Kamal Ghorui
The Supreme Court on 15.01.2026, clarified the scope of admission of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), holding that once the existence of financial debt and default is established, the Adjudicating Authority must admit the application and cannot refuse admission on considerations such as project viability, stage of completion, or the possible impact on homebuyers.A Bench of Justice J.B. Pardiwala and Justice R. Mahadevan delivered the judgment while deciding appeals arising from insolvency proceedings initiated against Takshashila Heights India Private Limited, the developer of the real estate project Takshashila Elegna in Ahmedabad.The Court further held that a housing society or resident welfare association has no locus standi to intervene in proceedings under Section 7 at the pre-admission stage as the proceedings are limited to the financial creditor and the corporate debtor.The Court further clarified that rejection of the society’s intervention does not leave homebuyers without remedies under the IBC framework. Homebuyers who have not yet received possession remain financial creditors and can submit claims and participate in the Committee of Creditors through authorized representatives once CIRP is admitted.At the same time, recognizing the particular vulnerability of homebuyers in real estate insolvencies, the Court issued directions requiring the Committee of Creditors (CoC) to record written reasons for certain key decisions affecting homebuyers.Background of the DisputeThe corporate debtor, Takshashila Heights India Pvt. Ltd., had obtained financial assistance of Rs.70 crores from ECL Finance Ltd. in 2018 through two term loan facilities for development of a residential-cum-commercial project titled Takshashila Elegna.The loan facilities were secured through mortgage and other security documents. However, due to delays in repayment, the loan account was classified as a Non-Performing Asset (NPA) on 30.12.2021. This debt was later transferred to Edelweiss Asset Reconstruction Company Limited (EARCL) by an assignment agreement that was signed on 09.05.2022.Following the assignment, EARCL issued a recall notice demanding repayment of over ₹53 crores and initiated recovery proceedings before the Debts Recovery Tribunal as well as under the SARFAESI Act. The parties then signed an agreement in May 2023 named Restructuring-cum- One Time Settlement (OTS) agreement according to which the corporate debtor would repay 55 crores in instalments. The developer made an initial instalment yet defaulted in other payments. After revoking the restructuring arrangement, the financial creditor filed a Section 7 IBC petition before the National Company Law Tribunal seeking initiation of the Corporate Insolvency Resolution Process (CIRP).NCLT Refuses AdmissionThe National Company Law Tribunal (NCLT), Ahmedabad Bench dismissed the Section 7 petition.The NCLT held that the IBC appeared to have been invoked as a recovery mechanism rather than for resolution. The tribunal also noted that the project was substantially complete and that initiation of CIRP could adversely affect homebuyers.Aggrieved by the order of dismissal the financial creditor filed an appeal before the NCLAT and set aside the NCLT’s order. The appellate tribunal held that once financial debt and default were established, the application had to be admitted under Section 7 of the IBC.The NCLAT therefore directed admission of the corporate debtor into CIRP.Another application which was rejected by the NCLAT was an intervention application by Elegna Co-operative Housing and Commercial Society Ltd. which was a society purportedly representing homebuyers in the project. The housing society and the corporate debtor appealed to the Supreme Court to the NCLAT ruling.Before the Supreme Court, the corporate debtor argued that the project was commercially viable and substantially complete and that insolvency proceedings would harm the interests of homebuyers.The Supreme Court, rejecting these arguments, reiterated that the inquiry under Section 7 is limited to determining whether financial debt exists and whether default has occurred.The Court observed:“The inquiry under Section 7(5)(a) is confined strictly to the determination of debt and default. Once the Adjudicating Authority is satisfied that a financial debt exists and a default has occurred, it must admit the application unless it is incomplete.”The Court clarified that several considerations relied upon by the NCLT were legally irrelevant at the admission stage.“Considerations such as project viability, the fact that the corporate debtor is a going concern, the stage of completion of the project, or the perceived prejudice to homebuyers are wholly extraneous to the statutory inquiry at the admission stage.”The Bench emphasized that the statutory trigger for insolvency proceedings is default, and once default is established the application must be admitted.The corporate debtor had relied on the decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. to argue that the Adjudicating Authority has discretion to refuse admission of insolvency petitions.Rejecting this contention, the Court held that the decision in Vidarbha Industries was confined to exceptional circumstances and does not alter the settled legal position.