No role for RWAs in insolvency proceedings: SC

The Supreme Court on Thursday held that a society or Resident Welfare Association of homebuyers has no locus standi (legal standing) to intervene in insolvency proceedings initiated against a real estate developer, as it is neither a creditor nor an authorised representative of allottees in the real estate project. A Bench of Justices JB Pardiwala and R Mahadevan held, “A society or Resident Welfare Association, not being a creditor in its own right and not recognised as an authorised representative of allottees under the IBC, has no locus standi to intervene in proceedings arising out of a Section 7 petition.”

The Court observed that homebuyers’ societies or welfare associations are ordinarily constituted for the maintenance and management of common facilities. Their office-bearers cannot litigate on behalf of allottees or claim representative status before adjudicatory fora (including those tasked with adjudicating insolvency proceedings) without express statutory recognition or legally valid authorisation, the Bench noted.

“Any contrary interpretation would impermissibly enlarge the statutory definition of ‘financial creditor’, encroach upon individual rights of allottees, and create an extra-statutory layer of representation. It would also enable errant corporate debtors to obstruct and delay insolvency proceedings under the guise of purported collective interests,” the Court added.

The case before the Court concerned the insolvency process initiated against real estate developer Takshashila Heights India Private Limited. Takshashila Heights had availed loans of `70 crore in 2018 from ECL Finance Limited for the development of a residential-cum-commercial project titled “Takshashila Elegna” in Ahmedabad. The loan was later assigned to Edelweiss Asset Reconstruction Company Limited (EARCL).

Following delays in repayment, the loan accounts were classified as non-performing assets in December 2021. Edelweiss initiated recovery proceedings and later entered into a restructuring-cum-one-time settlement with the developer in 2023. After further defaults, the settlement was revoked and insolvency proceedings were initiated.

The National Company Law Tribunal (NCLT), Ahmedabad, dismissed the insolvency plea in November 2024, holding that the insolvency law was being used as a recovery mechanism and that the building project was substantially complete, with insolvency likely to prejudice homebuyers.

On appeal, the National Company Law Appellate Tribunal (NCLAT) set aside the NCLT’s order and directed admission of insolvency proceedings. It also rejected the homebuyers’ society’s application to intervene, holding that it lacked locus.

Both the developer and the society approached the Supreme Court challenging the NCLAT’s decision. The Supreme Court has now effectively ruled that hardships faced by homebuyers cannot be used to prevent the admission of insolvency proceedings once a financial default is established.

“The interests of homebuyers are undoubtedly of paramount importance. However, such interests must be protected strictly within the legal framework,” the Court said.

Rejecting the approach adopted by the NCLT, which had refused to admit insolvency proceedings citing prejudice to homebuyers, the top court reiterated that the enquiry at the admission stage in insolvency cases is confined to examining whether a default in the payment of a debt exists. The Court also underscored that at the admission stage, insolvency proceedings are between corporate debtors and their creditors, and that no third party (such as homebuyers’ societies) can demand that they too be heard. “Proceedings under Section 7 are essentially bipartite at the admission stage, involving only the financial creditor and the corporate debtor. Unrelated third parties, including other creditors, have no independent right of audience at this stage, a principle consistently affirmed by this Court,” the Court said.

It added, “In the absence of any foundational right to participate in the proceedings before NCLT or NCLAT, the appellant society (a homebuyers’ 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.” The Court further reiterated that a plea to initiate insolvency proceedings cannot be rejected merely because lenders are pursuing recovery proceedings under other laws, such as the SARFAESI Act or before the Debts Recovery Tribunal. It held that the insolvency framework does not prohibit a financial creditor from invoking insolvency remedies alongside recovery mechanisms, and that the pendency of such proceedings does not bar initiation of insolvency proceedings.

While the Court expressed disapproval of creditors pursuing parallel remedies simultaneously, it clarified that such conduct is not illegal per se and does not invalidate insolvency proceedings. Any overlap is cured once insolvency is admitted, as the statutory moratorium comes into effect and stays all recovery actions, the Court noted. “The Code does not prohibit a financial creditor from invoking CIRP merely because recovery proceedings under the SARFAESI Act or before the DRT are pending or have been initiated. Section 238 accords overriding effect to the Code, and upon admission, the moratorium under Section 14 stays all such proceedings,” the judgment states, in this regard. The Court proceeded to dismiss the appeals before it and upheld the NCLAT’s ruling in the case.

Elegana, the homebuyers’ society, was represented by Senior Advocate Madhavi Divan with Advocates Purti Gupta, Arjun Sheth, Rishabh Shah and Pooja Aggarwal.