Inclusion of Home Buyers in the Insolvency Process: An Analysis

[Ashwin Mathew is with Mansukhlal Hiralal & Co, Mumbai]


Pursuant to the Insolvency Law Reform Committee Report dated 3 April 2018 (“Report”), the Government has promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (“Ordinance”) on 6 June 2018 to implement the recommendations in the Report by amending the Insolvency and Bankruptcy Code, 2016 (“IBC”). One of the objectives of the Ordinance is to balance the interests of various stakeholders in the IBC including home buyers. This post analyses the issues that arise from the amendments made by the Ordinance to include home buyers in the IBC.

The Ordinance includes home buyers as financial creditors by inserting an Explanation to Section 5(8)(f) which defines a “financial debt”. Financial debt is defined to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes inter alia any amount raised under any other transaction having the commercial effect of borrowing. Under the newly inserted Explanation (i) any amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing; (ii) the definition of “allottee” and “real estate project” are to be taken from the Real Estate (Regulation and Development) Act, 2016 (“RERA”). “Allottee” is defined under RERA in relation to a real estate project as a person to whom a plot, apartment or building has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter and includes a subsequent acquirer of such property. “Real estate project” is defined under RERA inter alia as the development of a building or a building consisting of apartments or converting an existing building or a part thereof into apartments or the development of land into plots or apartments for the purpose of selling all or some of the said apartments or plots or building, as the case may be. The Explanation results in the categorisation of home buyers as financial creditors under the IBC.

The IBC and RERA

The first issue that arises from the inclusion of home buyers in the IBC is whether such a step was necessary considering the provisions of RERA. RERA was enacted with the objective of establishing the Real Estate Regulatory Authority for regulation and promotion of the real estate sector, to promote efficiency and transparency in the sector and to protect the interests of consumers in the sector. RERA provides for registration of real estate projects with the competent authorities and imposes numerous obligations on the promoter of such real estate projects. Of relevance is the obligation of the promoter to enter into an agreement for sale with the allottees and adhere to the provisions of such agreement for sale. If the promoter breaches the terms of such agreement for sale, the allottee can choose to withdraw from the project and, in such a case, is entitled to return of any money paid by him along with interest and compensation as determined by the adjudicating authorities. RERA also imposes stringent penalties on the promoter for failure to adhere to the stipulations of RERA. It appears to be a complete code on the protection of allottees of real estate projects.

The IBC was enacted inter alia to consolidate and amend the laws relating to reorganisation and insolvency of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. It is important to emphasise that the IBC is not a recovery mechanism although commencing proceedings under IBC may practically result in the recovery of dues. The primary reason for this is that if a financial creditor files an application before the National Company Law Tribunal (“NCLT”) for commencement of the corporate insolvency resolution process against a corporate debtor and such application is admitted, a corporate insolvency resolution professional is appointed for the corporate debtor who is entrusted with management of the corporate debtor and the Board of Directors of such corporate debtor is superceded. This stipulation in the IBC leads to a settlement of a number of cases before the application is admitted.

For a home buyer to commence proceedings under the IBC as a financial creditor, there should be a default in relation to his financial debt. “Default” is defined to mean the non-payment of the debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or corporate debtor, as the case may be. The Ordinance creates a deeming fiction in relation to any amount raised by an allottee under a real estate project. But, when can a default in relation to such amount be said to occur? Is it when the agreement of sale is breached in any regard by the corporate debtor or is it only in relation to delays in completion of the real estate project and handing over possession? In relation to delays, is it any delay or an inordinate delay? The Ordinance is not clear on this aspect. This problem occurs because a debt has a repayment schedule while an amount raised from an allottee in a real estate project may or may not have a repayment stipulation in the agreement for sale. Given this ambiguity, the provisions of RERA would aid the allottee in withdrawing from a real estate project where the promoter has breached the agreement for sale. Therefore, was the amendment brought about by the Ordinance really necessary? Is it an indication that the provisions of RERA are inadequate?

There is another facet to this issue that needs discussion. Section 88 of RERA provides that RERA shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. Further, Section 89 of RERA provides that the provisions of RERA shall have effect, notwithstanding anything inconsistent contained in any other law for the time being in force. Similarly, Section 238 of the IBC provides that the provisions of the IBC shall have effect, notwithstanding, anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Can it be argued that the IBC and RERA are inconsistent because of the nature of consequences that flow under each legislation? I submit that this is not the case since the admission of an application under the IBC results in the commencement of the corporate insolvency resolution process while a complaint under RERA could result in the adjudicating authorities imposing penalties on the promoter and an order for return of money to the home buyer with interest and compensation. However, there is a catch. Once an application is admitted under the IBC, the NCLT must order a moratorium on the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. This moratorium would be in effect from the date of the order till the completion of the corporate insolvency resolution process. Thus, it appears that once an application is admitted under the IBC and a moratorium declared, any proceedings commenced under RERA would be suspended till completion of the corporate insolvency resolution process. While the corporate insolvency resolution process is to be completed within 180 days, which may be extended by a further 90 days on an application by the Committee of Creditors (“CoC”), practically this stipulation is rarely met. Therefore, if the home buyer is unable to settle the matter with the developer / promoter and his application under IBC is admitted, the moratorium may defeat the purpose of his inclusion in the IBC. Is this in the best interests of the home buyer?

