The Insolvency Dilemma in Real Estate: Project Completion vs. Creditor Rights under IBC

Source: The Indian Express 

Introduction 

Recently, the Supreme Court delivered a judgment clarifying that project completion stage cannot halt insolvency proceedings. The verdict by Justices J B Pardiwala and R Mahadevan in Elegna Co-op. Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Ltd. (2025)  addressed two critical questions:  

• Can builders avoid insolvency by claiming substantial completion?  
• Can housing societies intervene to prevent the process? 

The case involved "Takshashila Elegna" in Ahmedabad, where developer Takshashila Heights defaulted on Rs 70 crore. After Edelweiss ARC initiated insolvency under Section 7 of IBC, the NCLT dismissed it citing project viability, but NCLAT reversed this decision. 

What were the Court's Observations? 

The Supreme Court's Verdict: 

• The Court rejected the "substantial completion" defense, holding that once debt and default are established, admission into insolvency is mandatory with no scope for discretionary considerations. 
• Justice Mahadevan emphasized that Section 7(5)(a) inquiry is strictly confined to determining debt and default. Project completion, ongoing operations, or anticipated receivables are extraneous to the statutory mandate. 
• The Court clarified that assessing financial health belongs to the Committee of Creditors (CoC), not tribunals. The CoC's commercial wisdom is paramount and feasibility questions fall within its domain, not the threshold stage. 
• On housing society intervention, the Court distinguished between individual homebuyers (financial creditors under IBC) and maintenance societies. Societies are distinct entities and cannot claim financial creditor status unless they advanced funds themselves. Section 7 proceedings are bipartite at admission—allowing societies would create obstruction opportunities. 
• Despite strict enforcement, the Court mandated CoC transparency: extraordinary decisions must have written reasons, and information memorandums must comprehensively disclose all allottees. 

The NCLT and NCLAT Positions: 

• NCLT dismissed Edelweiss's petition citing project viability and substantial completion, arguing insolvency would harm homebuyers. NCLAT overturned this, ordering insolvency commencement and rejecting the housing society's intervention plea. 

Timeline of Events 

What is the Insolvency and Bankruptcy Code, 2016? 

About: 

• The IBC, 2016 consolidates laws on reorganization and insolvency resolution for corporate persons, partnerships, and individuals in a time-bound manner for asset value maximization.  
• It provides comprehensive framework for early identification of financial distress and balances stakeholder interests. 

Key Provisions: 

• Section 7: Allows financial creditors to initiate corporate insolvency resolution process (CIRP) when default occurs. 
• Committee of Creditors (CoC): Financial creditors collectively decide the debtor's fate with 66% voting threshold. 
• Time-bound Process: CIRP must complete within 180 days (extendable by 90 days); mandatory liquidation if no resolution. 
• Homebuyers as Financial Creditors: 2018 amendment classified real estate allottees as financial creditors with CoC representation. 

Related Judgments on IBC: 

• Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022):  
  • SC held NCLT has residual discretion to reject Section 7 applications. Elegna clarified this was an exception, not general rule. 
• Swiss Ribbons Pvt. Ltd. v. Union of India (2019):  
  • SC upheld IBC's constitutional validity including financial creditor primacy. 
• Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019):  
  • Court upheld homebuyers' financial creditor status. 
• Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019):  
  • Landmark judgment holding CoC's commercial wisdom is paramount. 

Conclusion 

The Supreme Court's January 2026 judgment decisively affirms that insolvency proceedings must be swift and objective, free from viability assessments at admission. By rejecting the substantial completion defense and clarifying housing societies cannot intervene, the Court reinforced statutory architecture while creating homebuyer safeguards through mandatory CoC transparency. 

For real estate, the message is clear: completion status cannot shield developers from accountability. For insolvency law, it clarifies that commercial wisdom rests with creditors, not courts, while ensuring CoC decisions balancing recovery with homebuyer protection remain reasoned and transparent.