In a significant ruling for the real estate sector, the Supreme Court of India has affirmed that allottees with buy-back agreements and assured high-return schemes are to be treated as “speculative investors” and not “financial creditors” eligible to initiate Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).
A bench of Justice J.B. Pardiwala and Justice R. Mahadevan, while hearing a batch of four appeals, upheld the core findings of the National Company Law Appellate Tribunal (NCLAT) which had set aside insolvency proceedings initiated by such investors. The Court clarified that while these investors are barred from triggering the IBC, they are at liberty to pursue other legal remedies for recovery.
The judgment also delved into the constitutional Right to Shelter under Article 21 and issued a slew of directions for systemic reforms to protect genuine homebuyers and cleanse the real estate industry.
Background of the Cases
The matter involved two lead cases with similar factual matrices. In the first, Mansi Brar Fernandes had entered into a Memorandum of Understanding (MoU) with developer Gayatri Infra Planner Private Limited for four flats. She paid Rs. 35 lakhs, and the MoU included a buy-back clause where the developer had the option to repurchase the units for Rs. 1 crore within 12 months. When the developer failed to pay and post-dated cheques were dishonoured, Fernandes initiated a Section 7 application under the IBC. The National Company Law Tribunal (NCLT) admitted the application, but the NCLAT reversed this, labeling Fernandes a “speculative investor.”
In the second case, Sunita Agarwal invested Rs. 25 lakhs in a project by Antriksh Infratech Pvt. Ltd. under an agreement that promised a 25% annual return and a compulsory buy-back. When the project never commenced, she initiated CIRP, which was admitted by the NCLT. Relying on its own precedent in the Mansi Brar Fernandes case, the NCLAT later set aside this admission order as well, holding Agarwal to be a “speculative buyer.”
Cross-appeals were also filed by the directors of Gayatri Infra, challenging the NCLAT’s finding that the IBC (Amendment) Ordinance, 2019—which introduced a minimum threshold for homebuyers to file a Section 7 application—was not applicable to their case.
Arguments of the Parties
The appellants, Mansi Brar Fernandes and Sunita Agarwal, argued they were legitimate homebuyers and thus qualified as financial creditors under Section 5(8)(f) of the IBC. They contended that the buy-back clauses were structured by the developers and that the NCLAT’s finding of them being “speculative investors” was erroneous and prejudicial.
The respondent developers argued that the appellants were not genuine allottees but speculative investors who had entered into transactions purely for exorbitant financial returns. They asserted that the IBC could not be used as a coercive recovery mechanism, a principle upheld by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd v. Union of India. The respondents pointed to the structure of the MoUs, the lack of a standard builder-buyer agreement, and the reliance on cheque dishonour proceedings as evidence of speculative intent.
Court’s Analysis and Findings
The Supreme Court undertook a detailed analysis of the distinction between genuine homebuyers and speculative investors, reinforcing the principles laid down in its Pioneer Urban judgment.
On the “Speculative Investor” Issue:
The Court held that the determination must be contextual, guided by the intent of the parties. It laid down several non-exhaustive indicators to identify speculative investors, including:
- Agreements substituting possession with buy-back or refund options.
- Insistence on refunds with unusually high interest.
- Purchase of multiple units inviting greater scrutiny.
- Unrealistic interest rates and promises of high returns over a short period.
The judgment noted that “possession of a dwelling unit remains the sine qua non of a genuine homebuyer’s intent.” The Court observed that schemes of assured returns and compulsory buybacks are “in truth financial derivatives masquerading as housing contracts.”
Applying these principles, the Court found that both appellants were indeed speculative investors.
- In Mansi Brar Fernandes’s case, the Court noted, “The MoU was in substance a buyback contract, not an agreement to sell flats. By the standard in Pioneer Urban, the appellant was a speculative investor, disentitling her from invoking Section 7.”
- In Sunita Agarwal’s case, the Court highlighted the guaranteed 25% annual return and compulsory buy-back clause, stating, “Such risk-free contracts place speculative investors in an advantageous position, to the detriment of genuine homebuyers and developers.”
Consequently, the Court affirmed the NCLAT’s findings that the appellants were speculative investors and upheld the orders setting aside the admission of their Section 7 applications.
On the Applicability of the 2019 IBC Ordinance:
The Court addressed the cross-appeals regarding the applicability of the 2019 Ordinance, which came into force after the NCLT had heard arguments but before it delivered its admission order in the Mansi Brar Fernandes case. The NCLAT had held the Ordinance to be inapplicable.
The Supreme Court, however, disagreed with the NCLAT’s reasoning on this specific point. Invoking the legal maxim ‘Actus Curiae Neminem Gravabit’ (an act of the Court shall prejudice no one), the bench held that since the order was reserved before the law changed, the appellant could not be penalized for non-compliance. It noted that the failure to consider the Ordinance was an “act of the Court.” The Court concluded that the Ordinance was “squarely applicable to the facts of the present case” and set aside the NCLAT’s order to that extent, clarifying that the appellant’s subsequent compliance during appellate proceedings cured the defect.
Decision and Directions for Systemic Reform
In its final verdict, the Supreme Court:
- Affirmed the NCLAT’s findings that appellants Mansi Brar Fernandes and Sunita Agarwal are “speculative investors” and cannot trigger CIRP under the IBC.
- Affirmed the NCLAT’s orders setting aside the admission of the Section 7 applications.
- Granted the appellants liberty to pursue their remedies before other appropriate forums, stating that the bar of limitation shall not apply.
- Set aside the NCLAT’s finding on the inapplicability of the 2019 Ordinance, holding that it was applicable to the facts of the case.
Emphasizing that the Right to Shelter is a fundamental right under Article 21, the Court expressed deep concern over the plight of genuine homebuyers and issued comprehensive directions to reform the real estate sector. These include filling vacancies in NCLT/NCLAT on a “war footing,” constituting a high-level committee to suggest systemic reforms, strengthening RERA authorities, promoting project-wise insolvency resolution, and considering the establishment of a revival fund for stressed projects.
