NEW DELHI: The Supreme Court on Thursday ruled that homebuyer associations or Resident Welfare Associations (RWAs), which are usually formed for the maintenance and management of common facilities in a housing project, cannot intervene in the insolvency proceedings of the developer company.A bench of Justices JB Pardiwala and R Mahdevan, who upheld the insolvency proceedings in respect of Takshashila Heights India Private Ltd under the Insolvency and Bankruptcy Code, 2016, said that if creditors choose to invoke the provisions of the code, they must do so with a genuine willingness to pursue the revival of the corporate debtor.
It said: “If revival were not their objective, the Code cannot be converted into an instrument of speedy recovery; alternative legal remedies, including under SARFAESI or other applicable laws, remain available in accordance with law.” The court upheld the National Company Law Appellate Tribunal’s (NCLAT) dismissal of Elegna Co-operative Housing and Commercial Society Ltd’s (a homebuyers’ association) application for intervention on the grounds that it did not have locus standi to intervene in the company’s appeal.
The bench said the IBC is a stand-alone code that confers participation rights only on persons falling within legally defined categories and a financial creditor under section 5(7) must be a person to whom a financial debt is owed.
“Although the explanation to Section 5(8)(f) considers individual rights holders as financial creditors, it does not extend this status to associations or associations unless the entity is itself a creditor in its own right, or is legally recognized as an authorized representative under the Code,” the report said.
The bench further said that an association is a separate legal entity from its members and unless it has itself advanced funds, executed allotment agreements or received allotments, it cannot claim the status of a financial creditor.
“The right to initiate or participate in CIRP arises from the debt transaction and statute, not from associative or representative interest,” it said and held, “An association or Resident Welfare Association, which is not itself a creditor and is not recognized as an authorized representative of allottees under the IBC, has no locus standi to intervene in proceedings arising out of a Section 7 petition”.
Justice Mahadevan, who wrote the judgment on behalf of the court, said homebuyers’ associations or welfare associations are generally constituted for the maintenance and management of common facilities.
“Their office holders cannot litigate on behalf of allottees or claim representative status before judicial authorities without explicit legal recognition or legally valid consent,” the court ruled.
It added that any contrary interpretation would impermissibly expand the statutory definition of “financial creditor”, infringe on the individual rights of allottees, and create an extra-legal layer of representation.
“It would also enable errant corporate debtors to obstruct and delay insolvency proceedings under the guise of perceived collective interests – an abuse expressly warned against in the Pioneer Urban Land judgment (2019),” the report said.
The court further reasoned that the procedure under Section 7 of the IBC is essentially two-fold 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 upheld by this Court,” the Court said, adding that collective representation of homebuyers is governed by law and arises only after admission of the Corporate Insolvency Resolution Process (CIRP) through the authorized representation mechanism.
It said the IBC does not contemplate ad hoc or self-appointed representation at the pre-admission or appeal stage and in the context of allotted property owners, Section 7 itself prescribes that an application must be made jointly by the prescribed number of allottees and not through an authorized representative, let alone through a non-partisan housing society constituted for maintenance purposes.
Referring to the present case, the court said that the Elegna Co-operative Housing and Commercial Society is neither a financial nor an operational creditor, but a maintenance company not established for the purpose of representing insolvencies.
“The Society is not a party to the financial transaction which forms the basis of the Section 7 application. Therefore, the appellant has no legal right of appeal,” the report said, adding that the NCLAT’s decision of no locus standi is on sound legal basis.
“Allowing such an intervention would undermine the expeditious and structured insolvency framework envisaged in the Code,” the report said, adding that this Court has been called upon time and again to protect the rights of homebuyers navigating the turbulent waters of the Indian real estate sector.
The Court said that the Court is aware of its constitutional and statutory duty and has made sustained efforts within the four corners of the law to protect the legitimate interests of home buyers.
“The right course lies in constructive cooperation with the Creditors’ Committee, with the aim of completing the project and advancing the collective interest, rather than fragmenting the process by individual self-interest,” the report said.
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