcy Code, 2016Following Innoventive Industries, E.S. Krishnamurthy, M. Suresh Kumar Reddy and Indus Biotech, the Court held that once financial debt and default are established, admission must follow; Vidarbha Industries was treated as a narrow exception confined to its facts and inapplicable here. (¶¶ 12.3, 12.4, 12.5, 12.6, 12.7, 12.8, 12.21)
- Section 65, Insolvency and Bankruptcy Code, 2016Allegations of mala fide or recovery-driven invocation can be examined only within Section 65, which requires specific pleading and proof of fraudulent or malicious initiation; none was pleaded or established. (¶¶ 12.12, 12.13, 12.15)
- Sections 14 and 238, Insolvency and Bankruptcy Code, 2016Pending SARFAESI or DRT recovery does not bar a Section 7 petition, as the Code overrides other laws and the moratorium stays such proceedings on admission. (¶ 12.11)
- Sections 5(7), 5(8)(f) Explanation and 21(6A), Insolvency and Bankruptcy Code, 2016The Explanation deems individual allottees to be financial creditors but not a society or association that is not itself a creditor or a statutorily recognised authorised representative; collective representation of homebuyers arises only after admission through the authorised representative mechanism. (¶¶ 13.7, 13.8, 13.12, 13.22)
- Rule 11, National Company Law Appellate Tribunal Rules, 2016The inherent power is residual and cannot override the Code's statutory structure or create participatory rights the statute excludes. (¶¶ 13.15, 13.16)
- Regulations 4E and 16A, IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016Relied on to show homebuyers' interests are safeguarded after admission (handover of possession with CoC approval; representation through authorised representatives), and the CoC was directed to record reasons when refusing handover under Regulation 4E. (¶¶ 13.12, 13.21, 15.1)
Held
- Once the Adjudicating Authority is satisfied that a financial debt exists and default has occurred, a Section 7 application must be admitted; reliance on business viability, unsold inventory, project completion or anticipated receivables is not a good reason to defer or deny admission, and Vidarbha Industries (an adjudicated, realisable claim exceeding the debt) did not apply. (¶¶ 12.3, 12.6, 12.8, 12.10, 12.21)
- Debt and default were established, including breach of the restructuring agreement and failure to pay instalments within the cure period; the creditor's alleged later refusal to issue NOCs did not absolve the debtor, and revocation of the restructuring was contractually justified. (¶¶ 12.9, 12.10, 12.19)
- A financial creditor may invoke the Code though SARFAESI or DRT recovery is pending; parallel recovery after approaching the NCLT is deprecated but not illegal per se, and only malicious invocation under Section 65 is prohibited. Viability and feasibility are for the CoC, with the Adjudicating Authority retaining scrutiny at plan approval. (¶¶ 12.11, 12.13, 12.14, 12.15, 12.16, 12.17)
- Before admission, Section 7 proceedings are in personam between the financial creditor and corporate debtor; other creditors and strangers to the debt have no right of audience at that stage, whether before NCLT or NCLAT. (¶¶ 13.5, 13.11)
- A society or resident welfare association that is not a creditor in its own right nor a recognised authorised representative has no locus to intervene in Section 7 proceedings; a society is a juristic entity distinct from its members, and Chitra Sharma's permission to homebuyer associations was an exceptional Article 142 measure, not a general precedent. (¶¶ 13.7, 13.8, 13.9, 13.10, 13.14, 13.17, 13.22)
- Without a foundational right to participate, the society could not claim a breach of natural justice, and no prejudice was shown because homebuyers in possession are outside the estate, pending allottees participate as financial creditors through authorised representatives, and RERA rights are harmonised with the Code. The NCLAT's distinction between completed and uncompleted towers may be overbroad, but its conclusion on locus was sound. (¶¶ 13.18, 13.19, 13.20, 13.21)
- As the CoC's wide powers carry a duty of responsibility, the Information Memorandum must disclose complete details of all allottees, and the CoC must record cogent written reasons when it finds handover of possession under Regulation 4E not viable or recommends liquidation. (¶ 15.1)
Result
Both appeals dismissed; NCLAT's admission of the corporate debtor into CIRP and its rejection of the society's intervention upheld, with clarification that aggrieved stakeholders may pursue remedies under the Code after CIRP commences; prospective directions issued to CoCs on disclosure of allottees and reasoned decisions on Regulation 4E handover and liquidation; no costs.