Factual Background and Procedural History
The case consolidated four civil appeals—C.A. No. 3826 of 2020 (Mansi Brar Fernandes v. Shubha Sharma & Anr.), C.A. No. 540 of 2021, C.A. No. 5495 of 2025, and C.A. No. 3903 of 2022—arising from orders of the National Company Law Appellate Tribunal (NCLAT).
Mansi Brar Fernandes, a homebuyer, entered into a Memorandum of Understanding (MoU) dated 6 April 2016 with Gayatri Infra Planner Pvt. Ltd. for the purchase of four flats in “Gayatri Life,” Greater Noida. The MoU contained a buyback clause, allowing the developer to repurchase the flats for ₹1 crore within 12 months of an investment of ₹35 lakh. Upon default and dishonour of cheques, the appellant filed proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the NCLT, which admitted the application on 2 January 2020.
However, on appeal, the NCLAT (17 November 2020) reversed the order, holding that Fernandes was a “speculative investor” and not a genuine homebuyer. A similar reversal occurred in Sunita Agarwal v. Antriksh Infratech Pvt. Ltd., where a Section 7 petition was rejected for being speculative.
These decisions were challenged before the Supreme Court, along with cross-appeals by the directors contesting the applicability of the IBC (Amendment) Ordinance, 2019, which introduced a threshold requirement (10% or 100 allottees) for initiating insolvency against real estate developers.
Identification of Legal Issues
The Court addressed two principal legal questions:
- Whether the appellants (Fernandes and Agarwal) were speculative investors disentitled from invoking Section 7 of the IBC.
- Whether the threshold introduced by the IBC (Amendment) Ordinance, 2019, applied to pending Section 7 applications reserved for judgment before its promulgation.
Arguments of the Parties
Appellants’ Submissions (Fernandes and Agarwal):
- Claimed the status of homebuyers and financial creditors under Section 5(8)(f) of the IBC.
- Contended that the buyback clause was at the developer’s discretion and did not indicate speculative intent.
- Asserted bona fide intention to obtain possession, not profits, citing Pioneer Urban Land & Infrastructure Ltd. v. Union of India (2019) 8 SCC 416.
- Argued that post-dated cheque dishonour and subsequent Section 138 N.I. Act proceedings did not convert a legitimate housing transaction into a speculative one.
- Invoked the doctrine of actus curiae neminem gravabit—that no party should suffer because of the act of the Court—since their case was reserved before the Ordinance.
Respondents’ Submissions (Developers/Directors):
- Asserted that the MoUs were investment contracts with high, guaranteed returns, showing no intent to acquire possession.
- Contended that such buyback schemes were financial derivatives masquerading as housing contracts.
- Relied on Pioneer Urban and Binani Industries Ltd. v. Bank of Baroda (2018) to argue that IBC is not a recovery mechanism.
- Claimed that the appellants sought to misuse insolvency proceedings for coercive recovery.
- Emphasized the mandatory threshold requirement under the 2019 Ordinance, arguing non-compliance made the petitions untenable.
Court’s Analysis and Reasoning
A. On Speculative Investors vs. Genuine Homebuyers
The Supreme Court reaffirmed that possession is the defining indicator of genuine homebuying intent. Drawing from Pioneer Urban, the Court held that:
- Speculative investors are those seeking profits or refunds without the intention to occupy or possess.
- Indicators of speculation include:
- Buyback/refund clauses substituting possession.
- Unrealistic returns (20–25% or higher).
- Multiple unit purchases.
- Post-dated cheques or assured exit options.
- Deviation from Model RERA agreements.
- Buyback/refund clauses substituting possession.
Applying these criteria, both Fernandes and Agarwal were found to have engaged in speculative contracts with assured returns and buyback clauses. The Court concluded that their transactions were investment arrangements, not housing purchases, and thus they could not trigger CIRP under Section 7 IBC.
However, the Court preserved their right to pursue remedies under RERA, consumer forums, or civil courts, ensuring that such investors are not entirely remediless.
B. Applicability of the IBC (Amendment) Ordinance, 2019
The Court observed that the Section 7 application in Fernandes’ case was heard and reserved before the Ordinance’s promulgation. Hence, compliance could not have been achieved at that stage. Invoking lex non cogit ad impossibilia (the law does not compel the impossible), the Court held:
- Procedural amendments should not prejudice a litigant where compliance was impossible due to judicial delay.
- The NCLAT erred in holding that the Ordinance was inapplicable; rather, it should have applied prospectively or allowed post-facto compliance.
- The doctrine of actus curiae neminem gravabit protected Fernandes from prejudice caused by the court’s own delay.
C. Fundamental Right to Shelter under Article 21
In a constitutional flourish, the Court reaffirmed that the right to housing is a facet of Article 21. Citing Chameli Singh v. State of U.P. (1996) 2 SCC 549 and Samatha v. State of A.P. (1997) 8 SCC 191, it held:
- Housing is a fundamental human need, not a speculative commodity.
- The State has a constitutional duty to ensure timely possession and prevent fraud by developers.
- Home-buying cannot be reduced to a commercial gamble; it embodies the dignity and security guaranteed under Article 21.
The Court also urged the Union Government to create a revival fund for stalled projects and directed immediate filling of NCLT/NCLAT vacancies, emphasizing that delays defeat the purpose of the IBC.
Final Conclusion and Holding
- The Supreme Court upheld the NCLAT’s findings that Fernandes and Agarwal were speculative investors, disentitling them from invoking insolvency under Section 7 IBC.
- However, it set aside the NCLAT’s finding on the inapplicability of the 2019 Ordinance, clarifying that procedural fairness demanded opportunity for compliance.
- The Court affirmed the right to shelter as a fundamental right, urging the State to enforce strict measures protecting genuine homebuyers.
- Directions were issued to the Union Government to strengthen NCLT/NCLAT infrastructure, introduce RERA-compliant Standard Operating Procedures, and ensure registration and escrow regulation of real estate transactions.
FAQs:
1. What is the difference between a homebuyer and a speculative investor under IBC?
A genuine homebuyer seeks possession of a property, while a speculative investor enters for profit through buyback or assured-return clauses. The Supreme Court bars speculative investors from initiating insolvency proceedings.
2. Can speculative investors file for insolvency under Section 7 of the IBC?
No. The Court held that speculative investors cannot misuse IBC for recovery. Only genuine homebuyers with intent to take possession qualify as financial creditors.
3. What is the significance of the 2019 IBC Amendment for real estate cases?
The amendment introduced a threshold—at least 100 or 10% of allottees—to jointly file insolvency proceedings, preventing misuse by isolated investors.
4. How does Article 21 relate to the right to housing?
The Supreme Court reaffirmed that the right to shelter is integral to the right to life under Article 21, obligating the State to ensure housing security and prevent developer exploitation.
5. What remedies are available to speculative investors if IBC relief is denied?
Such investors may seek recovery under RERA, Consumer Protection Act, or through civil courts, but not through insolvency proceedings intended for revival of distressed projects.
Stay informed with insights that matter. Follow us for more updates on key legal developments.
Disclaimer
The content provided here is for general information only; it does not constitute legal advice. Reading them does not create a lawyer-client relationship, and Mahendra Bhavsar & Co. disclaims all liability for actions taken or omitted based on this content. Always obtain advice from qualified counsel for your specific circumstances. © Mahendra Bhavsar & Co.