IBC - Speculative Investors Can't Be Permitted To Misuse Insolvency & Bankruptcy Code Proceedings: Supreme Court

In a significant observation aimed at curbing the growing misuse of the Insolvency and Bankruptcy Code (IBC) in the real estate sector, the Supreme Court has reiterated that the Code cannot be used as a tool by speculative investors seeking quick financial returns rather than the genuine revival of distressed companies or protection of real homebuyers.

Emphasizing the remedial and protective nature of the IBC, the Court observed that the legislation was “conceived for revival and the protection of sick companies and, in the case of real estate, genuine homebuyers.” The Court made it clear that while investors are vital to the health of any industry and their legitimate interests deserve protection, those driven purely by profit motives cannot invoke the insolvency framework for speculative or coercive purposes.

The Bench comprising Justice JB Pardiwala and Justice R Mahadevan noted that such speculative participants, who enter real estate projects as investors rather than as allottees seeking homes, already have alternative legal remedies available under consumer protection law, the Real Estate (Regulation and Development) Act (RERA), or by approaching civil courts in appropriate cases. Resorting to insolvency proceedings in such cases, the Court cautioned, distorts the purpose of the IBC and undermines its carefully balanced legislative framework.

"This Court reiterates that while investors are integral to any industry and their interests warrant protection, speculative participants driven purely by profit motives cannot be permitted to misuse the Insolvency and Bankruptcy Code, which is a remedial framework conceived for revival and the protection of sick companies and, in the case of real estate, genuine homebuyers. Such investors have alternative remedies under consumer law or RERA and even recourse to Civil Courts in appropriate cases. To admit speculative claims into insolvency proceedings would dilute the intelligible differentia underlying the legislative scheme, destabilize the residential real estate sector, and erode the social purpose embedded in housing as a fundamental right," the Court observed.

The Court observed that the determination of whether an allottee is a speculative investor, must be holistic, having regard to the terms of the agreement, the allotment letter, the payment terms, and the overall conduct of the allottee.

The judgment cited certain non-exhaustive indicators as follows :

(1) If the agreement substitutes possession with a buyback or refund option, or any other special arrangement, the allottee is likely a speculative investor.

(2) Insistence on refund with high interest, coupled with refusal to accept possession would indicate speculation.

(3) Purchase of multiple units, especially in double digits, shall invite greater scrutiny, though it is not conclusive. If the terms of the agreement provide for possession or refund in the event of failure to give possession alone, this factor may not be held against the allottee.

(4) Special rights, preferential treatment, or unusual privileges to the allottee would signal investment intent.

(5) Deviation from the RERA Model Agreement shall be a crucial indicator as to the nature of the transaction – the greater the departure, the greater the likelihood of speculation.

(6) Unrealistic interest rates and promises of 20 – 25% returns over a short duration are indicative of speculation.

The Court clarified that the distinction between speculative investors and genuine homebuyers is relevant only at the stage of initiation of CIRP. Such allottees are not barred from filing claims for the principal amount invested, or from pursuing remedies before other fora in accordance with law.

The matter that stemmed from a 2020 NCLAT judgment which rejected a Section 7 IBC petition filed by an allottee, Ms. Fernandes-Appellant. The tribunal found her Memorandum of Understanding (MoU) with the builder was not a standard builder-buyer agreement but a financial investment scheme with a compulsory buyback clause.

Appellant had invested ₹35 lakh and was promised ₹1 crore after 12 months, backed by post-dated cheques. When the cheques bounced, she sought insolvency proceedings. The NCLAT classified her as a “speculative investor” attempting to misuse the IBC as a coercive recovery mechanism, noting she had already pursued remedies under the Negotiable Instruments Act

Against the NCLAT's ruling, she approached the Supreme Court.

Affirming the NCLAT's ruling, the judgment authored by Justice Mahadevan ruled against the misuse of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by the speculative investors.

The Court reiterated that the IBC is not a recovery mechanism for speculative investors who are driven by profit motives and must explore other alternative remedies enshrined under relevant statutes.

Also from the judgment -