Supreme Court Warns Against Misuse of Insolvency Code by Speculative Investors, Calls Them ‘Slow Poison’ for Real Estate

September 14, 2025

Introduction

In a significant ruling with far-reaching implications for India’s real estate sector, the Supreme Court of India has drawn a sharp line between speculative investors and genuine homebuyers, calling the former a “slow poison” to the sector. The Court emphasized that the Insolvency and Bankruptcy Code (IBC), 2016, should not be exploited as a recovery tool by investors seeking quick profits without any intent of purchasing a home. Instead, the law must be a mechanism for protecting homebuyers and ensuring timely completion of projects.

The Case Before the Court

A bench of Justices JB Pardiwala and R Mahadevan was hearing a batch of appeals linked to insolvency proceedings initiated against two builders. The National Company Law Appellate Tribunal (NCLAT) had previously dismissed these cases, classifying the petitioners as “speculative investors.” The Supreme Court upheld the NCLAT’s decision, reiterating that speculative misuse of the IBC undermines the very stability of the real estate market and prejudices the Indian middle class.

Speculative Investors: A ‘Slow Poison’

The Court strongly criticized speculative practices such as assured return schemes, compulsory buybacks, and excessive exit options, calling them financial derivatives disguised as housing contracts. Such mechanisms:

Inflate demand artificially,
Fuel asset bubbles,
Allow investors to misuse the IBC as a coercive tool, and
Create unfair outcomes where developers and genuine buyers are both harmed.

Unlike financial markets, where speculation may sometimes improve liquidity, speculation in residential housing undermines fairness, stability, and the basic purpose of urban development.

Remedies Proposed by the Supreme Court

The Court proposed several key remedies to safeguard genuine buyers and protect the real estate ecosystem:

State’s Constitutional Duty:
- The government has a duty to prevent fraud by developers, curb speculative practices, and ensure timely project completion.
- Housing should not be treated as a speculative commodity but as a fundamental human need under Article 21 (Right to Life).
Revival Funds & Project Completion:
- Suggested the expansion of SWAMIH Fund or creation of a revival fund under NARCL to provide bridge financing for stressed projects under CIRP.
- Directed CAG audits to ensure transparency in fund utilization.
- Proposed using unsold inventory for affordable housing schemes like PMAY or for government housing needs.
Strengthening RERA:
- RERA authorities must be adequately staffed and empowered with strong enforcement powers to prevent them from becoming “toothless tigers.”
- All residential projects should be registered with local revenue authorities, with proceeds held in escrow accounts and disbursed in phases based on progress.

Institutional Reforms Ordered

The Supreme Court also passed binding directions to strengthen institutions managing insolvency and real estate disputes:

NCLT/NCLAT Reforms: Vacancies to be filled urgently; retired judges to be appointed ad hoc until regular appointments are completed. Dedicated IBC benches to handle cases expeditiously.
Systemic Reform Committee: To be chaired by a retired High Court judge, with members from the Ministry of Law, Housing, finance experts, and real estate professionals.
Project-Specific Resolution: Insolvency should proceed on a project-specific basis rather than against the entire corporate debtor, protecting solvent projects and genuine buyers.
Urban Development Agencies’ Role: Housing boards and state-level authorities (like DDA, MHADA, GMADA, CHB) should actively revive and complete stalled projects.

Conclusion

The Supreme Court’s ruling is a landmark in balancing investor interests with consumer protection in India’s real estate sector. By calling speculative investors a “slow poison,” the Court has reinforced the principle that housing is not a speculative asset but a basic human necessity.

The directives to strengthen RERA, reform insolvency institutions, and establish revival funds mark a decisive step toward ensuring transparency, accountability, and justice for homebuyers. The judgment underscores that protecting genuine homebuyers is not just an economic necessity but a constitutional obligation.