“The reliance placed on Vidarbha Industries is wholly misconceived. That decision has consistently been recognised as a narrow exception confined to its peculiar facts.”The Court clarified that admission under Section 7 remains mandatory once debt and default are established.Parallel Recovery Proceedings Not a Bar To CIRPAnother argument raised by the corporate debtor was that the financial creditor had already initiated recovery proceedings under the SARFAESI Act and before the DRT, and therefore could not invoke the IBC.“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.”The Court explained that the IBC contains an overriding provision under Section 238, and once CIRP is admitted, the statutory moratorium under Section 14 stays all such recovery proceedings.The Court also clarified that the objective of the IBC is resolution and revival rather than mere recovery.“The concept of revival under the IBC does not exclude recovery altogether; it excludes the abuse of insolvency as a pressure tactic.”Default Established from RecordUpon reviewing the record, the Court held that the presence of financial debt was not disputed and that the corporate debtor had continued to fail to make repayment obligations. The Court noted that the restructuring agreement had failed due to non-payment of instalments within the stipulated cure period and that the financial creditor was contractually entitled to recall the entire outstanding amount.The Court therefore upheld the NCLAT’s decision directing admission of CIRP.The second issue before the Court concerned the intervention application filed by Elegna Co-operative Housing and Commercial Society Ltd. The society argued that it represented more than 189-unit holders and that the insolvency proceedings would directly affect their proprietary rights.The Supreme Court rejected the intervention plea.The Court clarified that while individual homebuyers are recognized as financial creditors under the IBC, this status does not extend automatically to a housing society.“While individual allottees are financial creditors under the Explanation to Section 5(8)(f), this status does not automatically extend to a society unless it is a creditor in its own right or a statutorily recognised authorised representative.”The Court also emphasized that proceedings under Section 7 remain in personam at the pre-admission stage.“At the pre-admission stage, proceedings under Section 7 remain in personam between the applicant creditor and the corporate debtor.”Accordingly, third parties who are not creditors have no independent right to participate in such proceedings.The Court also cautioned that allowing housing societies to intervene in insolvency proceedings could enable corporate debtors to delay CIRP through indirect challenges raised in the name of collective interests of homebuyers.While rejecting the society’s plea, the Court acknowledged the difficult position faced by homebuyers in real estate insolvencies.The Bench observed that homebuyers often find themselves caught between developers and institutional lenders.“Caught between the developer on one hand and institutional lenders on the other, their interests are particularly vulnerable.”The Court emphasized that creditors invoking the IBC must do so with a genuine intent to pursue revival of the corporate debtor.“If creditors elect to invoke the provisions of the Code, they must do so with a genuine willingness to pursue revival of the corporate debtor. Should revival not be their objective, the Code cannot be converted into a tool for expedient recovery; alternative statutory remedies, including under SARFAESI, remain available.”The Court also noted that homebuyers are adequately protected under the statutory framework once CIRP commences, since they are treated as financial creditors and represented in the CoC through authorized representatives.Directions Regarding Committee of CreditorsRecognizing the importance of transparency in real estate insolvency cases, the Court issued directions regarding the functioning of the Committee of Creditors.The Court observed:“While the commercial wisdom of the Committee of Creditors is paramount and is not ordinarily amenable to judicial review, the width of powers vested in the CoC carries with it a corresponding duty of responsibility.”The Court further emphasized that important decisions affecting homebuyers must be supported by reasons.“Any extraordinary or non-routine decision taken by the CoC must, therefore, be supported by cogent reasons duly recorded in writing.”The Court issued the following directions:“The Information Memorandum shall mandatorily disclose comprehensive and complete details of all allottees.”“Where the Committee of Creditors, upon due consideration, finds it not viable to approve handover of possession in terms of Regulation 4E of the CIRP Regulations, it shall mandatorily record cogent and specific reasons in writing for such decision.”“Any recommendation for liquidation by the Committee of Creditors shall be accompanied by a reasoned justification recorded in writing, evidencing proper application of mind and due consideration of all viable alternatives, in consonance with the objective of the Code.”The Court clarified that these directions shall operate prospectively.(Vatsal Chandra is a Delhi-based Advocate practicing before the courts of Delhi NCR.)
