Homebuyers as financial creditors: time for a rethink?

Posted On - 6 May, 2022 • By - Souvik Ganguly


The Insolvency and Bankruptcy Code, 2016 (“Code”) was introduced in the year 2016 and since its introduction it has gone through a spate of amendments. Pursuant to the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (“2018 Amendment Act”), allottees of real estate projects (“Homebuyers”) have been included within the ambit of “financial creditors” under the Code and they could initiate insolvency proceedings against real estate developers. Consequently, 2018 Amendment Act was challenged before the Supreme Court in the case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India, wherein the Supreme Court upheld the constitutional validity of the 2018 Amendment Act.

It should be noted that in a real estate project, the number of Homebuyers can be hundreds or even thousands. With the passage of time, it was observed that if a single Homebuyer, as a financial creditor, is allowed to initiate an insolvency proceeding against the real estate developer, then the interests of all the other Homebuyers and creditors may be put in peril. Therefore, in order to bar single Homebuyers from initiating insolvency proceedings, a threshold limit was proposed for Homebuyers for initiation of insolvency proceedings under the Code.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“2020 Amendment Act”) introduced a threshold limit for Homebuyers wherein at least 100 Homebuyers or 10% of the total Homebuyers of the same project, whichever is lesser, are required to file an insolvency application against the real estate developer. This was again challenged before the Supreme Court in the matter of Manish Kumar v Union of India wherein the Supreme Court upheld the insertion of this new threshold by highlighting that, allowing individual Homebuyers to invoke the insolvency process will lead to misuse of the provisions of the Code.

An issue that has now come to the fore is that Homebuyers are initiating insolvency proceedings based on the above threshold limit and later withdrawing the same after settling the dispute with the promoters of the real estate developer. This might exert undue pressure on the real estate developer and might jeopardize the interests of other creditors of the real estate developer who are not in favour of such insolvency proceedings.

Basis the above background, this article looks into the effect of the inclusion of Homebuyers as financial creditors under the Code and whether this needs to be reconsidered.

Reason behind the inclusion of Homebuyers as financial creditors under the Code

Under the Code, ‘financial creditor’ means any person to whom a ‘financial debt is owed and includes a person to whom such debt has been legally assigned or transferred. Prior to the 2018 Amendment Act, the Code neither considered Homebuyers as financial creditors nor operational creditors and therefore they could not initiate insolvency proceedings against the real estate developer. Homebuyers could only recover their invested monies by other means such as approaching the National Consumer Disputes Redressal Commission (“NCDRC”) or by filing an application under Real Estate (Regulations and Development) Act, 2016 (“RERA”).

It is highlighted in the report of the Insolvency Committee dated 26 March 2018 that delay in delivery of flats to the Homebuyers has become a common phenomenon and this, in turn, affects the right of the Homebuyers. It was also observed in insolvency cases like the Jaypee Infratech case, Supertech case, Amrapali Group case, etc., that Homebuyers were one of the chief stakeholders. In these cases, aggrieved Homebuyers claimed deficiency in service on the part of real estate developers and approached the NCDRC. However, insolvency applications filed by other creditors were admitted against these real estate developers, and the Homebuyers’ complaints stayed.

The above instances prompted the Government of India to notify the 2018 Amendment Act. However, there are certain aspects to making Homebuyers financial creditors under the Code that, in our view, might turn the Code into a recovery tool for disgruntled Homebuyers rather than a restructuring mechanism.

 Defeating the object of the Code on account of withdrawal of proceedings

It is noteworthy that, on several occasions in the past, various High Courts and the Supreme Court of India have allowed the withdrawal of insolvency proceedings filed by the Homebuyers against real estate developers in view of the settlement arrived between the parties. Such action of the parties dilutes the object of the Code by using it as a means to recover monies from real estate developers. Recently, this issue came before the Supreme Court for adjudication in Amit Katyal v. Meera Ahuja and others (“Amit Katyal Case”) wherein the Supreme Court allowed Homebuyers to withdraw the insolvency proceedings post imposition of moratorium under the Code in light of the settlement arrived at between the parties.

