Does proof of debt and default under Section 7 of the IBC mandate admission of CIRP without inquiry into project viability?

Summary

Practical Impact

What’s New / What Lawyers Should Note

• Mandatory admission under Section 7(5)(a) is confined to proof of financial debt and default; courts cannot probe project viability or creditor motives at that stage.
• Vidarbha Industries’ exception is narrowly circumscribed and does not permit broad discretionary refusals.
• Proceedings under Section 7 remain in personam between creditor and debtor; unrelated third parties, including homebuyers’ societies, have no statutory right to intervene pre-admission or on appeal.
• Inherent powers under Rule 11 cannot override the Code’s prescribed admission scheme or confer substantive participatory rights.
• Post-admission, stakeholder representation is governed by authorised representative rules (Section 21(6A) & Regulation 16A).
• Supreme Court directions on CoC transparency (disclosure of all allottees; reasoned decisions for possession or liquidation proposals) will guide future real-estate CIRPs.

Summary of Legal Reasoning

• Reaffirmed Innoventive Industries and E.S. Krishnamurthy: debt + default → mandatory admission under Section 7; no room for equitable or viability considerations.
• Clarified Vidarbha exception remains “narrowly confined” to its unique facts; M. Suresh Kumar Reddy affirmed binding nature of Innoventive rule.
• Indus Biotech underscored the statutory ingredients (debt, default, creditor, corporate debtor) and limited role of NCLT to verify default.
• Kotak Mahindra and Tottempudi Salalith held parallel recovery proceedings do not bar CIRP; abuse must be proved under Section 65.
• Swiss Ribbons and GLAS Trust explained in rem vs in personam stages; homebuyers’ societies or RWAs have no locus at admission or appellate stage.
• Rule 11 and Section 151 CPC style powers cannot override explicit IBC procedures or create unsanctioned rights.
• Committees of Creditors retain exclusive domain over feasibility and viability post-admission; judicial review is limited.

Arguments by the Parties

Petitioner (Society’s Intervention Appeal)

• Society represents 189 homebuyers recognised as financial creditors under Explanation (i) to Section 5(8)(f).
• NCLAT denied hearing; procedural unfairness and breach of audi alteram partem.
• Artificial distinction between completed and uncompleted towers violates Article 14.
• CIRP extinguishes RERA rights and specific performance claims; homebuyers left vulnerable.
• Rule 11 empowerment was misused; inherent powers to prevent injustice were not applied.

Petitioner (Corporate Debtor’s Appeal)

• Project is 90% complete with sizeable receivables; CIRP would harm homebuyers and kill a viable enterprise.
• EARCL’s refusal to issue NOC under restructuring was mala fide, manufacturing default.
• Parallel SARFAESI, DRT and Section 7 filings constitute forum shopping and coercive recovery.
• NCLAT applied Section 7 mechanically, ignoring discretion under Vidarbha and twin objectives of IBC.

Respondent (EARCL – Financial Creditor)

• Debt assignment and defaults are undisputed; Section 7 admission is mandatory once default is shown.
• Multiple creditors face defaults, underlining systemic distress and need for CIRP.
• Vidarbha exception doesn’t override Innoventive rule; M. Suresh Kumar Reddy clarified this.
• Homebuyers’ interests protected through authorised representatives and post-admission safeguards (Reg 4E, Reg 46A).
• Parallel recovery proceedings are permissible; moratorium under Section 14 kicks in upon admission.
• Society lacks locus: not a financial or operational creditor, not party to debt documents, no authorisation from members.

Factual Background

Takshashila Heights India Pvt. Ltd. borrowed ₹70 crore in 2018, failed repayments, and its loan became NPA in December 2021. The original lender assigned the debt to Edelweiss ARC, which restructured the loan by a 2023 OTS but revoked it later for alleged defaults. EARCL filed a Section 7 petition before NCLT in April 2024. NCLT dismissed it as an abuse of IBC; NCLAT admitted the petition and rejected intervention by Elegna Co-op. Housing Society. Both the developer and the society appealed.

Statutory Analysis

• Section 3 & 5: Definitions of “debt”, “default”, “financial creditor” and “corporate debtor”.
• Section 7(2)–(5): Form, records, and mandatory admission once default is established; no scope for viability or bona fides inquiry.
• Section 14: Moratorium on recovery proceedings post-admission.
• Section 21(6A) & Regulation 16A: Authorised representative mechanism for homebuyers after admission.
• Regulation 4E (CIRP Regulations): Post-admission bar on possession transfers without CoC approval.
• Regulation 46A (Liquidation Regulations): Exclusion of homebuyer-in-possession units from liquidation estate.
• Section 65: Abuse of process for coercive recovery requires specific pleading and proof.
• Rule 11 (NCLAT Rules): Inherent powers cannot override express IBC admission procedures.

Procedural Innovations

• Mandated disclosure of complete homebuyer details in the Information Memorandum.
• Requirement for Committees of Creditors to record cogent, specific reasons in writing when:
  • refusing handover of possession under Regulation 4E
  • recommending liquidation over resolution, demonstrating proper application of mind and consideration of alternatives

Alert Indicators

• ✔ Precedent Followed: Existing IBC jurisprudence on Section 7 mandatory admission and locus standi has been reaffirmed.