Supreme Court Sets Accountability Standards for CoC in Real Estate CIRP
Supreme Court Sets Accountability Standards for CoC in Real Estate CIRP
Introduction
The Supreme Court has issued significant directions aimed at safeguarding the interests of homebuyers in insolvency proceedings against real estate developers. While reiterating that the commercial wisdom of the Committee of Creditors (CoC) is ordinarily immune from judicial review, the Court stressed that such power must be exercised with transparency, accountability, and proper application of mind, particularly where the fate of residential projects and homebuyers is concerned.
Factual Background
The directions were issued by a Bench of Justices J.B. Pardiwala and R. Mahadevan while hearing an appeal filed by a homebuyers’ association challenging an order of the National Company Law Appellate Tribunal (NCLAT).
The appellant association had sought to intervene in a Corporate Insolvency Resolution Process (CIRP) initiated against a real estate developer at the pre-admission stage under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLAT rejected the intervention application, holding that a homebuyers’ association, not being a financial creditor in its own right, has no locus standi at the admission stage.
The association approached the Supreme Court contending that exclusion at the pre-admission stage left homebuyers remediless and vulnerable to decisions taken without adequate regard to their interests.
Issues
1. Whether a homebuyers’ association has a right to intervene in Section 7 IBC proceedings at the pre-admission stage.
2. Whether rejection of such intervention leaves homebuyers without effective remedies under the IBC.
3. What safeguards are necessary to ensure that CoC decisions in real estate insolvencies adequately protect homebuyers’ interests.
Reasoning and Analysis
The Court upheld the NCLAT’s conclusion that proceedings under Section 7 of the IBC are strictly bipartite at the admission stage, involving only the financial creditor and the corporate debtor. A homebuyers’ association, unless it independently qualifies as a financial creditor, cannot seek intervention at this stage.
However, the Court clarified that denial of intervention at the pre-admission stage does not render homebuyers remediless. Once the CIRP is admitted, the interests of homebuyers necessarily fall within the consideration of the CoC.
The Bench emphasised that although the commercial wisdom of the CoC is paramount, the width of powers vested in it carries a corresponding duty of responsibility. Decisions that are extraordinary or non-routine such as refusal to hand over possession, rejection of registration, or recommendation of liquidation must be supported by cogent reasons recorded in writing.
The Court observed that real estate insolvencies are distinct from ordinary corporate insolvencies, as they involve not merely financial restructuring but the lives and homes of hundreds of families. Unreasoned decisions by the CoC could reduce near-complete housing projects into distressed assets, causing irreversible harm to homebuyers.
Directions Issued By The Court
To ensure transparency and accountability, the Supreme Court issued the following directions:
1. The Information Memorandum must mandatorily disclose comprehensive and complete details of all allottees in the real estate project.
2. Where the CoC finds it not viable to approve handover of possession or registration under Regulation 4E of the CIRP Regulations, it must record specific and cogent reasons in writing.
Any recommendation for liquidation by the CoC must be accompanied by a reasoned justification, demonstrating due consideration of all viable alternatives and proper application of mind, consistent with the objectives of the IBC.
Decision
While dismissing the appeal and affirming that a homebuyers’ association cannot intervene at the pre-admission stage of a Section 7 IBC petition, the Supreme Court clarified that homebuyers are not left without remedies under the insolvency framework.
By issuing binding directions governing the conduct of the CoC, the Court reinforced that commercial wisdom must operate within a transparent, reasoned, and accountable decision-making process when the rights and interests of homebuyers are directly affected.
