RWAs Cannot Step Into Builder Insolvency Proceedings Without Creditor Status: Supreme Court

RWAs Cannot Step Into Builder Insolvency Proceedings Without Creditor Status: Supreme Court

Introduction

The Supreme Court has clarified that Resident Welfare Associations (RWAs) or homebuyers’ societies cannot intervene in insolvency proceedings initiated against a builder unless the association itself qualifies as a financial creditor or is duly recognised as an authorised representative under the Insolvency and Bankruptcy Code, 2016 (IBC). The ruling reinforces the strictly bipartite nature of proceedings under Section 7 of the IBC at the admission stage.

Factual Background

The case arose from insolvency proceedings initiated by Edelweiss Asset Reconstruction Company against Takshashila Heights India Pvt. Ltd., the developer of a real estate project in Ahmedabad. Elegna Co-operative Housing and Commercial Society Ltd., representing 189 unit holders of a completed tower in the project, sought to intervene in the proceedings to safeguard the interests of its member homebuyers.

The society claimed that it represented the collective interests of homebuyers affected by the insolvency process and should therefore be permitted to participate in the proceedings.

Procedural Background

The intervention application filed by the housing society was rejected by the National Company Law Appellate Tribunal (NCLAT) on the ground that it lacked locus standi. Aggrieved by this rejection, the society approached the Supreme Court, challenging the NCLAT’s order and asserting a right to be heard in the insolvency proceedings.

Issues

1. Whether a Resident Welfare Association or homebuyers’ society has locus standi to intervene in insolvency proceedings under Section 7 of the IBC.

2. Whether such an association can claim the status of a financial creditor or an independent right of participation merely by representing homebuyers.

Reasoning and Analysis

A Bench of Justices J.B. Pardiwala and R. Mahadevan upheld the NCLAT’s view, holding that proceedings under Section 7 of the IBC are strictly bipartite at the admission stage, involving only the financial creditor and the corporate debtor. The Court reiterated that the adjudicating authority’s inquiry at this stage is confined to examining the existence of a financial debt and the occurrence of default.

The Court held that an RWA or housing society cannot intervene unless it is a creditor in its own right or is recognised as an authorised representative of allottees in accordance with the IBC. Merely representing the interests of homebuyers does not confer financial creditor status.

In the present case, the Court noted that the appellant society was neither a financial creditor nor an operational creditor. It was a maintenance society, not constituted for insolvency representation, and had produced no documentary proof of collective authorisation, registration for insolvency purposes, or a general body resolution empowering it to act on behalf of all allottees. The Court also observed that membership of such societies is often compulsory, which negates the element of consensual representation required under the IBC framework.

The Court further emphasised that, in the absence of a foundational right to participate in proceedings before the NCLT or NCLAT, no vested right of hearing can be claimed at the appellate stage. Such a right must flow from statute and cannot be asserted as a matter of equity or convenience.

Decision

The Supreme Court dismissed the appeal and affirmed the NCLAT’s order, holding that Resident Welfare Associations or homebuyers’ societies have no locus standi to intervene in insolvency proceedings under Section 7 of the IBC unless they themselves are creditors or are statutorily recognised as authorised representatives. The Court reiterated that intervention rights in insolvency proceedings are governed strictly by the IBC and cannot be expanded through representative claims lacking statutory backing.