Protection to Home buyers Under IBC (Insolvency And Bankruptcy Code) By CS Priyanka Kundnani


The purpose of enacting The Real Estate (Regulation and Development) Act, 2016 was to provide for the establishment of regulatory authorities at the state level, to register residential real estate projects. Not only this, but it also seeks to regulate contract between buyers and sellers in the real estate sector to ensure the sale of plot, apartment or building, etc, in an efficient and transparent manner. This seeks to ensure greater accountability towards consumers, and significantly reduce frauds and delays. It is an attempt to balance the interests of consumers and promoters by imposing certain responsibilities on both.

But in the recent past, there was an instance of delayed possession to home buyers who had booked flats/homes in real estate projects. Also, there were certain instances of Developers/Builders borrowing money from homebuyers in one project and investing them into another project and then becoming incapable of completing projects in which homebuyers had invested their hard earned savings. Homebuyers who had taken loans ended up paying EMI’s for flats whose possession they never actually got. Cases like Jaypee Infratech Case, Super tech Case, Amrapali Case, etc are clear examples which had projected Homebuyers as the worst sufferers. All of these factors propelled the government to bring in an amendment to the Insolvency and Bankruptcy Code, 2016 and recognise homebuyers as financial creditors.

Under the Insolvency and Bankruptcy Code, 2016 there are two types of creditors:

  • Financial Creditors
  • Operational Creditors
Financial Creditors includes a person who has lent money to the debtor against the payment of interest, on the other hand, Operational Creditors includes a person who has established a relationship with the debtor company such as the provision of goods and services, employment or government dues. The reason behind including home buyers in the list of Financial Creditors was the homebuyers were getting only limited reliefs/benefits as they were treated under the third class of creditors created by the Insolvency and Bankruptcy Board of India. There could possibly be many reasons behind the real state developer becoming insolvent for example delay in the approval of projects, funding issues, demand and supply situation, developer's negligence, etc. And no matter what the reason is but the only sufferers were homebuyers.

So, the amendment in the Insolvency and Bankruptcy code strengthens the position of homebuyers by including them in financial creditors and putting them on the same footing as any other stakeholder participating in the real estate project.


Real Estate (Regulation and Development) Act, 2016 (RERA) came into effect from May, 1, 2017, with an intention to protect the interest of homebuyers and enhance transparency in the real estate sector. RERA was enacted with the objective to set in motion the process of making necessary operational rules and creation of institutional infrastructure for the promotion and growth of real estate sector. However, the proper implementation of RERA is still a matter of concern for several state authorities.

The amendment in the Insolvency and Bankruptcy Code was, brought with an intention to cover the loopholes in the Insolvency and Bankruptcy Act along with the Real Estate (Regulation and Development Act), 2016. It also incorporates the key recommendations of the Insolvency Law Reform Committee's ("ILRC") report. The objective is to balance the interest of different stakeholders, particularly the Homebuyers. Post-amendment the Home Buyers are treated as financial creditors under the code since, money is raised from homebuyers as a means to finance construction, and thus they should be treated as any other financial creditor.


Prior to the amendment, Home buyers were treated as under third class of creditors and they were considered to be neither financial creditors as they haven't lent out money against the payment of interest nor were they operational creditors as that the code does not contemplate immovable property and refers to the provision of "goods and services". As a result, the homebuyers were not capable of initiating insolvency proceedings against a defaulting builder or Real Estate developer. The only recourse available to the Home Buyers was that they could just get the balance proceeds subsequent to payment of insolvency costs, financial creditors, workmen and government dues on the event of builder/developer confronting liquidation. The Hon'ble Apex Court in the Unitech Residential Resorts case took a strong stand against this situation and directed Unitech to deposit Rs. 15 crores in the apex court Registry. Further, the bench asked Unitech to deposit another Rs. 2 crores and the total amount of Rs. 17 crores that is to be distributed by the registry to the 39 respondents who had been waiting for their flats for over seven years. Similarly, in September 2017, the Hon'ble Supreme Court of India asked Jaypee Associates to pay Rs 5 lakh each to 10 home buyers who got their flats with the delay of 5 years.


After the amendment, the Home Buyers are treated as "allottee" under a 'real estate project'. The term "allottee" is defined under Real Estate (Regulation and Development) Act as "a person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent."

As per IBC amendment, if an allottee raises sum under a real estate project then that sum will be considered to have an impact similar to the commercial impact of borrowing. Therefore, the sums paid by the Home Buyers to a builder will be considered as financial debt and homebuyers will be categorized as financial creditors. This helps the home buyer to file a petition to start insolvency proceedings against a defaulting builder company.


The amendment to the Insolvency and Bankruptcy code proves helpful to the buyers who are facing hardships due to incomplete real estate projects. In India, around 20-30% of the projects face delay due to various reasons and the developer also find themselves in a debt trap because of that delay. The delay affects the Home Buyers to a great extent as they invest a substantial portion of their savings to make a down payment for the property, pay an EMI on the loan and over and above that continue to pay rent in the current place of stay. But the tables have turned now, the homebuyers after attaining the status of a financial creditor under the code have the right to invoke Section 7 of the IBC against the guilty developer. The financial creditors can file an application in NCLT (National Company Law Tribunal) for initiating corporate insolvency resolution (CIRP) against a defaulting company. In addition to this, the homebuyers have representation in the committee of creditors through an authorized representative and they can expect fast-tracking of pending court cases against leading real estate groups.


RERA, which caters to the real estate sector, contains stringent norms and penalties against defaulting builders or developers. The IBC recognized homebuyers as financial creditors to protect their rights even when a creditor, other than a homebuyer, invokes insolvency proceedings against the builder. In my opinion, it may be in the interests of homebuyers to approach the National Company Law Tribunal only when the promoter fails to remedy default under RERA or where RERA is not active.

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