Homebuyers' Maintenance Societies, RWAs Don't Have Locus Standi To Intervene in insolvency process of developer firm: SC

The Supreme Court on Thursday held that homebuyers’ societies or Resident Welfare Associations (RWAs), typically formed for the maintenance and management of common facilities in a housing project, cannot ordinarily intervene in insolvency proceedings initiated against the developer company.

A bench of justices JB Pardiwala and R Mahdevan, which upheld the insolvency proceedings related to Takshashila Heights India Private Ltd under the Insolvency and Bankruptcy Code of 2016, said 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.

It said, "Should revival not be their objective, the Code cannot be converted into a tool for expedient recovery; alternative statutory remedies, including under SARFAESI or other applicable laws, remain available in accordance with law."

The bench upheld the rejection of intervention application by National Company Law Appellate Tribunal (NCLAT) of Elegna Co-operative Housing and Commercial Society Ltd (a society of home buyers) on the ground that it lacked locus standi to intervene in the company's appeal.

The bench said the IBC is a self-contained code which confers participatory rights only on persons falling within statutorily defined categories and a financial creditor under its Section 5(7) must be a person to whom a financial debt is owed.

"While the explanation to Section 5(8)(f) deems individual allottees to be financial creditors, it does not extend such status to societies or associations unless the entity is itself a creditor in its own right, or is statutorily recognised as an authorised representative under the Code," it said.

Elaborating further, the bench said that a society is a distinct juristic entity separate from its members and unless it has itself advanced funds, executed allotment agreements, or received allotments, it cannot claim financial creditor status.

"The right to initiate or participate in CIRP flows from the debt transaction and the statute, not from associative or representational interest," it said and held, "A society or Resident Welfare Association, not being a creditor in its own right and not recognised as an authorised representative of allottees under the IBC, has no locus standi to intervene in proceedings arising out a Section 7 petition".

Justice Mahadevan, writing the judgement on behalf of the bench said homebuyers' societies or welfare associations are ordinarily constituted for maintenance and management of common facilities.

"Their office-bearers cannot litigate on behalf of allottees or claim representative status before adjudicatory fora absent explicit statutory recognition or legally valid authorisation," the bench held.

It added that any contrary interpretation would impermissibly enlarge the statutory definition of "financial creditor", encroach upon individual rights of allottees, and create an extra-statutory layer of representation.

"It would also enable errant corporate debtors to obstruct and delay insolvency proceedings under the guise of purported collective interests – an abuse expressly cautioned against in Pioneer Urban Land (2019 verdict)," it said.

The bench further reasoned that the proceedings under section 7 of the IBC are essentially bipartite at the admission stage, involving only the financial creditor and the corporate debtor.

"Unrelated third parties including other creditors, have no independent right of audience at this stage, a principle consistently affirmed by this Court," it said, adding that a collective representation of homebuyers is statutorily regulated and arises only after admission of Corporate Insolvency Resolution Process (CIRP) through the authorised representative mechanism.

It said the IBC does not contemplate ad hoc or self-appointed representation at the pre-admission or appellate stage and in the context of real estate allottees, section 7 itself mandates that an application must be filed jointly by the prescribed number of allottees and not through any authorised representative, much less through a non-party housing society formed for maintenance purposes.

Referring to the instant case, the bench said the Elegna Co-operative Housing and Commercial Society is neither a financial nor an operational creditor but a maintenance society not constituted for insolvency representation.

"The Society is not a party to the financial transaction forming the substratum of the Section 7 application. Hence, no statutory right of appeal inheres in the appellant," it said, adding that the NCLAT's decision absence of locus standi rests on sound legal footing. "Permitting such intervention would undermine the expeditious and structured insolvency framework envisaged under the Code," it said, adding that this Court has, time and again, been called upon to protect the rights of homebuyers navigating the turbulent waters of India's real estate sector.

It said conscious of its constitutional and statutory duty, this Court has made sustained efforts, within the four corners of the law, to safeguard the legitimate interests of homebuyers.

"The appropriate course lies in constructive engagement with the Committee of Creditors, with a view to completing the project and advancing the collective good, rather than fragmenting the process through individual self-interest," it said.