Home Buyers as Financial Creditors: Desperate Improvisation and its Ramifications

[Rishabh Sant Tiwari is a 4th year B.A. LL.B. (Business Law Honours) student at National Law University, Jodhpur, India]

The recently released Report of the Insolvency Law Committee (“Committee Report”) has brought about seminal changes in the Insolvency and Bankruptcy Code, 2016 (“IBC”). The most remarkable highlight of the Committee Report is its recommendation to treat home buyers of under-construction apartments as financial creditors under the IBC. In this post, I critically analyse the development and its ramifications under the IBC.


The imposition of moratorium under the IBC forced home buyers to initiate proceedings under the legislation. In the case of JaypeeInfratech Ltd., the Supreme Court faced the dilemma of securing the interests of home buyers as against those of the lenders under the corporate insolvency resolution process (“CIRP”). The unique nature of the transactions within the Indian real estate sector has forced the Government to seek recommendations from the Insolvency Law Committee in this regard. Since home buyers are not included within the definition of either financial or operational creditors under the IBC, it deprives them of the right to initiate the CIRP, the right to be on the committee of creditors, and the guarantee of receiving at least the liquidation value under the resolution plan. To address the difficulty and provide remedy to the home buyers under the IBC, the Committee has analyzed the definition of “financial debt” under the IBC and sought to carve out a possible mechanism of interpretation so as to include amounts raised from home buyers within its scope.

Reasoning of the Committee

Under section 5(7) of the IBC, a “financial creditor” is defined to mean any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. The Committee Report points out that the definition of “financial debt” in section 5(8) is an inclusive definition.[1] In various cases, the words “time value” have been interpreted to mean compensation or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money, or factoring of a discount in the payment (which is the case in real estate sector).

The Committee deliberated that the amounts so raised are used as a means of financing the real estate project, and are thus, in effect, a tool for raising finance. Accordingly, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8).[2]

Questions Still Unanswered

The treatment of home buyers as financial creditors raises many questions as to the ramifications of such an amendment to the IBC itself, as I now seek to elaborate.

First, how can such an enormous number of stakeholders be represented in the committee of creditors? The model proposed in the Committee Report is similar to that of a Debenture Trustee model wherein a Debenture Trustee is appointed by virtue of an agreement between the company issuing debentures and the Debenture Trustee, which in turn enters into the agreement on behalf of the debenture holders. The Debenture Trust Deed is executed at the time of issuance of the debentures. However, in existing cases involving home buyers, there has been no agreement to such effect when they ‘disbursed’ money to the promoter/developer of the project. Therefore, can an ex post facto agreement now be entered into by the home buyers to appoint a representative? What happens to the dissenting minority, if any? Also, under the second model that is proposed in the Committee Report, it is the National Company Law Tribunal (“NCLT”) which shall appoint a representative for the home buyers. This model restricts the say of home buyers in appointment of their own representative. Also, this does not provide for the mechanism in case there is a minority dissent, or for that matter any dissent at all.

Second, whether Real Estate (Regulation and Development) Act, 2016 (“RERA”) would be made redundant if home buyers are made financial creditors under the IBC? The most efficacious remedy for the home buyers is naturally under RERA, i.e., (a) entitlement to penal interest in case of delayed possession and (b) grant of project development rights to the association of allottees itself. However, if such home buyers are to be covered under the IBC, the specialized legislation enacted for the benefit of the home buyers would be made redundant due to the moratorium imposed under the IBC.

Third, the sophistication of the home buyers to take commercial decisions is also under scanner. If home buyers proceed under the IBC, then unlike existing financial creditors (generally banks and financial institutions), the home buyers are likely to be looking mainly for liquidation of the developer and recovery of the money from the process. On the other hand, bankers are more likely to take a commercially informed decision to revive the company when they are acting on the committee of creditors.

Fourth, in the case of Innoventive Industries v. ICICI Bank, the Supreme Court has made it amply clear that apart from the conditions stipulated in the IBC, there is no other ground that the NCLT needs to satisfy itself on. Hence in case of home buyers, even if one home buyer has not been granted possession, such a buyer can drag the entire company to the NCLT even if banks and other financial institutions may not be willing to do so. This will likely hamper the growth of the already ailing real estate industry in the country.

Fifth, making sector specific amendments to IBC will render the process too complicated and operate in a manner that is inimical to the objectives of the Act. For instance, apart from the real estate industry, the automobile industry (for example) also functions in the similar fashion of raising finance and then delivering the final product. Will automobile industry not warrant such an amendment in the IBC to protect the rights of the consumers?

Possible Solutions

There are other alternatives so as to protect the interests of the home buyers apart from treating them as financial creditors under the IBC. The obvious alternative would be to make a provision for payment under section 53 of IBC. This, however, should not be coupled with the right to initiate CIRP. Second, an exception can be carved out for sector specific remedies under section 238 of IBC. Home buyers should first exhaust the remedy under RERA and then proceed under the IBC. Third, upon delay in grant of possession by the developer, the designated bank account under RERA (in which 70% of the amount raised from the home buyers is kept for the specific project), be made exclusively available to the association of allottees and such association of allottees should be given a right develop the project notwithstanding the initiation of CIRP by any bank or financial institution under the IBC.


The issue at hand is sensitive. Thousands of home buyer are stranded due to the conflict between the existing laws and, furthermore, the real estate sector is suffering from several ailments. Making home buyers financial creditors under IBC can prove to have an effect that is opposite to the spirit of the IBC itself and will make the recently enacted sector-specific legislation in the form of RERA redundant.

The legislature has to take an informed decision keeping in mind all the considerations as discussed above and avoid desperate improvisation as the ramifications of such an improvisation may be undesirable. 

Rishabh Sant Tiwari

[1] Based on B.V.S. Lakshmi v. Geometrix Laser Solutions Private Limited, NCLAT New Delhi, 27 December, 2017.

[2] Para 1.6, Supra Note 1.

About the author

Add comment


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages


Recent Comments


web analytics

Social Media