Beyond Labels: Towards a Test for Investors under IBC

CCL NLUO
23 hours ago
6 min read

Authors: Mausam yadav and Vaibhav mewada

Third year law students at National Law Institute University, Bhopal

I. Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) was not created as a debt recovery device but as a collective settlement structure. In 2018, Parliament changed Section 5(8)(f) to identify homebuyers as financial creditors. The 2018 amendment to Section 5(8)(f) recognising homebuyers as financial creditors, empowered genuine allottees but also allowed misuse through speculative filings under Section 7.

The Supreme Court’s recent decision in Mansi Brar Fernandes v. Shubha Sharma directly addressed this issue by naming signs of speculation, including refusing to take ownership and contracts that promise assured profits. However, the Court also revealed a more serious problem: the IBC doesn’t define “speculative investor” in law, so tribunals must make up their own rules, which leads to different results. The principal legal question is whether the IBC requires legislative clarification to distinguish between legitimate purchasers and speculative investors in accordance with Section 5(8)(f) and Section 65.

This article examines the subject through legislative intent, judicial evolution, comparative jurisprudence, and constitutional assurances, including the right to refuge as stipulated in Article 21. The purpose is to analyze whether statutory reform is now necessary to safeguard both consumer protection and the integrity of the Code.

II. Homebuyers under the IBC Framework

The 2018 change to Section 5(8)(f) made it clear that money received from allottees in housing projects counts as “financial debt.” This change gave real homebuyers the power to start corporate insolvency resolution proceedings (CIRP) under Section 7.

The Court also stressed that the Code must not be perverted into a recovery forum for speculative investors.

Section 7’s admittance right is not absolute. Section 65 functions as a protection against petitions filed with fraudulent or malicious intent. The 2019 modification included an additional threshold: at least one hundred allottees or ten per cent of the total allottees in a project must jointly submit under Section 7. In Manish Kumar v. Union of India (2021) this criterion was maintained as constitutionally legitimate, the Court highlighting its importance in preventing frivolous or speculative filings.

This statutory structure has established a stark split. On one side stand homebuyers, whose claims are related to Article 21. On the other hand, are speculative investors, treating real estate as a yield-bearing tool and seeking exits through insolvency. From Pioneer Urban to Mansi Brar Fernandes, courts have tried to regulate this gap, but the absence of a legislative definition of speculation continues to generate inconsistent adjudication.

III. The Rise of Speculative Investors

In Pioneer Urban, the Court recognized this issue, noting that the IBC cannot serve as a debt recovery mechanism. This warning established doctrine in Mansi Brar Fernandes, where the Court evaluated agreements giving buyback clauses, post-dated payments, and yearly returns of 25%-all apparent evidence of speculative intent. The Court deemed such claims irreconcilable with Section 7.

At the same time, the Court safeguarded remedies for investors by affirming their entitlement to recover the principal amount before RERA, consumer fora, or civil courts, and underlined that limitation bars would not apply. This distinction, while the IBC cannot be hijacked as a private escape route, contractual rights remain recoverable through other venues.

Speculative petitions overburden NCLTs, triggering premature insolvency and endangering thousands of genuine homebuyers. The result is unpredictability and forum shopping - a void in legislation that cannot be filled by judicial remedies.

IV. Judicial Reasoning in Mansi Brar Fernandes

The Supreme Court in Mansi Brar Fernandes v. Shubha Sharma (2025 INSC 1110) clearly addressed the exploitation of Section 7 by speculative investors. The Court examined contractual provisions like mandatory buybacks and guaranteed yearly returns and concluded that they were financial instruments disguising themselves as housing agreements. The resistance or inability of allottees to accept possession further underlined speculative intent.

The Court rooted its reasoning in the goal of the IBC: revival and resolution of stressed businesses, not individual healing. Reading Section 5(8)(f) alongside Section 7, the Court underlined that the role of homebuyers as financial creditors was designed to protect real allottees and not to legitimize speculative withdrawals. Section 65 was enhanced as a protection against malicious or fraudulent beginnings, showing that speculative filings undermine the Code’s goals.

It further reaffirmed that exclusion from IBC does not destroy remedies. Speculative investors are right to pursue recovery before RERA, consumer fora, or civil courts, and may still claim principal sums without restriction barriers.

The verdict relied on purposive interpretation, valuing substance over form, and accepted the constitutional importance of housing rights under Article 21. The Court supported the IBC’s collective resolution structure by separating real purchasers from speculative investors. Yet, by relying on ad hoc indicators rather than codified rules the tribunals will continue to employ conflicting criteria.

