IBC Amendment, 2020: A Delusional Relief for Homebuyers

[By Ishita Soni and Sanjana Karnavat]

The authors are third year students of Symbiosis Law School, Pune.


The Insolvency and Bankruptcy Code, 2016 (“the Code”) consolidates India’s insolvency laws under one comprehensive scheme to ensure value maximization of an insolvent debtors’ assets for the benefit of all stakeholders.[i] The Code classifies all creditors as either financial creditors or operational creditors based on the kind of debt Corporate Debtor owes them. Whereas, the former give consideration in the form of cash (in return for an interest), the latter extends debt in the form of goods or services.

This distinction is of essence because the Code extends certain exclusive rights to the financial creditors, namely, the right to initiate the corporate insolvency resolution process (“CIRP”) without sending any demand notice, the right to be a member of the committee of creditors (“CoC”), and the guarantee of receiving at least the liquidation value under the resolution plan.[ii] This creates an unequal balance of powers between the two types of creditors, solely on the basis of the type of debt that is owed to them.

The status quo of homebuyers under the Code is a vehemently debated issue since their role as financial creditors has been claimed and subsequently challenged innumerable times. Real estate allottees are persons to whom an apartment or plot in a real estate project has been allotted or sold.[iii] Consequently, certain ‘homebuyers’ give an advance to the developers and fund the cost of the project in return for a house.[iv] Since this advance is a means of raising finance, it is deemed to have “commercial effect of borrowing” under Section 5(8)(f) of the Code.[v] Therefore, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 included homebuyers under the category of financial creditors for all intents and purposes of the Code.

The IBC Amendment, 2020

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“the 2020 Amendment”)[vi] was introduced as a Bill on 12th December 2019 in the 17th Lok Sabha Session, post which it was referred to the Standing Committee on Finance for recommendations and suggestions. The Committee discussed several issues surrounding homebuyers, however, after perilously disregarding the same, the 2020 Amendment made the following modifications in the implementation of the Code, by adding a proviso in form of Section 7(1) before the Explanation in the Code.[vii]

The same reads as under:

  1. Financial creditors under Section 21(6A)(a) & (b), whose debt was in the form of securities or deposit, are allowed to file an application for initiating CIRP jointly with not less than 100 such creditors or 10% of their number, whichever is less.
  2. Financial creditors, who are real-estate allottees are allowed to file an application for initiating the CIRP jointly with not less than 100 such allottees or 10% of such allottees under the same real estate project, whichever is less.
  3. The pending applications for CIRP that were filed by the aforesaid two categories of creditors must be altered to comply with the minimum threshold requirements within 30 days of the commencement of the 2020 Amendment Act. A failure to do so would deem the application to be withdrawn before its admission.[viii]

Loopholes and Patent Irregularities in the IBC Amendment, 2020

I. Undue restriction in initiating the CIRP

Section 7 of the Code prescribes three distinct modus operandi through which a financial creditor is permitted to file an application for initiating a CIRP against a defaulting Corporate Debtor. Accordingly, the financial creditor is allowed to apply:

  1. By itself,
  2. Jointly with other financial creditors, or
  3. With any other person on behalf of the financial creditor, as may be notified by the Central Government.

Since homebuyers are equivalent to all the other financial creditors whose debt falls under the classification of Section 5(8)(a)-(e), they must be treated identically in every aspect of the insolvency proceeding under the Code. Albeit all financial creditors have the discretion to approach the NCLT via any of the aforesaid means. However, by virtue of the 2020 Amendment, a homebuyer is deprived of the right to file an application himself/herself i.e. ‘by itself’. Insertion of the 2nd proviso explicitly contradicts and violates the beneficial construction of Section 7 of the Code that is extended to every financial creditor, since it mandates solely a homebuyer to take refuge with at least 99 other homebuyers or satisfy the minimum 10% requirement before he/she can apply for the recovery of his/her debt.

II. Complete disregard to the amount of debt

The Code allows all the financial creditors to initiate the CIRP if the debtor makes a default of Rs. 1 Lakh or more. However, the 2020 Amendment mandates the homebuyers to satisfy the minimum members’ requirement, even if the debt that is individually owed to them exceeds 10 times the amount of Rs. 1 Lakh. Thus, this sinister provision hinders them from reaping the benefits that are available to all other financial creditors.

III. Impractical and Unenforceable Provision

Every legislation is made keeping in view its practical considerations and hazards involved in implementation. The 2020 Amendment, however, is uncalled for and highly impractical because it is not feasible for a single homebuyer to obtain information, consolidate data, contact other homebuyers and then persuade them to file an application for initiating the CIRP against a Corporate Debtor. This is all the more bizarre when a homebuyer, with a pending application, is obliged to fulfill this requirement within 30 days of enactment of the 2020 Amendment, as per the 3rd proviso of the newly inserted provision.

