The Supreme Court (“Court“) in its recent judgment has clarified the distinction between speculative investors and genuine homebuyers in the context of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC“). The Court has re-affirmed that insolvency proceedings cannot be a tool for speculative investors. The Court also issued a slew of directions in the interest of bonafide homebuyers and stability of real estate sector.

Brief Background

The appellants were allottees in stalled real estate projects where the developer failed to deliver possession despite substantial amount having been paid by the allottees. The agreement between the allottees and the developer also contained a buy-back clause and assured returns to the allottees. Upon the developers failure to deliver possession or give the assured returns, allottees filed applications under Section 7 of the IBC before the National Company Law Tribunal, New Delhi, (“NCLT“) seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) of the developer. While NCLT admitted the applications, the National Company Law Appellate Tribunal (“NCLAT“) set aside the NCLT decision. The NCLAT held that the appellants were speculative investors who were interested in making profit, and not allottees under Section 5(8)(f) of the IBC who were interested in possession of the units.

In its judgment, the Court affirmed NCLAT’s findings that the appellants / allottees were “speculative investors” rather than genuine homebuyers, and therefore could not use Section 7 of the IBC to trigger CIRP.

The Court also laid down certain indicative factors for distinguishing speculative investors from genuine allottees.

Who is a “Speculative Investor”? Key Tests

The Supreme Court provided a holistic, fact-specific framework for distinguishing speculative investors from genuine homebuyers. The Court reiterated the distinction between speculative investors and genuine homebuyers in Pioneer Urban Land and Infrastructure Limited v. Union of India, (2019) 8 SCC 416, and held that delivery and possession of a unit remains sine qua non of a genuine homebuyer and an allottee who has no intention to take possession of the unit and is interested in a refund or profit falls within the category of ‘speculative investor’.

The Court identified several non-exhaustive indicators of speculative intent, including:

• Agreements replacing the right to possession with buyback or refund options;
• Agreements offering assured returns or unrealistic interest rates (such as 20–25% per annum) over short periods;
• Purchase of multiple units would invite greater scrutiny;
• Special rights or preferential treatment not available to standard buyers;
• Deviation from the RERA Model Agreement to Sell;
• Conduct that demonstrates an insistence on refund with interest rather than acceptance of possession;

Right to Shelter – Fundamental right under Article 21 of the Constitution:

The Court reiterated that the right to shelter is enshrined as an integral part of the right to life under Article 21 of the Constitution of India, 1950, as has been held in various decisions by the Court. The Court emphasized that purchasing a home cannot be treated as mere ‘commercial transaction’. The State has a duty to establish and enforce a protective framework that shields homebuyers from fraud and exploitation at the behest of developers and the State must proactively address the menace of a parallel cash economy and speculative practices in the real estate market, which artificially inflate housing costs.

Directions issued by the Court

The Court issued various directions to strengthen the ecosystem and protect bona fide homebuyers inter alia:

1. Filing up vacancies in the NCLT and NCLAT, the creation of dedicated IBC benches, and infrastructure upgrades, with compliance to be reported within three months;
2. Constitution of a Committee to suggest commercially viable systemic reforms for cleansing and infusing credibility into the real estate sector;
3. RERA authorities be strengthened with adequate staffing, due diligence processes, and at least one legal or consumer expert member;
4. Constitute a council to frame specific guidelines for insolvency proceedings in real estate sector, including timelines for project-wise CIRP, and safeguards for allottees and to facilitate the handover of possession where substantial completion has taken place;
5. Insolvency proceedings in real estate should, by default, be conducted on a project-specific basis rather than the entire corporate debtor, unless circumstances justify otherwise, to protect solvent projects and the interests of homebuyers;
6. Establishment of a revival fund through NARCL or the expansion of the SWAMIH fund to provide bridge financing for stressed projects undergoing CIRP thereby preventing liquidation of viable projects and safeguarding homebuyer interests;
7. For nascent projects, the Court mandated that allottee funds be held in escrow and released according to RERA-sanctioned standard operating procedures;
8. NCLT must record a prima faciefinding at the stage of admission of Section 7 IBC application on whether the applicant is a genuine homebuyer or speculative investor;
9. Government to prioritize e-filing, video-conferencing, and dedicated case management system for IBC matters, in view of the heavy caseload before NCLTs.

Key Takeaways

The judgment makes clear that the intention to take possession is the central criterion for distinguishing genuine homebuyers from speculative investors other than the other key indicators of speculative intent. The Court reiterated that RERA should be the first forum for homebuyer grievances, with the IBC reserved for the revival and completion of projects, and not for individuals seeking to make profit on investments.

In the Court’s own words and spirit, the objective is to ensure that India’s “dream homes” are delivered on time to genuine allottees, while insulating the sector from speculative distortions and as in the culmination of the landmark Kesavananda Bharti case, where “Kesavananda Bharti lost but the country won”, the various directions have been issued by the Court to ensure that larger interest of the sector and genuine allottees must prevail over narrower considerations.

The judgment truly blends doctrinal clarity with administrative reform, reaffirming that in real estate insolvency, resolution (not recovery) must lead, and the right to shelter must prevail.