V. Comparative Jurisprudence: Lessons from Abroad

United Kingdom, English insolvency law sees applications submitted for ulterior motivations as abuse of procedure. In Re A Company (No 0012209 of 1991) [1992] 1 WLR 351 , the court struck down a petition made simply as a coercive strategy, affirming insolvency as a last-resort measure based on actual financial distress.

Singapore employs a “bona fide intent” requirement. In BNP Paribas v. Jurong Shipyard Pte Ltd. [2009] SGHC 114 , the High Court dismissed proceedings because the creditor’s intent was judged speculative. Strict disclosure rules further require petitioners to prove genuine creditor status, curbing forum and speculative disguise.

European Union distinguishes between housing-seeking borrowers and investment-driven participants, mandating member states to provide differentiated remedies. The EU framework combines market stability with consumer rights, decreasing the risk of insolvency legislation being subverted by speculative activity.

VI. Relevance to the Indian viewpoint

The models reveal India’s shortcomings. Dependence on case-specific variables to guide judicial improvisation is unreliable and unsustainable. Legislative action, like to Singapore’s bona fide criteria or the UK’s misuse doctrine, is essential to reestablishing consistency and protecting the fundamental right to housing of actual homebuyers.

VII. Loopholes Requiring Legislative Attention

Absence of Statutory Definition

Neither Section 5(8)(f) nor Section 65 defines speculative investment. Courts in Pioneer Urban and Mansi Brar Fernandes recognized markers, but these remain circumstantial. Investors might readily reinterpret contracts to dodge examination. Therefore, it should be necessary to insert an Explanation in Section 5(8)(f), barring speculative arrangements or change Section 65 to formalize objective standards.

Uneven Application of Section 65

Tribunals diverge in Navin Raheja v. Shilpa Jain (NCLAT, 2020), buyback petitions were dismissed. Whereas, in others, similar claims were granted. This unpredictability erodes consistency.

It is suggested that an amendment be made to clarify that petitions based on buybacks, guaranteed returns, or refusals of possession are examples of malicious initiation.

Mechanical Threshold under Manish Kumar

The 100/10% level upheld in Manish Kumar effectively prevents fraudulent claims, albeit in a blunt manner. Genuine homebuyers in small projects are excluded, whereas speculative investors in large projects may still qualify.

A mixed qualitative and quantitative methodology should be used instead, eliminating speculative investors of all sizes while excluding actual allottees.

Forum Shopping and Multiplicity

The concurrency of IBC, RERA, and consumer fora, as noted in Pioneer Urban, encourages speculative investors to file in several venues and delaying relief for real purchasers.

It is suggested that jurisdictional priority be established for speculative contracts that are channeled to RERA or consumer forums, with IBC retained for legitimate settlement claims.

Threat Value of Section 7

Developers incur reputational costs because of baseless filings, which force settlements. It is suggested that speculative petitions rejected at admission be subject to monetary fines based on claim value.

VIII. Constitutional Perspective

The continuation of these loopholes implicates Articles 14 and 21. Dilution of genuine claims weakens the right to shelter established in Chameli Singh v. State of U.P. (1996) and Shantistar Builders v. Narayan Totame (1990) Inconsistent tribunal practice undermines Article 14’s equality duty. Legislative reform will restore constitutional fairness by shielding legitimate homebuyers and preventing speculative misuse.

IX. Conclusion

The jurisprudential arc from Pioneer Urban to Mansi Brar Fernandes indicates the judiciary’s effort to insulate the IBC from speculative exploitation while safeguarding real homeowners. Yet reliance on judicial indicators has produced fragmented outcomes, forum shopping, and uncertainty. Comparative experience illustrates that codified standards are both attainable and important.

The argument is no longer whether speculative investors should be excluded-they already are in principle-but whether legislative quiet can support a fair and effective system. Without reform, tribunals will continue to diverge, speculative investors will exploit loopholes, and real homebuyers will see their Article 21 rights weakened.

Reform is necessary. Parliament must establish a concept of speculative investment Section 5(8)(f) or Section 65, adjust the Manish Kumar threshold, apply deterrent costs for frivolous petitions, and clarify the IBC–RERA jurisdictional difference. Only then will the IBC be both a shield for legitimate purchasers and a weapon against speculative exploitation.

The Supreme Court in Mansi Brar Fernandes has drawn the boundary in principle, it is for Parliament to enshrine it in law, if the IBC is to remain both a shield for genuine homebuyers and a sword against speculative investors.

Note: This article has been reviewed by Mr. Steve Levitsky (Merger Clearance and Antitrust Counseling, Manhattan, New York, United States), at the Tier II Stage.