Residents Welfare Association Or Homebuyers' Society Can't Intervene In Insolvency Petition Against Builder : Supreme Court

The Supreme Court on Thursday (January 15) held that Resident Welfare Associations (RWAs) representing homebuyers cannot intervene in the Corporate Insolvency Resolution Process unless the RWA itself has disbursed funds or is directly a party to the financial transaction, as only then can it claim the status of a financial creditor. “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.”, observed a bench of Justices JB Pardiwala and R Mahadevan, while dismissing a homebuyer's association plea who sought intervene in the Section 7 IBC proceedings. The case arose from an attempt by the Appellant-Elegna Co-operative Housing and Commercial Society Ltd., representing 189-unit holders of a completed tower in the “Takshashila Elegna” project situated in Ahmedabad, to intervene in Section 7 IBC proceedings initiated by Edelweiss ARC against the corporate debtor, Takshashila Heights India Pvt. Ltd. The Appellant sought to participate in the proceedings to protect the interests of its member homebuyers. However, the NCLAT rejected its intervention application, holding that it lacked locus standi. This rejection was challenged before the Supreme Court. Upholding the NCLAT's decision, the judgment authored by Justice Mahadevan ruled that proceedings under Section 7 of the IBC are strictly bipartite at the admission stage, involving only the financial creditor and the corporate debtor. The Court reiterated that the adjudicating authority's inquiry at this stage is limited to determining whether a financial debt exists and whether there has been a default. Third parties, including other creditors or representative bodies, have no independent right to intervene at this point. In essence, the court said that the RWAs, like the Appellan,t cannot claim the status of a financial creditor merely because they are representing the interest of the homebuyers. Unless it is shown that the RWA itself is the creditor, it has no locus to intervene, the court said. “In the present case, the appellant Society is neither a financial nor an operational creditor. It is a maintenance society not constituted for insolvency representation. No documentary proof of registration, collective authorisation, or general body resolution has been produced. Membership is automatic and mandatory, negating consensual representation. Reliance on compulsory membership to claim representational authority on behalf of allottees is nothing but a brutm fulmen. Notably, the intervention application was filed only at the appellate stage and not before the NCLT. 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.”, the court observed. “in the absence of any foundational right to participate in the proceedings before NCLT or NCLAT, the appellant society cannot claim a vested right to be heard at the appellate stage, for such right flows from the statute and is not a matter of right.”, the court held.Also From Judgment: 'To Safeguard Homebuyers' Interests' : Supreme Court Issues Directions For CoC In Insolvency Cases Against BuildersHeadnoteInsolvency and Bankruptcy Code, 2016 – Section 7 – Admission of CIRP – Mandatory Nature – Discretion of Adjudicating Authority – Supreme Court issued a set of directions regarding the functioning of the Committee of Creditors (CoC) under the Insolvency & Bankruptcy Code, noting that while the commercial wisdom of the CoC is paramount, such power must be exercised with responsibility, transparency and proper application of mind, particularly in real estate insolvencies where homebuyers' interests are deeply involved - Held, the inquiry under Section 7(5)(a) is confined strictly to the determination of debt and default - Once the Adjudicating Authority is satisfied that a financial debt exists and a default has occurred, it must admit the application unless it is incomplete - Considerations such as project viability, business status (going concern), stage of completion, or perceived prejudice to homebuyers are extraneous and irrelevant at the admission stage. [Para 12]Insolvency and Bankruptcy Code, 2016 – Section 7 – Locus Standi of Homebuyer Societies – Held, a society or Resident Welfare Association (RWA) does not possess locus standi to intervene in Section 7 proceedings at the pre-admission stage - At this stage, proceedings are in personam between the applicant creditor and the corporate debtor - While individual allottees are "financial creditors" under the Explanation to Section 5(8)(f), this status does not automatically extend to a society unless it is a creditor in its own right or a statutorily recognized authorized representative. [Para 13]Insolvency and Bankruptcy Code, 2016 – Object of Code – Resolution...

Residents Welfare Association Or Homebuyers' Society Can't Intervene In Insolvency Petition Against Builder : Supreme Court

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Yash Mittal

Residents Welfare Association Or Homebuyers' Society Can't Intervene In Insolvency Petition Against Builder : Supreme Court

Yash Mittal

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