[Anushka Aggarwal is a third-year B.A. LL.B. (Hons.) student at the National Law School of India University, Bengaluru]
The 2018 amendment to the Insolvency and Bankruptcy Code, 2016 (‘IBC’) marked a significant evolution, granting the status of financial creditors to homebuyers. As real estate insolvency cases continue to burden the courts, the question of whether homebuyers a class, united by the IBC but divided by the circumstances, can be treated differently within insolvency resolution plans, has received inconsistent interpretations from courts. Should a buyer who seeks a refund be treated differently from one who awaits possession? Should a buyer holding a recovery certificate or decree under the Real Estate (Regulation and Development) Act, 2016 (‘RERA’), thereby asserting a right beyond the IBC framework, be treated the same as one without any such decree? These questions have plagued the courts concerning the treatment of homebuyers.
I argue that while homebuyers are not a homogenous group, any intra-class distinction must align with the fundamental principles of the IBC focusing on the importance of equitable treatment to creditors and the need to revive the real estate projects, thus addressing the interests of the key stakeholders involved. A principled approach is necessary, as courts have often refrained from elaborating on the permissibility of differential treatment under Article 14 of the Constitution, instead merely deferring to the commercial wisdom of the committee of creditors (‘CoC’). It must be emphasized that the treatment of creditors in a manner inconsistent with the IBC constitutes a valid ground for invoking the jurisdiction of supervisory courts. Where such treatment is accepted solely based on CoC approval, without scrutiny, it risks undermining the IBC’s foundational principles.
Equitable Treatment to Creditors: Similarly Situated Standard?
Under the IBC, it is now well-settled that similarly situated creditors must be given equitable treatment. After the 2018 amendment, homebuyers are treated as financial creditors. However, homebuyers are not similarly situated to otherfinancial creditors. Before the amendment, the jurisprudence supported the status of the homebuyers as financial creditors only in cases where a “committed returns” scheme or a similar element in nature of “time value” existed. This is consistent with the understanding of financial debt under the IBC, which necessarily requires a “consideration for the time value of money.” In Nikhil Mehta and Sons v. AMR Infrastructure Ltd., the National Company Law Appellate Tribunal (‘NCLAT’) ruled that the developer’s promise to pay the buyers “committed returns” until the units were handed over amounted to a “consideration for the time value of money.” The payment by the buyers practically funded the developer. Further, the developer classified these returns as “financial costs” in books of accounts, demonstrating the commercial nature of the transaction; moreover, the Securities and Exchange Board of India (‘SEBI’) had stated that real estate schemes with committed returns are “collective investment schemes.” Thus, the specific nature of this real estate transaction was such that it qualified as a financial debt and the homebuyers as financial creditors. However, the 2018 amendment does not impose any such qualifications to the status of homebuyers as financial creditors.
While deciding the constitutionality of this amendment, the Supreme Court justified the existence of “time value of money” in all cases of real estate projects. It was reasoned that the allottees gained the benefit from early investment, i.e., acquiring an under-construction flat at a price lower than that of a ready-to-move-in unit. On the other hand, the developer benefits by receiving funds in advance. This is inconsistent with the commercial logic guiding the interpretation of “time value of money” which focuses on being compensated for giving up immediate access to money. In a real estate transaction, the buyer pays the money in exchange for property, not to earn a return on the money given. There is no deferment of money for the buyers and they do not incur an opportunity cost like a lender does, who expects to be compensated for giving up immediate access to money. If the possession is delayed, the buyer may suffer loss due to rising costs or lost investment opportunity, but this is not the same as being a lender whose money was borrowed with interest. This “time value” suffered by the buyer due to delay is a consequence of a breach of the contract, not a feature of the original transaction with the debtor (developer). This could lead to inconsistent treatment of homebuyers, where only those buyers who face delays are recognised as financial creditors, while excluding others who still await possession within contractual timelines.
This demonstrates that mere payment of advance money cannot fulfil the requirement of “time value.” It is an overinclusive interpretation where every advance payment can be subsumed as financial debt, blurring the line between consumers and financial creditors. Therefore, in cases where there is no financial debt, homebuyers cannot beconsidered similarly situated to financial creditors, negating the requirement of equitable treatment. This demonstrates that the basis for equitable treatment between classes of creditors would be the nature of the debt, irrespective of the amount or the timing of payment.
