Protecting Dreams, Not Profits: Supreme Court's Clarification On Homebuyers And Speculative Investors

The Insolvency and Bankruptcy Code, 2016 (Code) is often described as one of India's most significant economic legislation, ushering systemic reforms over the last decade. It is designed to resolve insolvency in a time-bound manner, seeking to revive viable companies, maximise the value of distressed assets, all while balancing the interests of various stakeholders involved. Since 2018, it has evolved to become a powerful mechanism for genuine homebuyers after they were classified as financial creditors pursuant to the Insolvency And Bankruptcy Code (Second Amendment) Act, 2018 (2018 Amendment), granting them the right to initiate insolvency proceedings against defaulting real estate developers.

However, this reform also came with its fair share of unintended consequences. Alongside genuine allottees who sought possession of their homes, many others resorted to filing applications under Section 7 of the Code with an intent to claim assured returns, enforce buyback clauses or exit from projects with high profits. This misuse raised troubling questions: Should such investors be treated at par with genuine homebuyers, and how can one distinguish between the two classes? How can bona fide developers be safeguarded against such speculative claims?

To address these concerns, the Insolvency And Bankruptcy Code (Amendment) Ordinance, 2019 (later codified in the Insolvency and Bankruptcy (Amendment) Act, 2020) introduced a threshold which was, requiring that an application under Section 7 of the Code can only be filed jointly by at least 100 homebuyers or 10% of the total allottees in a project, whichever is lower. Yet, various questions continued to loom large over the real estate sector (2019 Amendment).

The Hon'ble Supreme Court (SC) recently addressed these issues in a set of connected appeals in the matter of Mansi Brar Fernandes v. Gayatri Infra Planner Pvt. Ltd. and Sunita Agarwal v. Antriksh Infratech Pvt. Ltd. (MansiBrar Judgment), wherein Ms. Mansi Brar Fernandes and Ms. Sunita Agarwal (jointly, the Appellants) had invested in real estate projects under agreements that prioritised assured returns and buybacks rather than possession. While the National Company Law Tribunal (NCLT) had admitted their application filed under Section 7 of the Code, the National Company Law Appellate Tribunal (NCLAT) set aside NCLT'S admission orders, holding that the Appellants were "speculative investors". NCLAT further held that the statutory requirements introduced by the 2019 Amendment were not applicable to the facts of the present case. The Appellants challenged the NCLAT's orders before the SC, which laid down parameters to draw a clear and intelligible differentia between genuine homebuyers and speculative investors and also decided the jurisprudential question of the applicability of the 2019 Amendment to matters that had already been reserved for orders when the amendment came into force.

The Legislative Context: Homebuyers and the Code:

Initially, homebuyers had no standing under the Code and the advances paid by them were treated merely as contractual payments. To address this imbalance, 2018 Amendment came into effect recognising them as financial creditors under Section 5(8)(f) of the Code and thereby not only empowering them to file Section 7 petitions but also ensuring their seat in the Committee of Creditors (CoC) as one of the classes of financial creditors.

This reform, however, opened the floodgates to numerous individual petitions before the NCLT. In Mansi Brar Judgment (supra), SC noted that in reality, many of these petitions were not filed by genuine homebuyers but by investors who had entered into agreements containing clauses for buybacks, high exit options, or guaranteed returns. These agreements, the SC observed, resembled financial instruments disguised as real estate deals. SC further noted that such investors used these agreements as a threat for filing petitions to pressurize the developers and recover amounts given by them. SC further noted that this creates a situation wherein if the market goes up, investors make profits otherwise they run to the NCLT to get refunds. The outcome of these situations are clogged tribunals, destabilised real estate projects, and delayed relief for genuine homebuyers actually seeking a home for themselves.

It is further observed that to cure this defect, the Code was amended by the 2019 Amendment, which mandated the threshold limit, that at least 100 homebuyers or 10% of the total allottees whichever is lower must jointly file a Section 7 petition under the Code. The aim was to ensure that insolvency is triggered only where there is genuine consensus among homebuyers and not at the whim of a few speculative investors chasing quick profits.

SC on Speculative Investors:

The SC in, Mansi Brar Judgment (supra) drew a sharp distinction between genuine homebuyers and speculative investors. SC explained in detail that speculative misuse of real estate agreements has been a persistent problem. It noted that speculation can be used to provide liquidity in financial markets but when it comes to the housing sector it harms genuine buyers, inflates housing demand artificially and destabilises the sector. On one hand, such contracts give developers a way to lure ordinary homebuyers with false promises and on the other hand they allow sharp investors to simply 'jump ship' and demand their money back, the moment the market turns unfavourable.

SC further observed that schemes of assured returns, compulsory buybacks, and high exit options are not housing contracts at all but financial derivatives masquerading as real estate agreements. Such contracts create a "heads I win, tails you lose" scenario, allowing investors to profit in good times and use insolvency proceedings to escape in bad times.

SC relied upon Pioneer Urban Land v. Union of India, which had upheld the 2018 Amendment recognising homebuyers as financial creditors but warned against speculative misuse. SC observed that to identify speculative investors, a holistic view must be taken which includes looking at the agreement, the allotment letter, the payment terms, and the buyer's overall conduct. It listed six non-exhaustive indicators of speculation, such as:

1. If the agreement replaces possession with buyback or refund options, the buyer is likely a speculative investor.
2. The buyer insists on refunds with high interest instead of accepting possession, it suggests speculation.
3. Buying multiple units (especially in double digits) raises suspicion. If the contract provides possession or refund only when possession fails, then it may still be genuine.
4. The buyer has special rights, preferential treatment, or unusual privileges, proving investment intent.
5. The agreement is substantially different from the standard RERA Model Agreements, the greater the deviation, the greater the chance it is speculative.
6. Unrealistic promises of 20% to 25% returns in a short time are classic signs of speculation.

