NCLAT Allows Welfare Association to Cure Authorization Defect in Section 7 IBC Petition Against Real Estate Developers

In a significant ruling for real estate insolvency proceedings, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has clarified the maintainability of Section 7 applications under the Insolvency and Bankruptcy Code, 2016 (IBC), when filed by registered welfare associations on behalf of homebuyers. The tribunal, presided over by Justice Ashok Bhushan, upheld a National Company Law Tribunal (NCLT) Mumbai order but granted the association liberty to file individual affidavits from homebuyers to validate authorization, emphasizing procedural fairness in curing defects.

Case Overview

The appeals, Company Appeal (AT) (Insolvency) No. 1572 of 2025 and No. 1573 of 2025, were filed by Sumer Radius Realty Pvt. Ltd. and Sumer Buildcorp Pvt. Ltd. (the appellants and corporate debtors) against a common order dated September 12, 2025, passed by the NCLT Mumbai Bench (Court-V). This order dismissed interlocutory applications (I.A. No. 5195/2024 and I.A. No. 6034/2024) seeking dismissal of a Section 7 petition (C.P. (IB) No. 284/MB/2024) filed by the Avenue 54 Welfare Association.

The underlying Section 7 petition alleged a default of over ₹203 crore by the corporate debtors in handing over possession of 98 flats in the "Avenue 54" project at Santacruz West, Mumbai. The Avenue 54 Welfare Association, a registered society under the Societies Registration Act, 1860, formed by these flat purchasers, initiated the proceedings claiming to represent their financial interests as homebuyers.

Arguments from Both Sides

The appellants, represented by Senior Advocates Krishnendu Dutta and Arun Kathpalia, argued that the welfare association lacked locus standi as it is not a "financial creditor" under Section 7 of the IBC. They contended that only individual financial creditors or notified entities (per the Central Government's February 27, 2019, notification) can file such applications. The appellants highlighted defects in the petition's Form I, where the association was listed as the financial creditor without proper authorization from all 98 members. They criticized the reliance on a January 23, 2024, resolution by the association's core committee as insufficient, urging outright dismissal.

In response, Senior Advocate Abhijeet Sinha, for the respondent association, defended the petition's maintainability by drawing parallels to the Supreme Court's ruling in JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd. (Civil Appeal No. 20978/2017, decided April 30, 2019), where a registered trade union was permitted to file under Section 9 of the IBC for workers' dues. Sinha argued that the association, comprising exclusively the 98 flat buyers, acts as their representative. He noted an offer made on June 17, 2025, before the NCLT to file individual affidavits from homebuyers confirming their identity and authorization, which was opposed by the appellants and denied by the tribunal. Sinha described this as a curable technical defect aimed at delaying proceedings.

Precedents and Legal Principles Applied

The NCLT had relied on two prior decisions: Vipul Green Residents Welfare Association v. Vipul Ltd. [IB 541(ND)/2019, NCLT New Delhi] and Krrish Florence Estate Buyer’s Welfare Association v. Angle Infrastructure Pvt. Ltd. [IB-238(ND)/2024, NCLT New Delhi], affirming that welfare associations could file Section 7 petitions without infirmity.

The NCLAT distinguished these by focusing on Section 7(1) IBC, which allows filings by financial creditors individually, jointly, or through notified persons (e.g., guardians, trustees). The tribunal observed that while the association is not explicitly notified, Form 1 under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, permits authorization by financial creditors. However, the core committee resolution was deemed inadequate as it did not reflect consensus from all members.

Key excerpt from the judgment: "There being defect in authorisation, opportunity ought to have been given to applicant to file individual affidavit and authorisation as was submitted before the Court on 17.06.2025... We grant 7 days’ time to the respondent Avenue 54 Welfare Association to file the individual affidavits of homebuyers stating the identity as also the fact that they individually authorised the applicant in the company petition."

The NCLAT declined to delve deeply into maintainability precedents, noting that valid authorization would render the petition procedurally sound.

Court's Final Decision and Implications

The NCLAT disposed of both appeals without interfering with the NCLT's dismissal of the interlocutory applications. It directed the Avenue 54 Welfare Association to file the promised individual affidavits within seven days. Upon receipt, the NCLT Mumbai is to proceed with hearing the Section 7 petition in accordance with law.

This ruling reinforces procedural flexibility in IBC proceedings, particularly for class actions by homebuyers in delayed real estate projects. It signals that technical lapses in representative filings can be remedied, preventing undue dismissals and promoting access to justice for aggrieved allottees. For developers, it underscores the need for robust challenges to authorization at early stages, while benefiting welfare associations by allowing curative steps. The decision may influence similar cases under the Real Estate (Regulation and Development) Act, 2016, and IBC, ensuring homebuyers' dues are not stalled by form over substance.

The order was pronounced on the appeals filed in 2025, with hearings involving detailed arguments from counsels on both sides.