This would imply that there is no valid basis for creating a distinction within the class of homebuyers in the resolution plan, who are owed the same nature of debt (allotment of flat in return for money with an element of “time value”) based on when the advance payment was made (i.e., the stage of their involvement). Homebuyers who paid later (likely at higher prices) must be considered similarly situated with those who paid earlier (likely at lower prices) and must be treated equitably under the IBC. Such a classification (even though upheld in Innova Home Buyers Neyveli Association) would give the impression that the money contributed by the homebuyers is like a return-based investment, where returns scale with contributions. This creates an artificial similarity with other financial creditors like banks. However, banks are not similarly situated to homebuyers. The purpose of recognizing homebuyers was not because they invested huge sums, but because they were vulnerable stakeholders who financed the project and faced risk due to its potential non-completion. Homebuyers are not merely “creditors”, but individuals with equitable interest in the project.
Due to the nature of the stakes involved in the process and the relationship between the homebuyer and developer, the intra-class classification based on secured interest is also not compatible with the requirement of being similarly situated. If the existence of security were a relevant factor for the classification of creditors and equitable treatment, homebuyers, who are predominantly unsecured, would logically fall under the category of operational creditors. However, the 2018 amendment expressly recognizes them as financial creditors, given their stake in the completion of the real estate project. Additionally, the nature of homebuyers as “unsecured” arises due to the standard form nature of flat-purchase agreements, drafted by the developers, leaving little to no room for negotiation by the homebuyer. According to RERA as well, the majority of the homebuyers do not have any security under the terms of the agreement and, therefore, all they can seek is a refund of their amount along with interest under RERA. This structural power asymmetry supports rejecting the distinction based on security interest. Given that the homebuyers contribute substantial amounts and bear significant risk generally without the protection of security, relying on the structural binary of “secured” versus “unsecured” to determine their treatment within the same class is inconsistent with the equitable nature of IBC. In any case, the classification into “secured” or “unsecured” is immaterial at the stage of resolution plan and relevant only at the stage of liquidation.
Consensus and Revival: Eliminating Risks of a Fractured CoC?
The primary purpose of real estate insolvency is not to ensure the recovery of money, but the revival of the project. Under the 2018 amendment, all homebuyers can be part of the CoC, irrespective of the timing of payment, security interest, or other terms. To achieve a meaningful resolution, it is necessary to avoid the probability of disagreements and fragmentation within the CoC. Any fragmentation can undermine the consensus necessary to support a feasible and viable resolution plan, potentially delaying its implementation. It is pertinent here that neither the IBC nor the regulations framed thereunder provide any guidance concerning the stage of implementation of the resolution plan, necessitating the need to pre-empt and avoid disagreements that may arise at that stage. Further, the legislative intent to treat the homebuyers as a single class is apparent from section 25A (3-A). As per this section, the homebuyers can vote in only two ways, either approve or disapprove. The minority is bound by the decision of the majority even if that homebuyers may not be a homogenous group. In Pioneer Urban Land, while addressing the concern that a “rogue” refund-seeking homebuyer can initiate corporate insolvency resolution process (‘CIRP’), thus disrupting the interests of other possession-seeking homebuyers, it was held that all such homebuyers have valid “claims” and can participate in the CoC. This affirms that differences in individual intent or nature of claim do not translate into valid basis for legal classification and emphasizes the need to maintain coherence within the class of homebuyers to ensure efficient decision-making within the CoC.
The treatment of homebuyers as a class aligns with the design of the IBC given the jurisdictional limitation imposed on appellate review under section 61(3). Since the NCLAT cannot examine the logic underlying the CoC’s commercial decisions, this eliminates the room for minority dissenting financial creditors, whether banks or homebuyers, to challenge a plan merely because they disagree with the majority’s outcome. This reinforces the IBC’s design of treating homebuyers as a unified class, voting collectively under section 25A, and bound by the will of the majority. Any attempt to introduce intra-class distinctions would not only disrupt the functioning of the CoC, but would also undermine the finality of resolution, and defeat the IBC’s primary objective of reviving the project in a time-bound manner.
Conclusion
The principle of treating similarly situated creditors equitably is central to the IBC. Homebuyers, regardless of when they invested, how much they paid, or whether they seek refunds or possession, share a common legal and economic position: they are creditors with a substantial stake in the real estate project. Classification into sub-groups based on technical differences ignores this shared vulnerability and undermines the equitable framework of the IBC. Further, introducing intra-class distinctions threatens the primary goal in real estate insolvency, i.e., revival of the project. Such distinctions can lead to fractured CoC votes, delayed plans, and greater chances of liquidation. Revival demands consensus, and consensus requires the equitable treatment of all homebuyers.
– Anushka Aggarwal
