The Continuing Saga of Homebuyers under Insolvency and Bankruptcy Code

[Karan Sahi is a lawyer and company secretary. He can be contacted at [email protected]]


The recent slump in the real estate industry culminated in a grim situation where several major builders have been unable to complete their housing projects and hand over possession to their customers, leaving them in the lurch. As is the usual practice, many of these customers have taken home loans, and they have to continue paying equated monthly instalments (EMIs) on their loans with no delivery date in sight. Banks will continue to demand EMI payments and, if these customers default, the lenders can seize other assets to claim their dues. Recently, Jaypee homebuyers have started receiving notices that threaten to cancel the allotment of units in their name for defaulting on payment of EMIs.

In order to pacify the homebuyers, the Government promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (“Ordinance”) on 6 June 2018 to implement the recommendations of the Insolvency Law Reform Committee Report dated 3 April 2018. One of the objectives of the Ordinance is to balance the interests of various stakeholders under the Insolvency and Bankruptcy Code, 2016 (“IBC”) including homebuyers. This post analyses the issues that emanate from the amendment.

The position of home-buyers before the Ordinance

Prior to the Ordinance, there was no clarity regarding homebuyers’ rights, either as financial or operational creditors under the IBC. Thus, homebuyers were unable to assert their rights for initiating an insolvency resolution process and participate in committee of creditors (“CoC”). This ambiguity enabled real estate developers to side-line the claims of homebuyers.

Amid this, a public interest litigation was considered in Chitra Sharma v. Union of India [2018] 92 265 (SC), which was filed by certain homebuyers before the Supreme Court against the order of the Allahabad Bench of the National Company law Tribunal (“NCLT”) in IDBI Bank Ltd. v. Jaypee Infratech Ltd. wherein the Supreme Court considered the concerns of the homebuyers and, through its order dated 4 September 2017, directed the insolvency resolution professional to formulate and submit an interim resolution plan within 45 days before the Court and to make all necessary provisions to protect the interest of 30,000 homebuyers.

Further, the Supreme Court also directed Jaypee to deposit a sum of Rs 2000 Crores (Rs. Two Thousand Crores) before the Court on or before 27 October 2017. However, on the failure of Jaypee to deposit the sum of Rs. 2000 crores as directed, the personal properties of the directors would be attached.

Hence, it becomes relevant to analyze the pre-Ordinance status of home-buyers to gather a realistic and legal interpretation of the Ordinance amendments.

1. Home-buyers not operational creditors

The Delhi Bench of the NCLT in Col. Vinod Awasthy v. AMR Infrastructures Ltd. [2017] 80 268 adjudicated that the homebuyers do not fall within the realm of ‘operational creditor’ under the IBC. The NCLT held that since the homebuyer has not supplied any ‘goods’ or ‘services’ to the real estate company, the homebuyer cannot be considered an operational creditor and hence cannot initiate insolvency resolution process against the corporate debtor. An operational creditor refers to the creditor to whom amount is due from the corporate debtor on account of rendering any service or supply of any goods.

Further, the NCLT expressed a similar opinion in Pawan Dubey v. J.B.K Developers C.P. where it was held that the provisions of section pertaining to operational creditor cannot be construed so widely so as to include within its ambit the situations wherein the dues are on account of advance made to purchase the flat or any other property to be constructed by the real estate developer. The homebuyer cannot be considered as an operational creditor especially when the homebuyer has a remedy available under the Consumer Protection Act and the general law of the land.

2. Home-buyers as financial creditors

Financial debt includes money borrowed against payment of interest, amounts raised under a credit facility and any other transaction having the commercial effect of a borrowing. For a debt to qualify as financial debt, it must have the following components:

  • there must be a liability or an obligation in respect of a claim which is due from any person;
  • the debt must be disbursed against consideration for the time value of money; and
  • it must be included in the illustrative list of financial debts or must arise from a transaction having the commercial effect of a borrowing.

As a general rule, the National Company Law Appellate Tribunal (“NCLAT”) has held that transactions wherein amounts are disbursed for sale of real estate in the future do not have the commercial effect of a borrowing and thus, are not financial debts.

