Supreme Court Bars Speculative Homebuyers from Section 7 IBC, Clarifies Allottee Criteria
- REEDLAW
- Sep 16
- 4 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the Supreme Court of India clarified the ambit of “allottee” under the Insolvency and Bankruptcy Code, 2016, holding that speculative homebuyers cannot invoke Section 7 to initiate a corporate insolvency resolution process. The Court ruled that agreements containing buyback clauses, assured returns or investment-style arrangements demonstrate an intent of financial speculation rather than genuine homeownership, thereby disentitling such investors from being treated as allottees for the purpose of insolvency proceedings.
The Supreme Court Bench comprising Justice J. B. Pardiwala and Justice R. Mahadevan, while deciding a batch of four appeals, categorically held that a homebuyer entering into agreements with buyback clauses, assured returns, or investment-style arrangements was a speculative investor and not a genuine allottee. Consequently, such a claimant stood barred from initiating proceedings under Section 7 of the Insolvency and Bankruptcy Code against the corporate debtor.
The Supreme Court dealt with four connected appeals arising from two judgments of the Appellate Tribunal, both of which examined the maintainability of Section 7 applications filed by individual homebuyers against real estate companies. In the first set of appeals, the Adjudicating Authority had admitted a Section 7 application filed by a homebuyer, recognising her as a Financial Creditor of the Corporate Debtor. However, the Appellate Tribunal reversed the decision, branding her a speculative investor and not a genuine allottee. Cross-appeals were also filed by the directors of the Corporate Debtor, challenging the Appellate Tribunal’s reasoning and raising the question of whether the statutory threshold introduced by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, later enacted as an Amendment Act, applied to pending cases. In the second set of proceedings, another homebuyer’s petition had been admitted by the Adjudicating Authority, but again, the Appellate Tribunal set aside the admission, holding her to be a speculative investor.
The Supreme Court analysed the legislative intent behind recognising homebuyers as Financial Creditors under the 2018 amendment to the Code. While this recognition was intended to protect genuine homebuyers and provide them a collective voice in insolvency proceedings, the Court noted that speculative investors had begun misusing the provision to seek early refunds and assured returns. This led Parliament to introduce the 2019 Ordinance, which mandated that a minimum of 100 homebuyers or 10% of the total allottees in a project must jointly file a Section 7 application. The Court emphasised that this safeguard was necessary to prevent abuse while maintaining protection for genuine allottees.
In its detailed reasoning, the Court defined speculative investors as those entering into transactions solely for financial gain, with no genuine intention of taking possession of the property. It clarified that the presence of buyback clauses, abnormally high assured returns, and agreements structured as investment contracts were strong indicators of speculative intent. The Court referred to earlier rulings such as Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502; Duni Chand Rataria, and Jute Investment Co. to reinforce the principle that possession and delivery are central to the determination of a genuine allottee. Applying these standards, the Court found that in both sets of appeals, the agreements contained clauses guaranteeing abnormal returns—25% per annum in one case—and mandatory buyback obligations, thereby reflecting speculative motives rather than genuine home purchase.
The Court also addressed the issue of the Ordinance’s applicability to pending cases. It invoked the principle of actus curiae neminem gravabit, observing that litigants should not be prejudiced by acts of the Court. Since some applications had been reserved for orders before the Ordinance came into effect, subsequent compliance during appellate proceedings was held to be sufficient to cure procedural defects. This interpretation reinforced the legislative intent to balance genuine homebuyer rights with safeguards against speculative misuse.
Importantly, the Court reaffirmed that the right to shelter is a fundamental right under Article 21 of the Constitution, imposing a duty upon the State to safeguard genuine homebuyers. It issued systemic directions aimed at strengthening NCLT and NCLAT infrastructure, enhancing the powers of RERA authorities, and encouraging project-specific insolvency resolutions. The Court made clear that while investors play a role in real estate financing, speculative participants cannot be allowed to distort the objectives of the Code or prejudice the rights of genuine allottees.
Ultimately, the Supreme Court dismissed the appeals of the homebuyers, upheld the maintainability of the objections raised by the directors of the Corporate Debtor, and confirmed the findings of the Appellate Tribunal. This landmark ruling not only clarified the criteria distinguishing speculative investors from genuine homebuyers under the Insolvency and Bankruptcy Code but also harmonised the operation of the 2019 threshold requirement with pending and future insolvency cases, thereby strengthening the legislative purpose of protecting the real estate sector while curbing misuse.
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