IBC and Real Estate Homebuyers: Are they truly Protected?

Abstract: The study argues that while the IBC has progressively transformed homebuyers’ legal position — notably by recognising them as financial creditors eligible to participate in insolvency proceedings — significant structural and practical limitations continue to undermine their protection. These include their often-unsecured status in liquidation priority, stringent thresholds for initiating corporate insolvency resolution processes (CIRP), dominating influence of institutional lenders in the Committee of Creditors (CoC), and procedural complexities that restrict meaningful recovery. Furthermore, judicial clarifications have refined but not eliminated these vulnerabilities, while overlapping regulatory regimes (like the Real Estate (Regulation and Development) Act, 2016 or RERA) create jurisdictional friction.

Methodologically, the research combines doctrinal legal analysis with case law review and statutory interpretation. Primary sources include legislative texts, IBC amendments, and key judicial pronouncements by the Supreme Court and National Company Law Appellate Tribunal (NCLAT). Secondary sources consist of peer-reviewed legal scholarship, law commission reports, and industry commentaries contextualising homebuyer rights within corporate insolvency. Through this multi-layered approach, the paper critically evaluates how the IBC’s creditor hierarchy, procedural thresholds, and institutional practices impact homebuyers, proposing targeted recommendations for strengthening their statutory and equitable protections within India’s insolvency regime.

1. Introduction and Research Question

The real estate sector in India has witnessed significant growth over the past two decades, but it has also been plagued by problems such as delayed projects, stalled construction, developer insolvency, and financial mismanagement. Many homebuyers invest their life savings into under-construction housing projects, often through bank loans and long-term financial commitments. When real estate developers become insolvent, homebuyers are left in a vulnerable position. Further, they neither receive possession of their homes nor recover their invested money easily. This situation raises serious concerns about the legal protection available to homebuyers in insolvency proceedings.

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to consolidate insolvency laws in India and provide a time-bound process for insolvency resolution. The primary objective of the Code is to maximise the value of assets and balance the interests of all stakeholders. However, when the Code was originally enacted, homebuyers were not recognised as financial creditors, which significantly weakened their position in insolvency proceedings.

To address this issue, the Insolvency and Bankruptcy Code (Amendment) Act, 2018 recognised homebuyers as financial creditors. This allowed them to initiate insolvency proceedings and participate in the Committee of Creditors (CoC). While this amendment appeared to strengthen their legal position, several structural and practical issues still remain.

This paper examines the central research question: Are homebuyers truly protected under the Insolvency and Bankruptcy Code, or does the law merely provide formal recognition without effective protection?

This paper argues that although the IBC has improved the legal recognition and procedural rights of homebuyers, structural issues such as limited voting power, threshold requirements, liquidation priority, and conflicts with real estate regulation continue to undermine their effective protection. Therefore, homebuyers are not fully protected under the current insolvency framework.

2. Doctrinal and Conceptual Framework

2.1. Insolvency Law and Creditor Hierarchy

The Insolvency and Bankruptcy Code introduced a creditor-in-control model in India, where financial creditors control the insolvency resolution process through the Committee of Creditors. The Committee of Creditors plays a crucial role in deciding whether a company should be revived or liquidated and in approving resolution plans.

Under the IBC, creditors are classified into different categories:

• Financial creditors
• Operational creditors
• Secured creditors
• Unsecured creditors
• Government authorities
• Shareholders

Financial creditors are given greater powers because they are considered sophisticated lenders who can assess financial risk and decide the viability of a distressed company. They can initiate insolvency proceedings, vote in the Committee of Creditors, and influence the resolution process.

Initially, homebuyers were not considered financial creditors. They were treated as operational creditors or consumers, which meant they had very limited rights in insolvency proceedings. This created injustice because homebuyers were often the most affected stakeholders in real estate insolvencies.

The 2018 amendment changed this position by recognising the money paid by homebuyers as financial debt, thereby classifying them as financial creditors. This doctrinal shift was significant because it brought homebuyers into the core insolvency decision-making framework.

2.2. Overlap Between Insolvency Law and Real Estate Regulation

Real estate insolvency is complex because it involves multiple legal frameworks. Apart from the IBC, the Real Estate (Regulation and Development) Act, 2016 (RERA) also plays an important role in protecting homebuyers. RERA was enacted to regulate the real estate sector, ensure transparency, and protect the interests of homebuyers.

Under RERA, homebuyers can seek remedies such as:

• Refund of their money
• Compensation for delays
• Interest payments
• Orders for project completion

However, when insolvency proceedings begin under the IBC, a moratorium is imposed, which prevents legal proceedings against the developer. This often stops proceedings under RERA or consumer courts. As a result, homebuyers may lose their remedies under RERA once insolvency proceedings begin.

This creates a conflict between the objectives of the two laws. While RERA focuses on consumer protection and project completion, the IBC focuses on insolvency resolution and maximising asset value. This overlap creates legal uncertainty and reduces the effectiveness of protection available to homebuyers.

3. Analytical Discussion

3.1. Recognition of Homebuyers as Financial Creditors

The recognition of homebuyers as financial creditors was upheld by the Supreme Court in Pioneer Urban Land & Infrastructure Ltd. v. Union of India. The Court held that the money paid by homebuyers to developers is used for financing real estate projects and therefore qualifies as financial debt.

This judgment was a major development because it recognised the economic reality that homebuyers fund real estate projects. The Court also observed that homebuyers should be allowed to participate in insolvency proceedings because they are directly affected by developer insolvency.

After this judgment, homebuyers gained several rights:

• They can initiate insolvency proceedings.
• They can participate in the Committee of Creditors.
• They can vote on resolution plans.
• They can receive distribution during resolution or liquidation.