It was observed by the Supreme Court in Amit Katyal Case, that if the withdrawal application of the Homebuyer is rejected and if insolvency proceedings are successfully continued then the Homebuyers, like all other creditors, will only be able to recover the payouts provided in the resolution plan approved by the committee of creditors. Most often, resolution plans provide for a high percentage of haircuts to all creditors, thereby significantly reducing the recovery of the creditors. Unlike other financial creditors like banks and financial institutions, the effect of such haircuts will be unduly harsh and unjust for Homebuyers. It should also be noted that if insolvency proceedings of the real estate developer fail, then the developer will be liquidated and the proceeds from the sale of assets of the real estate developer will first be distributed to the secured financial creditors, workmen, and employees of the real estate developer, and then to Homebuyers who are unsecured financial creditors. So, the Homebuyers would stand to lose their hard-earned money, which will defeat the legislative intent behind the 2018 Amendment Act i.e., to secure, protect and balance the interests of Homebuyers.

Recently, in the case of Anand Murti v. Soni Infratech Pvt. Ltd & Anr. (“Soni Infra Case”), the Supreme Court stayed the insolvency proceedings against the real estate developers and permitted the promotor of the real estate developer to complete the housing project. In the Soni Infra Case, the Supreme Court noted that the real estate developer had completed a substantial portion of the housing project and had secured funds for completing the rest of the project before insolvency proceedings were initiated. The real estate developer submitted a settlement proposal and was further willing to refund the money along with interest at the rate of 6% per annum to Homebuyers objecting to the settlement proposal. The Supreme Court opined that it would be in the interest of the Homebuyers that the developer is permitted to complete the project.

Further, as per the Insolvency and Bankruptcy Board of India (“IBBI”) quarterly newsletter for the month of January – March 2022 (available here), it is observed that:

–   1,051 out of 5,258 total insolvency proceedings admitted by the National Company Law Tribunal as on 31 March 2022, are with respect to real estate developers;

–   329 out of the aforesaid 1,051 proceedings have been withdrawn or settled or set aside on appeal, and another 274 have ended in orders of liquidation;

–   As of 31 March 2022, only 62 real estate companies have been rescued under the Code which amounts to less than 6% of the total insolvency proceedings initiated against real estate developers.

Interestingly, the data available for Maharashtra RERA* online portal (available here) reveals that alternative forums like RERA have been more successful in redressal of grievances of Homebuyers. As per the portal, as of 04 May 2022

–   Out of the 17,748 complaints received by Maharashtra RERA against real estate developers, orders have been passed in 11,974 cases i.e., over 67% of the total complaints filed; and

–    Out of the 890 conciliation matters, conciliation has been completed in 772 matters i.e., over 86% of conciliation matter.

* (As there is no centralised data base under RERA, we have referred to data available for Maharashtra only)

The above data indicates that the Code may not be the best available resource to resolve diverse grievances of the Homebuyers, and specialised authorities such as RERA may be better suited for resolving issues being faced by Homebuyers against entities involved in real estate businesses.


It has been time and again reiterated by the Supreme Court of India that the Code is not a recovery tool, and its object is to rescue ailing businesses by infusing new life in such concerns through timebound implementation of resolution plans. It is noteworthy that, if the real estate developer fails to deliver the unit / project within the agreed time, the Homebuyers have remedies available in alternative forums under the Consumer Protection Act, 2019 and RERA which are more effective, as evident from the information available in the public domain.

Due to the inefficiencies which has deeply infiltrated the insolvency resolution process, any application filed by Homebuyers under the Code to rescue a real estate developer is a time-consuming affair, which in most cases will adversely impact all the stakeholders involved in the real estate project, especially the Homebuyers. Initiation of insolvency proceedings against a real estate developer by the Homebuyers would have detrimental impact on both (a) the real estate developers – as banks and other financial institutions may restrict access to financing, which in turn may adversely affect other projects and may lead to cash flow issues resulting in a solvent real estate developer becoming insolvent, and (b) the Homebuyers – who might have to face further delays in either getting their money back or getting possession of completed units in the real estate projects. Therefore, in the interest of the real estate sector which includes the real estate developer, financial institutions having exposure to such real estate developer and Homebuyers, the legislature may need to rethink the position of Homebuyers as financial creditors under the Code.

Authors: Souvik Ganguly and Altamash Qureshi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident or any other cause.