There is only a bleak possibility that one can gather 99 other homebuyers or 10% of their number, given that in most cases, it is the defaulting party i.e. the real-estate developer/builder or the project head that possesses all the details about the homebuyers. Thus, it is extremely unlikely that they would willingly assist the aggrieved homebuyers and handover these details so that they can initiate the CIRP against the defaulter. Since non-adherence to the mandatory provision will result in quashing of the homebuyer’s application, the 2020 Amendment may prevent genuine and bonafide cases from being brought before the court of law.

Although the impugned provision was enforced under the pretext that it would ‘prevent the potential abuse’[ix] of the Code via frivolous and vexatious litigation, this objective is already being defeated through the pre-existing economic condition of having of debt over Rs. 1 Lakh.

IV. Provides for equal treatment of unequals

A prima facie distinction must be drawn between the financial creditors under Section 21(6A), whose debt is in the form of securities or deposits, and the financial creditors who are homebuyers as per Section 5(8)(f) of the Code. The former can be given a differential treatment since the ‘debt’ that is owed to them does not fall into the confines of ‘financial debt’[x] under the Code. Hence, the former have no right of representation in the CoC,[xi] however, the latter do.

The 2020 Amendment imposes the same minimum members’ requirement upon the former, through the 1st proviso, as it does upon the homebuyers, through the 2nd proviso. By inserting the 1st and the 2nd proviso together, the Amendment has placed the two distinct classes of financial creditors at the same pedestal. Therefore, the Amendment treats the unequals equally and leads to the creation of a ‘class within a class’, which is manifestly arbitrary and violative of Art. 14 of the Constitution.[xii]

V. Other issues

In addition to the aforementioned lacunas, the 2020 Amendment suffers from various other vices. Among others, it failed to address the procedure to be followed in case a few homebuyers settle or withdraw lis pendens against the developer. Unlike the Companies Act, 2013 or the Consumer Protection Act, 1986 (“CPA”), which clearly define class litigation and the procedures governing it, the 2020 Amendment stipulates nothing in this regard.

Furthermore, the 2020 Amendment failed to address the key issues that plague the Code, namely, the determination of the status of the homebuyers as ‘secured’ or ‘unsecured’ creditors during the waterfall of liquidation and the procedure for recovery for a single homebuyer in case no other creditor is desirous/available.


Instead of filling the critical gaps in the corporate insolvency framework, the 2020 Amendment harnessed certain manifest loopholes with respect to homebuyers. It is imperative that the Parliament dwells upon the aforementioned obscurities and enacts a well-thought-out comprehensive and exhaustive legislation that caters to the needs of hundreds of homebuyers having over 1800 cases pending across India. Any subsequent legislation must embody the suggestions put forth by the Standing Committee regarding the strengthening of the Real Estate (Regulation and Development) Act, 2016 and the CPA for providing better alternative remedies for the recovery of debt.

End Notes

[i] Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, ¶11.

[ii] REPORT OF THE INSOLVENCY COMMITTEE, 2018, http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf.

[iii] Section 2(d), Real Estate (Regulation and Development) Act, 2016, http://mohua.gov.in/upload/uploadfiles/files/1Real_Estate_Act_2016.pdf.

[iv] Challenges in the Implementation of Insolvency Code and the Insolvency Amendment Ordinance, 5 RFMLR (2018) 326 at pg. 338.

[v] Section 5(8)(f), Explanation (i), The Insolvency and Bankruptcy Code, 2016; REPORT OF THE INSOLVENCY COMMITTEE, 2018, http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf; Nikhil Mehta and Sons v. AMR Infrastructure Ltd., 2017 SCC OnLine NCLAT 377, ¶24.

[vi] https://ibbi.gov.in//uploads/legalframwork/d36301a7973451881e00492419012542.pdf.

[vii] Clause 7, The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019.

[viii] The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019.

[ix] The Statement of Objects and Reasons, The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019.

[x] See, Section 5(8), The Insolvency and Bankruptcy Code, 2016.

[xi] See, Section 21(2), The Insolvency and Bankruptcy Code, 2016.

[xii] State of U.P and Ors. v. Committee of Management, Mata Tapeshwari Saraswathi Vidya Mandir and Ors., (2010) 1 SCC 639.


One response to “IBC Amendment, 2020: A Delusional Relief for Homebuyers”

  1. ปั้มไลค์ Avatar

    Like!! I blog frequently and I really thank you for your content. The article has truly peaked my interest.

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