However, despite these rights, practical challenges still limit their protection.

3.2. Threshold Requirement for Initiating Insolvency Proceedings

One of the major limitations in the protection of homebuyers is the threshold requirement introduced in the IBC. Under the law, at least 100 homebuyers or 10% of total allottees must jointly file an application to initiate insolvency proceedings.

This provision was introduced to prevent misuse of insolvency law by individual investors who might use insolvency proceedings to recover money rather than resolve insolvency. However, this requirement has created significant practical difficulties.

Homebuyers are often located in different cities or countries, and it is difficult to coordinate a large number of buyers to file a joint application. Developers may also settle with some buyers to prevent the threshold from being reached. This makes it difficult for genuine homebuyers to initiate insolvency proceedings even when the developer is insolvent.

Therefore, the threshold requirement acts as a procedural barrier and weakens the protection available to homebuyers.

3.3. Limited Influence in the Committee of Creditors

Although homebuyers are classified as financial creditors, their voting power in the Committee of Creditors is based on the amount of financial debt they hold, not the number of homebuyers. Banks and financial institutions usually lend much larger amounts to developers compared to individual homebuyers.

As a result, banks dominate the Committee of Creditors, and homebuyers have limited voting power. Banks are primarily interested in recovering their loans, while homebuyers are more interested in completing the housing project and obtaining possession of their homes.

This creates a conflict of interest between banks and homebuyers. The insolvency process often prioritises financial recovery for banks rather than completion of housing projects. Therefore, even though homebuyers are financial creditors, they do not have significant decision-making power in insolvency proceedings.

3.4. Weak Position in Liquidation

Another major issue is the position of homebuyers in the liquidation waterfall under the IBC. When a company is liquidated, assets are distributed according to a priority order. Homebuyers are generally treated as unsecured financial creditors, which places them lower in the priority list. Secured creditors such as banks are paid first, and only after their claims are satisfied do unsecured creditors receive payment. In many cases, very little money is left for unsecured creditors.

This means that homebuyers often recover very little money in liquidation. Therefore, their financial protection under the IBC is weak, especially when the company is liquidated instead of resolved.

3.5. Judicial Developments and Restrictions

The judiciary has attempted to balance the interests of homebuyers and financial institutions while preventing misuse of insolvency law. In Mansi Brar Fernandes v. Shubha Sharma, the Supreme Court held that insolvency proceedings should not be used merely as a recovery mechanism by homebuyers.

The Court emphasised that the objective of the IBC is resolution of insolvency and not recovery of individual debts. While this prevents misuse of insolvency law, it also limits the ability of homebuyers to use insolvency proceedings as a tool to pressure developers.

Thus, judicial decisions have both strengthened and limited the protection available to homebuyers.

3.6. Conflict Between IBC and RERA

The conflict between IBC and RERA continues to be a major issue. RERA focuses on protecting homebuyers and ensuring project completion, while the IBC focuses on insolvency resolution and asset value maximisation.

When insolvency proceedings begin, the moratorium under the IBC may stop RERA proceedings. This reduces the remedies available to homebuyers and creates confusion about which law should apply.

Although courts have attempted to harmonise the two laws, practical conflicts still exist, and homebuyers often face delays and legal uncertainty.

4. Conclusion and Policy Suggestions

The Insolvency and Bankruptcy Code has significantly improved the legal recognition of homebuyers in India. Recognising homebuyers as financial creditors was an important reform that gave them participation rights in insolvency proceedings.

However, homebuyers are not fully protected under the IBC due to several structural and procedural limitations. These include threshold requirements for initiating insolvency, limited voting power in the Committee of Creditors, weak position in liquidation, conflicts between IBC and RERA, and procedural delays.

Therefore, the protection provided to homebuyers under the IBC is more formal than practical.

Policy Suggestions

To improve the protection of homebuyers, the following reforms should be considered:

Creating a separate class of creditors for homebuyers in insolvency proceedings.

1. Giving priority to project completion rather than liquidation in real estate insolvency.

2. Improving the position of homebuyers in the liquidation waterfall.

3. Reducing the threshold requirement for initiating insolvency proceedings.

4. Improving coordination between insolvency authorities and RERA authorities.

5. Creating special insolvency frameworks for real estate companies.

6. Providing financial assistance for completing stalled housing projects.

5. Conclusion

In conclusion, the Insolvency and Bankruptcy Code has improved the legal position of homebuyers but has not fully protected them in practice. Homebuyers are not merely financial creditors; they are individuals seeking housing and financial security. The insolvency framework, which is primarily designed to protect financial institutions and maximise asset value, does not fully address the needs of homebuyers.

Therefore, while the IBC has improved the legal recognition of homebuyers, they are not yet truly protected, and further legal and policy reforms are necessary to ensure effective protection.

Cases Discussed

• Mansi Brar Fernandes v. Shubha Sharma and Another, Civil Appeal No. 3826 of 2020 and connected appeals, decided on 12 September 2025 (Supreme Court of India). The Supreme Court distinguished genuine homebuyers from speculative investors, emphasising that insolvency proceedings should promote resolution rather than function merely as an individual debt-recovery mechanism. The case is discussed in the article in relation to judicial restrictions on invoking CIRP against real estate developers.
• Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, (2019) 8 SCC 416; Writ Petition (Civil) No. 43 of 2019 and connected matters, decided on 9 August 2019 (Supreme Court of India). The Supreme Court upheld the constitutional validity of recognising real estate allottees as financial creditors under the IBC. The judgment is discussed concerning the treatment of homebuyer advances as financial debt and their participation in corporate insolvency resolution proceedings.

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AUTHOR NAME : ARULPRASATH P | CLASS : LL.B-2^ND YEAR (A)