Applying these tests, SC concluded that the Appellants were speculative investors and that their petitions could not be admitted under Section 7 of the Code. However, once the process has begun, even those treated as speculative investors are not completely shut out and can still seek recovery of the amounts invested or pursue remedies before other forums as permitted by law. In particular, they may recover their principal sums before consumer fora, the Real Estate Regulatory Authority (RERA), or civil courts, with the benefit that the period spent in the insolvency proceedings would be excluded for the purpose of calculating limitation.

The Threshold Question: Applicability of the 2019 Amendment:

SC noted that Ms. Mansi Brar Fernandes had filed her Section 7 application on March 18, 2019, which was heard, final arguments concluded, and reserved for orders on December 4, 2019. The NCLT admitted the application on January 2, 2020 without reference to the 2019 Amendment, whereas it had already come into effect on December 28, 2019. SC observed that the limitation period of thirty days to comply with the 2019 Amendment would have expired on January 27, 2020. Even if reckoned from January 2, 2020 (when the NCLT reopened after the winter recess), the limitation would have lapsed by January 31, 2020. SC further noted that although the affidavits filed by Ms. Mansi bore the date January 27, 2020, they were actually submitted before the NCLAT only on February 1, 2020, by which time the limitation had already expired. Consequently, the appellant could only attempt compliance with the amendment during the appeal.

Further, SC held that it was incumbent upon the NCLT to take cognizance of the 2019 Amendment and afford the appellant an opportunity to meet its requirements. Since no such opportunity was granted, the appellant had no occasion to comply before the NCLT. Relying on the doctrines of Actus Curiae Neminem Gravabit (an act of the court shall prejudice no one) and lex non cogit ad impossibilia (the law does not compel the impossible), SC ruled that once orders were reserved, the appellant could not have complied with the amendment until pronouncement, and insisting on compliance in such circumstances would amount to compelling an impossibility.

Accordingly, SC clarified that the application of the 2019 Amendment depends on the stage of the proceedings and the feasibility of compliance. Where orders were reserved prior to the promulgation of the 2019 Amendment, the requirement cannot be retrospectively enforced to defeat vested rights. On this basis, SC set aside the NCLAT's finding that the 2019 Amendment was not applicable to the present case.

Right to Shelter as a Constitutional Obligation

Beyond the insolvency framework, SC also underscored that housing is a basic human need and an integral facet of the right to life under Article 21 of the Constitution of India. It emphasised the State's duty to ensure access to affordable housing and cautioned against treating housing merely as a commercial commodity. Recognising the plight of middle-class families who continue to pay rent and EMIs while projects remain stalled, the SC placed the right to shelter at par with fundamental rights such as equality, dignity, and livelihood.

Directions for Systemic Reform

SC also issued broad directions aimed at strengthening the insolvency and housing ecosystem:

• The NCLT/NCLAT and RERA authorities must be adequately staffed. There should be designated IBC benches and services of retired judges can be used on an ad-hoc basis and RERAs must ensure that projects are approved only after proper due diligence.
• A Council should be formed consisting of Insolvency and Bankruptcy Board of India (IBBI) and RERA authorities to provide guidelines for project-wise CIRP and safeguards for allotees.
• In newer projects where of projects have not yet commenced, the proceeds from the allottees should go into an escrow account and disbursed as per the level of completion of the projects and the registration should be done after 20% of funds being received from the allottees. Further, if the contracts deviate from standard RERA agreements with buyback clauses, they must have an affidavit to ensure people over 50 years understand the risks associated.
• The NLCTs must ascertain at the stage of admission if the application is that of a genuine homebuyer or a speculative investor.
• The Central Government (CG) must establish a revival fund to ensure projects that can be saved are helped with the fund ensuring genuine homebuyers do not suffer consequences and liquidation is prevented.
• The CG should ensure uniformity in application of RERA across states and consider establishing a body to ensure completion of stalled projects under the Code.

Conclusion

This judgment marks a turning point in how courts will approach petitions by homebuyers under the Code. Although in the present case, the Appellants were recognised as speculative investors and while that may seem like a setback for those individuals but in the larger picture, this decision is a significant victory for genuine homebuyers as SC has reaffirmed that the Code is not to be used as a mere recovery tool but a mechanism for revival and collective resolution. It stabilises the real estate sector by ensuring that insolvency is triggered only through collective action reflecting genuine buyer consensus, while also holding that no litigant should suffer due to judicial delay.

This SC ruling benefits genuine homebuyers in three key ways:

1. It shields them from speculative investors who could derail projects for personal gains.
2. It directs systemic reforms to make NCLTs and RERAs more effective.
3. It reinforces that housing is not a playground for speculation but a fundamental human need deserving constitutional protection.

Lastly, as SC observed citing Kesavananda Bharati, where it was noted that while one individual may lose, the nation as a whole gains, here too, although the two Appellants lost their individual cases, Indian homebuyers as a class, stand to benefit.

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