The Supreme Court has ruled that a society or association of homebuyers, which is not a creditor itself, lacks the locus standi to intervene in proceedings under Section 7 of the IBC at the pre-admission or appellate stage. The right to be heard at this stage is limited to the applicant creditor and the corporate debtor, as the proceedings are in personam, and therefore, unrelated third parties, including other creditors or societies, have no inherent right of audience.
The Court explained that the right to participate in insolvency proceedings is statutory, not equitable. Further, the status of “financial creditor” is granted to individual allottees under Section 5(8)(f) of the IBC, but this status does not extend to a society they are members of, as the society is a distinct juristic entity.
The Court also clarified that the inherent powers of the NCLAT under Rule 11 cannot be used to override the statutory structure of the IBC or to create substantive participatory rights where the statute deliberately excludes them. Hence, no prejudice was caused to homebuyers, as their interests are adequately protected under the IBC framework through mechanisms like participation in the Committee of Creditors (CoC) via an Authorised Representative post-admission.
Therefore, the Court upheld the NCLAT’s order to admit the Corporate Debtor into CIRP and affirmed the rejection of the Society’s intervention application. Further, to enhance transparency and protect homebuyer interests within the CIRP, the Court directed that the Information Memorandum must disclose complete details of all allottees, and if the CoC decides not to approve the handover of possession under Regulation 4E of the CIRP Regulations, it must record specific and cogent reasons in writing.
A Two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed that the Adjudicating Authority’s (NCLT) role under Section 7(5) of the IBC is limited to ascertaining the existence of a financial debt and default. Once established, admission of the CIRP application is mandatory, and considerations of project viability, stakeholder prejudice, or the creditor’s motives are irrelevant at this stage.
The Bench clarified that the discretion indicated by the word “may” in Section 7(5)(a) of the IBC, as interpreted in Vidarbha Industries Power Ltd. v. Axis Bank Ltd [(2022) 8 SCC 352], is a narrow exception applicable only in peculiar factual circumstances, such as the corporate debtor having an adjudicated and realisable claim exceeding the debt owed. This position was authoritatively clarified in M. Suresh Kumar Reddy v. Canara Bank [2023 SCC OnLine SC 608].
Lastly, the Bench concluded that the pursuit of parallel recovery proceedings under the SARFAESI Act or before the DRT does not bar a financial creditor from initiating CIRP. Such actions do not automatically constitute a malicious invocation under Section 65 of the IBC unless specific abuse of process is proven.
Briefly, the Corporate Debtor availed term loans of Rs. 70 crores from ECL Finance Ltd. (Original Lender) in 2018 for developing a real estate project named “Takshashila Elegna”, and the loans were secured by various agreements and a mortgage over project assets. As the Corporate Debtor defaulted on repayments, the loan accounts were classified as Non-Performing Assets (NPA) on 30 December 2021. The debt was assigned to Edelweiss Asset Reconstruction Company Ltd. (EARCL/ Financial Creditor) on 9 May 2022, who issued a recall notice for Rs. 53.03 crores and initiated recovery proceedings before the Debts Recovery Tribunal (DRT) and under the SARFAESI Act, 2002.
Thereafter, a Restructuring-cum-One Time Settlement (OTS) Agreement was executed for a settled amount of Rs. 55 crores. The Corporate Debtor paid the first instalment of Rs. 5.5 crores but alleged that EARCL breached the OTS by refusing to issue a No Objection Certificate (NOC) for the sale of units, which hindered further payments. Citing default, EARCL revoked the OTS, and filed a petition under Section 7 of the IBC. The NCLT dismissed the petition, holding that the IBC was being used as a recovery mechanism, the project was viable, and CIRP would harm homebuyers. On appeal, the NCLAT initiated CIRP against the Corporate Debtor, and rejected the Society’s intervention application for lack of locus standi.
Appearances:
AORs Henna George and Purti Gupta, for the Appellant
AORs Abhishek Agarwal and Henna George, for the Respondent
