Homebuyers Tryst with Developers: Has the IBC covered it all?

[By Abhishek Jha & Rishi Raj

The authors are students at the Maharashtra National Law University, Aurangabad. 


The Insolvency and Bankruptcy Code 2016 (“the Code”), a milestone in the Indian Legislative journey has by far been successful in safeguarding the interests of most stakeholders, if not all.

However, one such stakeholder has lagged behind, i.e., the homebuyers. Even after substantial developments in the Code, the homebuyers still remain highly risk averse owing to the host of unresolved issues in the Real Estate sector.

In this article, the authors will discuss the position of the homebuyers with respect to the Code. The Real Estate Sector has been witness to a steep increase in corporate insolvency resolution processes (CIRPs) over the course of four years. Such an increase was triggered by an ever-growing liquidity crisis and accelerated by the pandemic’s effect on the Real estate sector. As a result, the Real estate now accounts for more than 20 percent of the overall CIRPs initiated.

Although the homebuyers have availed certain protection through courtroom victories, the skirmish is far from being resolved. This gets even more complicated when remedies are sought against pending projects that are already under moratorium.

Therefore, the above warrants a re-visit to the Code for a brief analysis of the real extent of Homebuyers’ protection.

Recent Developments 

Under the Code, only financial creditors[i] constitute the Committee of Creditors (“COC”) and enjoy voting rights in the COC. However, such rights are not extended to the operational creditors[ii] which was worrisome as the homebuyers were recognized as “Operational creditors” within the Code. Therefore, the Homebuyers were deprived of certain important privileges, including the right to be represented in the Committee Of Creditors (“CoC”) and a favorable treatment for payment of debts.

Thus, a growing demand was felt to recognize the homebuyers as “financial creditors”. Subsequently, in  Nikhil Mehta v. AMR Infrastructure, the NCLAT classified the allottees as ‘financial creditors’. It was observed by the NCLAT that the assured return scheme in the Buyer-BuilderAgreement(“Homebuyer’s agreement”) was ultimately a transaction wherein ‘financial credit’ was raised in the nature of the loan. In  Anil Mahindroo & Anr v. Earth Organics Infrastructure, the NCLAT concluded that an effect of commercial borrowing  could be seen within the terms of the homebuyer’s agreement. The effect amounted to financial credit within the meaning of the Code. Ultimately, the IBC (Amendment) Ordinance, 2018 came into existence, placing the allottees on an equal pedestal as other financial creditors like Banks, NBFCs, etc.

Such inclusion was necessary as the builders usually raise huge capital through home buyers, a primal example of this can be found in cases like Chitra Sharma v. Union of India in which, a whooping INR Fifteen Thousand Crore was owed to the Homebuyers.

However, it cannot yet be concluded that an inclusion of homebuyers as Financial Creditors sufficiently equips the homebuyers to get justice. This is because the effect of inclusion was diluted by the changes in legislation discussed below.

2.1 Placing homebuyers with Financial Creditors: a relief or a patch-work?

A positive yet incomplete step towards securing justice for homebuyers was to secure the status of financial creditors bestowed upon them under the Code as per Section 5(8). However, the legislature, while providing this right, has also neutralized its effects by attaching certain conditions to it.

The IBC 2019 Ordinance (now replaced by the 2020 Amendment Act) sought to impose a threshold limit on the homebuyers to initiate CIRP. Section 7 of the ordinance required no less than 100 or 10% homebuyers, whichever is less, to initiate insolvency against the builder. Further, the amendment also barred a single buyer from approaching the NCLT under Section 7 of the Code. Therefore, the homebuyers’ failure in achieving such numbers would seriously cripple the pursuit of availing their home units.

