Supreme Court Clarifies RERA vs. IBC: Homebuyers Must Prove Residential Intent for Insolvency Claims

The Supreme Court's recent judgment in Mansi Brar Fernandes v. Shubha Sharma & Anr clarifies the interplay between India's Real Estate (Regulation and Development) Act (RERA) and the Insolvency and Bankruptcy Code (IBC). RERA was designed for homebuyer protection and project completion, while IBC aims to resolve corporate insolvency.

Background: A 2019 Supreme Court ruling (Pioneer Urban Land and Infrastructure Ltd v. Union of India) had recognized homebuyers as financial creditors under IBC, allowing them to initiate insolvency against developers. This led to misuse by speculative investors.

Current Ruling: The Mansi Brar Fernandes ruling re-establishes RERA as the primary mechanism for homebuyer disputes concerning delays, refunds, or possession. IBC is designated as a remedy of last resort, to be used only for genuine cases of financial distress of a company.

Speculative Investor Test: A key aspect of the judgment is the introduction of a "speculative investor" test. Agreements with buy-back clauses, fixed returns, or assured appreciation are now viewed as investment instruments, not as a genuine intent to occupy the property. Such investors cannot use IBC to initiate corporate insolvency resolution processes (CIRP). Their recourse lies with RERA or consumer forums.

Impact: This ruling aims to restore balance, preventing IBC from becoming a recovery tool for speculative investors and discouraging misuse of insolvency proceedings. It reinforces that developers gain relief from frivolous insolvency petitions but face continued scrutiny under RERA. Insolvency professionals and National Company Law Tribunals (NCLTs) will need to conduct pre-admission scrutiny of agreements to identify speculative intent. Policymakers are urged to improve coordination between RERA authorities and NCLTs and consider legislative recognition for project-specific insolvency and the speculative investor test.

Impact: 8/10. This judgment significantly alters how homebuyers can pursue claims against defaulting developers, potentially impacting the volume of cases filed under IBC and the strategies employed by both aggrieved buyers and developers. It clarifies the regulatory landscape for a vital sector, influencing investor confidence and legal proceedings.

Difficult Terms:

• RERA (Real Estate (Regulation and Development) Act): A law enacted in 2016 to protect homebuyers, ensure transparency, and promote timely completion of real estate projects. • IBC (Insolvency and Bankruptcy Code): A law enacted in 2016 to consolidate and amend laws relating to insolvency resolution of entities, firms, and individuals in a time-bound manner. • Financial Creditors: Entities or individuals to whom a financial debt is owed. In the context of IBC, homebuyers were recognized as financial creditors. • Corporate Insolvency Resolution Process (CIRP): The process under IBC to resolve the insolvency of a corporate debtor. • NCLT (National Company Law Tribunal): Adjudicating authority for corporate insolvency matters under IBC. • Forum Shopping: The practice of choosing the most advantageous court or tribunal to file a case in. • Bona fide: In good faith; genuine.