Journey of Home Buyers under IBC

The article discusses the status of homebuyers under the IBC since the inception of the code in 2016 till now.
Hammurabi & Solomon Partners - Shweta Bharti, Jatin Chadda
Hammurabi & Solomon Partners - Shweta Bharti, Jatin Chadda

In India, the real estate sector, a vital cog in the nation's economic engine, is becoming more and more significant, and investors consider it to be the most desirable investment option. However, in recent years numerous builders have defaulted on their obligations of timely handing over the possession of flats to the homebuyers. This has led to a situation wherein lakhs of homebuyers across the country are facing uncertainty concerning the timely delivery of possession of their flats and apartments.

Delayed projects, stalled construction, fraudulent acts on the part of builders/ developers, and financial woes of developers often leave homebuyers stranded, transforming their dreams of owning a new home into a nightmare. Regrettably, helpless homebuyers have no choice but to drag out lengthy legal battles in consumer forums for the deficiency in service by the builders.

The introduction of the Insolvency and Bankruptcy Code, in 2016, offered a glimmer of hope. However, the path for homebuyers within its ambit has proven to be a challenging, complex, and continually evolving one.

Status of Home Buyers under IBC

Under the provisions of the Insolvency and Bankruptcy Code 2016, there are two different categories of creditors: financial creditors, as defined under Section 5(7) of the IBC, and operational creditors, as stated under Section 5(20) of the IBC. Financial creditors are the one who provides financial assistance or who lends loans to other companies whereas operational creditors are the one who supplies goods and services to a company. However, a prominent lack of clarity persisted regarding the classification of homebuyers under the IBC, leaving uncertainty as to whether they would fall within the purview of financial creditors or operational creditors. This ambiguity resulted in a state of confusion regarding the standing of homebuyers under the Code.

The plight of homebuyers gained significant attention before the Supreme Court, particularly in the wake of the collapse of housing projects by Jaypee Infratech Ltd (Chitra Sharma v. Union of India 2018 SCC OnLine SC 874) wherein the Hon’ble Supreme Court expressed apprehension that if homebuyers were placed in the last category of the creditor's list as per the waterfall mechanism in the insolvency resolution process, it would amount to gross injustice to the homebuyers.

The Amendment Act of 2018: A Turning Point

Following the judgment rendered by the Hon’ble Supreme Court discussing the status of homebuyers, the government established an Insolvency Law Committee led by Injeti Srinivas. The Committee recognized that the non-inclusion of homebuyers within the ambit of either financial creditors or operational creditors deprived them of significant rights, including the right to initiate a Corporate Insolvency Resolution Process (CIRP), representation on the Committee of Creditors, and, in the event of liquidation of the corporate debtor, the guarantee of receiving at least the liquidation value under the resolution plan.

The Insolvency and Bankruptcy Code underwent its first major amendment in 2018 wherein a pivotal change was the introduction of a specific explanation under Section 5(8)(f), explicitly recognizing homebuyers who have made payments against the allotment of a unit in a real estate project as “financial creditors." This empowerment enabled them to initiate the CIRP against defaulting developers.

The amendment also conferred upon homebuyers to be included in the Committee of Creditors, a pivotal decision-making body during CIRP. This allowed them to participate in formulating a resolution plan for distressed developers, potentially leading to project completion or the recuperation of their investments.

Furthermore, the amendment expanded the definition of financial debt under Section 5(8) to include an explanation stipulating the amount/ money raised from allottees of real estate projects would be deemed financial debts.

Subsequently, this amendment faced a challenge by a consortium of builders/ real estate developers before the Hon’ble Supreme Court through Writ Petition No. 43 of 2019 titled Pioneer Urban Land and Infrastructure Limited and Ors. Vs. Union of India and Ors, wherein it was upheld that the 2018 amendment was constitutionally valid.

Amendment Act of 2020

The Insolvency and Bankruptcy Code has undergone further amendment with the addition of a proviso in Section 7. This proviso stipulates the requisite minimum threshold of allottees eligible to initiate insolvency proceedings against defaulting builders / real estate corporations. Specifically, it mandates that either a minimum of one hundred allottees from the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project, whichever is less, are eligible to file a petition for initiating the insolvency resolution process.

The Hon’ble Supreme Court, in the case of Manish Kumar V UOI 2021 SCC OnLine SC 30, has upheld the validity of this amendment, which imposes a minimum threshold limit to initiate the insolvency process. The Court noted that in a real estate project, there could be hundreds or even thousands of allottees, and allowing a single allottee, acting as a financial creditor to make an application under Section 7 could potentially jeopardize the interests of other allottees.

Project-wise CIRP

Following the 2020 amendment, homebuyers were conferred with the authority to initiate CIRP. However, a subsequent issue arose for homebuyers whereby, despite their right to initiate CIRP, if the builder or corporate debtor targeted for CIRP has multiple projects, a moratorium would be imposed on all projects. This resulted in every project of the builder being subject to CIRP, thereby potentially causing immense hardship to homebuyers of other projects and plunging each project into a state of uncertainty.

