The Supreme Court has ruled that homebuyers’ societies or Resident Welfare Associations (RWAs), typically formed for the maintenance and management of housing projects, have no locus standi to intervene in insolvency proceedings against a developer under the Insolvency and Bankruptcy Code, 2016.

Emphasising that the IBC is a self-contained code, the court held that participatory rights in the corporate insolvency resolution process are confined to statutorily recognised creditors, and cannot be expanded to societies that are not creditors in their own right, PTI reported.

A bench of justices JB Pardiwala and R Mahdevan, which upheld the insolvency proceedings related to Takshashila Heights India Private Ltd under the Insolvency and Bankruptcy Code of 2016, said if creditors elect to invoke the provisions of the code, they must do so with a genuine willingness to pursue revival of the corporate debtor.

It said, “Should revival not be their objective, the Code cannot be converted into a tool for expedient recovery; alternative statutory remedies, including under SARFAESI or other applicable laws, remain available in accordance with law.”

The bench upheld the rejection of intervention application by National Company Law Appellate Tribunal (NCLAT) of Elegna Co-operative Housing and Commercial Society Ltd (a society of home buyers) on the ground that it lacked locus standi to intervene in the company’s appeal.

The bench said the IBC is a self-contained code which confers participatory rights only on persons falling within statutorily defined categories and a financial creditor under its Section 5(7) must be a person to whom a financial debt is owed.

“While the explanation to Section 5(8)(f) deems individual allottees to be financial creditors, it does not extend such status to societies or associations unless the entity is itself a creditor in its own right, or is statutorily recognised as an authorised representative under the Code,” it said.

Elaborating further, the bench said that a society is a distinct juristic entity separate from its members and unless it has itself advanced funds, executed allotment agreements, or received allotments, it cannot claim financial creditor status.

“The right to initiate or participate in CIRP flows from the debt transaction and the statute, not from associative or representational interest,” it said and held, “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”.

Justice Mahadevan, writing the judgement on behalf of the bench said homebuyers’ societies or welfare associations are ordinarily constituted for maintenance and management of common facilities.

“Their office-bearers cannot litigate on behalf of allottees or claim representative status before adjudicatory fora absent explicit statutory recognition or legally valid authorisation,” the bench held.

It added that any contrary interpretation would impermissibly enlarge the statutory definition of “financial creditor”, encroach upon individual rights of allottees, and create an extra-statutory layer of representation.