In Nikhil Mehta & Sons (HUF) v. AMR Infrastructure Ltd. [2017] 78 302 (NCLT – New Delhi), the Bench held that where the transaction was a pure and simple agreement of sale or purchase of piece of property, such a transaction would not acquire the status of a ‘financial debt’ as the transaction did not have consideration for time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of expression ‘financial debt’.

In other words, the Bench held that, to qualify as a financial debt and thus as a financial creditor in terms of the provisions of IBC, what is important that the money has been advanced for a consideration for the time value of money. However, in the case of homebuyers, the money was advanced for the purchase of property and not with a consideration for the return of any time value of money.

The position of home-buyers after the Ordinance

The Ordinance provides for homebuyers under the ambit of financial creditors after insertion of an explanation to section 5(8)(f) which defines a “financial debt”.

Financial debt means 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, any amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing. The definition of “allottee” and “real estate project” are defined under 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 homebuyers as financial creditors under the IBC.


The categorisation of homebuyers as financial creditors is a certainly a big step but the entire issue continues to suffer from myriad practical issues as mentioned below:

(a)        Representation of Homebuyers

The representation in the case of bank lending is limited but the same shall not hold true for homebuyers. In the case of Jaypee Infratech, a company has taken money from nearly 27,000 buyers. It does raise a pertinent question as to how many buyers can be represented on the Committee of Creditors and amount of representation to be provided.

Apparently, there is a lack of clarity on the subject but it is believed that homebuyers would form an association, and the association would select someone who represents them in the CoC.

(b)       Representation on the Committee of Creditors

After the amendment, there is uncertainty as to who shall attain a better representation on the committee of creditors, i.e., whether banks or homebuyers? For instance, Jaypee Infratech had raised around Rs 13,500 crore from homebuyers by way of booking amount and instalments, which is far higher than the Rs 9,800 crore raised from banks. Whether representation shall be dependent on the sum owed remains an open question.

(c)        Harmonise the Interest

How does one align the interest of banks and homebuyers? The banks will be inclined towards disposing of the company and retrieve the money at the discount. On the contrary, a section of the homebuyers may be interested in obtaining a home, given that prices may have risen between the time they invested and now.

(d)       Status of Homebuyer as Unsecured Creditor?

Apart from the “financial” tag, it is also important to be classified as a secured creditor. Pursuant to the section 53 of the IBC, the priority is given to secured creditors. The banks are secured creditors as the debtor has offered land as security for obtaining loans. Hence, secured creditors, i.e. banks, will continue to have a more favourable position. The resolution plan of most bidders takes care of only secured creditors.

However, it is envisaged that homebuyers may be given a separate grade in waterfall mechanism under section 53 of the code. Waterfall mechanism refers to the order of priority in which the proceeds from the sale of liquidation assets are distributed.

(e)        The distinction between Homebuyer and Purchase of Commercial Property

Moreover, the Government needs to provide clarity on whether there would be a distinction between homebuyers and purchasers of the commercial real estate, as has been done in the case of the Consumer Protection Act, 1986.

(f)        Procedural Aspects

The Ordinance has not provided details regarding the procedural aspect of handling homebuyer applications against the developer. As it stands, even a single homebuyer could make such an application. Problems may surface if multiple homebuyers from a single developer initiate multiple proceedings. This could clog the NCLT and lead to delays that are contrary to the time-bound process mandated by IBC.

(g)       IBC vs RERA

Section 89 of RERA provides that the provisions of RERA shall have an 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 an 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.

For instance, homebuyers approach a real estate regulator and, at the same time, banks move the NCLT against the developer. The IBC provides that all other proceedings will be halted when a company is admitted to the NCLT. It remains to be seen what will happen to the RERA proceeding under such circumstances.


The amendments brought about by the Ordinance in relation to homebuyers has left us with many unanswered questions which need to be addressed by the authorities. The efficacy of the IBC as a remedial mechanism for homebuyers appears doubtful. Nevertheless, the stringent provisions in RERA and IBC shall serve as a deterrent from these errant developers.

Karan Sahi

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