2.2 Challenges to the threshold: Karvy Investor’s case

The Ordinance was subsequently challenged upon its constitutional validity before the hon’ble the Supreme Court in Manish Kumar v Union of India. The Supreme Court initially imposed a stay on the ordinance, but ultimately upheld the threshold limit under the IBC 2019 ordinance stating that “the mere difficulties in given cases to comply with a law can hardly furnish a ground to strike it down”. The hon’ble Supreme court also refused to delve into the question of constitutionality with regards to the threshold requirements which according to petitioners amounted to class creation  amongst the Financial Creditors violating Article 14 of the Constitution.

Meanwhile, an amendment to IBC was introduced in 2020 (the 2020 amendment) which again imposed the aforementioned threshold to initiate CIRP. Subsequently, the 2020 amendment was also challenged before the Hon’ble Supreme Court  in the Association of Karvy Investors v. Union of India & Ors. The plea stated that the 2020 Amendment has imposed a severe and almost impossible condition on the right of an individual financial creditor to file an application to initiate CIRP. . Even though a deviation from the decision in Manish Kumar (Supra) is highly unlikely, the Karvy investors case has been filed and remains pending before the SC.

A setback from the Supreme Court

In Shelly Lal & Ors v. Union of India & Ors, an amount of INR 49 crore was raised from the Homebuyers for real estate project in Noida Sector but the directors of the project absconded and the project was stalled. In the wake of this, the homebuyers approached the Supreme Court under Article 32 and requested the Apex Court to take a supervisory role of the project. However, the apex Court shied away from passing any relief premised upon the reasoning that managing day to day supervision of the project is outside the purview of the Judiciary and the court is not competent to do so. The apex court justified taking such a stance by highlighting that the law has improved considerably and now Homebuyers can approach alternative forums such as the consumer court or the Real Estate Regulatory Authority.

On similar lines, in Upendra Choudhury v. Bulandsahar Development Authority and Ors., where the petitioner approached the SC under Article 32 for a court-monitored probe of the construction of the project and handed it over within a limited period. While dismissing the petition, the court observed that “entertaining a petition of this nature will involve the Court in virtually carrying out a day-to-day supervision of a building project. Appointing a Committee presided over by a former Judge of this Court would not resolve the problem because the Court will have nonetheless to supervise the Committee for the reliefs sought in the petition Under Article 32.”

Thus, the Apex court has made it clear that it would be improper for the Courts to entertain any petition which is related to the jurisdiction to manage the conduct of a development project particularly in facts like those which are produced in the above cases. This will definitely bring the court into the everyday monitoring of the project, including financing, permissions and execution – something which lies beyond the ambit of judicial review and the competence of the court.


The Supreme Court has time and again taken up the responsibility for overseeing the approval of the resolution plan and timely completion of projects in cases like Amrapali and Jaypee Infratech. However, the Supreme Court in recent times, has closed its gates for new homebuyers through a self-imposed delimitation, such as in the above discussed cases. Thus, the only feasible solution for Homebuyers would be to approach the alternative forums.

It is undisputed that the complainants before the Consumer forum can be heard irrespective of the proceedings under RERA or IBC, as held in M/s. Imperia structures ltd v. Anil Atni and another.  However, the practical applicability of claims before the alternative forums wherein the Corporate Debtor has already entered the CIRP process is a serious concern.

As noted by Haryana RERA authority in Ritu Rana v IREO Fiveriver Pvt. ltd., “when assets of the project have been attached and are already under CIRP, there are practical difficulties in implementation of any order issued by alternative forums. The complainants may have to approach multiple forums/authorities and may have to compete with multiple claims under a variety of laws”. The aforementioned observations by the RERA are a clear indication and admittance of the limitations & difficulties in the applicability of such reliefs provided by the alternative forums. Thus, longer legal battles lie ahead for Homebuyers especially now when the doors of the Supreme Court have been closed for overseeing stalled projects.

[i] Section 5(7), the Insolvency & Bankruptcy Code 2016. Financial creditor can be defined as- “a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.”

[ii] Section 5(20), the Insolvency & Bankruptcy Code 2016. Operational Creditor can be defined as- “any person to whom an operational debt is owed and included any person to whom such debt has been legally assigned or transferred.”


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