Thereafter, in the case of Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Private Limited 2020 SCC OnLine NCLAT 1199,
the Honorable NCLAT introduced the concept of "Reverse CIRP" and stressed that if allottees, financial institutions/banks, or operational creditors of a specific project initiate CIRP against a real estate company/ builder, it should be limited to that project only and should not impact the other projects of the same real estate company situated elsewhere with distinct stakeholders/ homebuyers.

Recently in April 2024, in the case of Pankaj Mehta VS M/s. Ansal Hi-tech Township Limited Comp. App (AT) (INS) No. 248 / 2023, The homebuyers' application for the initiation of the CIRP against Ansal Hi-Tech Township under Section 7 of the IBC was rejected by the Hon’ble NCLAT, which held that the homebuyers were associated with different projects. As a result, they fall short of the minimal requirement needed to initiate CIRP proceedings against the respondent.

Interplay between IBC and RERA

Another significant legislation enacted to safeguard the interests of home buyers and promote the real estate sector is the Real Estate (Regulation and Development) Act (RERA). Undoubtedly, both the Insolvency and Bankruptcy Code and RERA operate within distinct spheres, leading to a fundamental contradiction between them. While one seeks to prioritize creditors, the other endeavors to prioritize consumers.

In a recent ruling in the case of Vishal Chelani and others v. Debashis Nanda 2023 SCC OnLine SC 1324, the Hon’ble Supreme Court held that homebuyers cannot be treated differently from other "financial creditors" under the IBC 2016 merely because they have obtained orders from the authority under RERA.

Recently, in 2024 in the case of Tarun Ahuja & Ors. V Puri Construction Private Limited 2024 SCC OnLine NCLT 512, NCLT Delhi held that regardless of whether homebuyer-allottees have sought recourse through RERA or NCDRC prior to approaching the Tribunal, their status as 'financial creditors' under Section 5(8) (f) of the IBC will remain unchanged.

Homebuyers and Liquidation

Earlier, a homebuyer who had attained possession of the property was grouped together with homebuyers who had not yet acquired possession, in the circumstance of the builder encountering insolvency. In such a scenario, the sole recourse available was to be eligible for a refund.

To eliminate this anomaly, the Insolvency and Bankruptcy Board of India has introduced a recent amendment in 2024 in IBBI (Liquidation Process) Regulations, 2016 vide a notification dated 12.02.2024 which aims to exclude flats—where possession has been granted but conveyance deeds have not been executed or registered—from the liquidation estate. This measure is undertaken to alleviate the immense hardships and substantial challenges faced by homebuyers and to offer relief to those who find themselves in predicaments subsequent to the insolvency declaration of the builder or the developer.

Challenges and Roadblocks: A path yet to be perfected

  1. The IBC (Amendment) Act, 2020, mandated a minimum of hundred homebuyers or ten per cent of their total number, whichever is lower, to file an insolvency petition. This requirement can be difficult to meet, especially in smaller projects.

  2. Delays in approvals, legal intricacies, and complexities of the resolution process can significantly extend timelines, putting further strain on the financial and emotional well-being of homebuyers.

  3. Secured creditors are positioned ahead of unsecured creditors in the IBC's waterfall mechanism for distributing proceeds from asset sales. However, there are other claims that get priority ahead of some secured debt. Further IBC doesn't explicitly lay out the order of repayment among secured creditors with different types of charges.

  4. Less number of benches in the tribunals and the paucity of judges in these tribunals is also one of the major reasons for the delay in adjudicating the matters by these tribunals.

Suggestions / Solutions

Some of the suggestions are provided herein below to ameliorate the deplorable situations of homebuyers:

  1. Homebuyers often lack the resources and organization to effectively represent themselves in complex IBC processes. Measures like the creation of a dedicated representative body or increased voting rights could strengthen their voice.

  2. IBC processes can be lengthy, causing hardship for homebuyers who may be paying rent while waiting for their homes. Expedited timelines for resolving cases involving real estate projects could be explored.

  3. Homebuyers may be pressured to continue paying EMIs (Equated Monthly Installments) even after insolvency proceedings begin. A mechanism to shield them from such payments until the project's future is determined could be implemented.

  4. The IBC framework might be amended to consider the unique aspects of real estate projects. This could involve provisions for project completion by alternative developers or ensuring land remains earmarked for housing.

  5. Stricter regulations for developers and real estate projects could prevent financial mismanagement leading to insolvency in the first place.


The journey of homebuyers under the Insolvency and Bankruptcy Code (IBC) has been characterized by both progress and challenges. While legislative amendments have granted them greater rights, ongoing improvements are imperative to ensure that the IBC evolves into a genuinely effective mechanism for resolving their grievances.

In conclusion, through sustained cooperation and adherence to principles of fairness and equity, the IBC can emerge as a potential instrument for resolving disputes and promoting stability within the real estate sector, thereby fostering confidence among stakeholders, especially homebuyers, and facilitating sustainable growth. Further, by proactively addressing existing roadblocks and fostering a collaborative environment among all stakeholders, including homebuyers, developers, and regulatory authorities, a more secure and prosperous future for the real estate sector can be envisioned.

About the author: Shweta Bharti is the Managing Partner of Hammurabi & Solomon Partners. Jatin Chadda is an Associate at the Firm.

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