A linked issue relates to the relief that a home buyer can claim once an application is admitted by the NCLT against the corporate debtor who is a promoter / developer. The process under the IBC contemplates submission of resolution plans to the insolvency professional based on an information memorandum circulated by the insolvency professional. These plans are then placed before the CoC who, pursuant to the amendment brought about by the Ordinance, must approve a plan by a 66% majority. Once such approval is in place the NCLT must give its final approval for the approved resolution plan which would bind all stakeholders, including home buyers. Most developers in India are burdened by large debt, most of which is secured. The ability of a home buyer to influence the approval of a resolution plan and ensure his interests are protected appears limited given this scenario. The question, therefore, remains as to what a home buyer can do if he is unable to recover any money paid by him to the developer after a resolution plan has been approved? Can he continue with proceedings under RERA? Further, if a resolution plan is not submitted or is rejected, the corporate debtor goes into liquidation. In the priority waterfall prescribed by Section 53 of the IBC, it appears that a home buyer would be an unsecured creditor and can only recover his dues after workers, secured creditors and employees have recovered their dues. Given that a corporate debtor who is being liquidated may not have sufficient assets to meet large amounts of debt, the possibility that a home buyer will receive any money on liquidations appears slim.

Other Issues

An elaborate mechanism for representation of home buyers at meetings of the CoC is also prescribed by the IBC. As part of this mechanism, an authorised representative must be appointed if the number of home buyers seeking relief exceeds a specified threshold. The authorised representative must take instructions of each home buyer he represents and vote in accordance with those instructions at the meetings of the CoC to the extent of the voting share of such home buyer. The actual process of such voting is to be laid down by the Insolvency and Bankruptcy Board of India. For corporate debtors with large amounts of debt from other financial creditors, the ability of the home buyer or group of home buyers to influence the outcome of decisions at meetings of the CoC appears limited. This is further enhanced by the fact that the Ordinance reduces the voting threshold for decisions of the CoC from 75% to 66%. Where provision is not made in the IBC specifying a voting threshold for decisions of the CoC, decisions by the CoC are to be based on the approval of a simple majority of the financial creditors. Due to these changes, a home buyer is unlikely to have a major say at the meeting of the CoC.  

The Ordinance does not deal with the manner in which home buyers can apply to the NCLT for initiating the corporate insolvency process against a developer. As it stands, even a single home buyer could make such an application. Problems may arise if multiple home buyers from a single developer initiate multiple proceedings. Also, if the developer has multiple projects, multiple proceedings could be initiated by home buyers in each project. This could clog the NCLT and lead to delays that are contrary to the time bound process mandated by IBC.


As is usual with most legislation in India, the amendments brought about by the Ordinance in relation to home buyers do not address a number of issues that should have been considered before the changes were made. I submit that strengthening the processes under RERA would have been a more optimal solution rather than including home buyers as financial creditors in the IBC. The efficacy of the IBC as a remedial mechanism for home buyers appears doubtful. The only positive from such inclusion is that home buyers could put pressure on an errant developer with adequate means to recover their moneys through a settlement after an application has been filed under IBC.     

Ashwin Mathew

About the author


  • Dear Ashwin Mathew,
    1. Good article. Good analysis. Thank you for the same.
    2. I fully agree with you that this legislative move will at least help the hapless buyers to put pressure on the defaulting developers/builders to bring about “amicable” out of court settlement. In fact, similar efforts have worked in many cases like SME sector / small time contractors to recover their legitimate dues from the big players. I have secured many such settlements simply on issuing a notice to the debtors. Thanks to IBC regime.
    3. You are right in pointing out the need to strengthen the mechanism under the Real Estate ( Regulation and Development ) Act, 2016to protect the rights of the innocent customers / Allottees. Given the kind of untrained and ill-equipped officers working in RERA authorities, I am not sure whether it will help in achieving the goal of the regulatory measures envisaged under the RERA.
    Many Thanks,
    Vivekananda Paniyala | Advocate | Paniyala & Associates.

  • Dear Ashwin
    Now that the status of home buyers as Financial creditors is confirmed, they are higher up in the Sec 53 waterfall. These are some of the new ponderables
    1. How can the Home buyer select an Authorised Representative from a list ( a mere list of three names in a newspaper ). This invariably results in option of the AR being influenced and a bad apple here can be lethal
    2. The home buyers are a generally less aware lot and in the non metro areas, they are absolutely unaware of the IBC and more so the technical jargon in the public announcement
    3. No specifications on the voting etc. 12 hours seems just too short for the voting portal to be kept open

  • Can a homebuyer not satisfied with the outcome of resolution plan proceed with RERA , Consumer courts and other forums for recovery of its dues or there won’t be any option left to the homebuyers to accept the resolution plan whether or not it turns out to be in its interest or otherwise.


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