From Creditor Formalism To Consumer Fairness: Reimagining Real Estate Insolvency

From Creditor Formalism To Consumer Fairness: Reimagining Real Estate Insolvency; SC Ruling Bars Allottees with Buyback from IBC Relief

A retiree invests her entire life savings in a promised apartment for a rental income and a secure home, only to be barred from insolvency relief because the builder’s contract terms include a buyback clause that she never negotiated. Recent ruling in Mansi Brar Fernandes v. Shubha Sharma exposed this harsh reality in real-estate sector where the Supreme court ruled that real estate “allotees” with contracts featuring buyback clauses, assured returns or high-interest refunds clauses often included in developer-drafted contracts cannot initiate insolvency proceedings under Section 7 of the IBC Code, 2016, labeling them as “speculative investors”, who are chasing profits with no long-term intention of residence. This decision, intended to limit abuse, necessitates a reassessment of builder strategies and purchaser vulnerabilities amidst India’s 5.08 lakh halted housing projects.

BUILDER- LED SPECULATION – AN “ENGINEERED” WEB

Historically, India’s real estate market is heavily tilted in favor of builders. Developers cleverly craft adhesion contracts containing non-negotiable deals, standardized agreements with lucrative clauses with good assured returns or (monthly lump-sum yield on investments or fixed deposits) or buyback options that permit developers to reacquire units after a lock-in duration, along with the invested amount plus profit. In Mansi Brar, the MOU guarantees refunds alongside premiums and post-dated cheques as security, which seems an easy chance to take advantage of consumers in an industry where 60% of the projects encounter delays due to funding issues and regulation-based hurdles.  In India, this appears as “Designed speculation” whereby, by virtue of information asymmetry, sellers possess better information than buyers about market functioning and the latter lacks visibility into financial feasibility and construction schedules, making it a strong tool for builders.

However, the court’s standard deviation from RERA model agreements (Standardized formats for buyers and sellers under the Real Estate (Regulation and Development) Act, 2016, which mandates possession-tied payments and bulk unit purchase, in turn, holds buyers at fault, thereby overlooking their own lack of power and parity. Builders manipulate RERA’s safeguards by exploiting legal gaps. Section 3 mandates the registration of potential projects before sales to ensure transparency; however, builders often delay or misrepresent information, resulting in improper disclosures and contravention of quarterly reporting requirements under Section 4. This avoidance allows them to gather money in advance, considering purchasers as investors rather than homeowners.

In Pioneer Urban, the Court upheld “allottees” as financial creditors, ruling that homebuyers’ advancement inherently includes time value due to the expectation of timely delivery. With the inclusion of Section 5 (8), a financial debt includes disbursement with consideration for “time value of money”. In other words, compensation is given for deferred possession of property, like interest paid on advances. Builders counter this logic with high returns, presenting as non-debt speculation, but courts must assume time value in allotments, since delays naturally compensate via possession expectations, avoiding evasion and ensuring creditor inclusion amid defaults.

Mansi Brar mostly expanded on this but omitted allottees with guaranteed returns or buybacks, considering those clauses as a sign of “no intent to recover debt”, thereby invalidating the time value for money. Here, Builders take advantage of this by framing transactions as profit-speculative (non-time-valued), undermining IBC’s revival goal by maximizing value via resolution over liquidation.

THE CONTRACT ADHESION BLIND SPOT – WHEN “CONSENT” ISN’T MUTUAL

Real Estate MOUs frequently project an illusion of equitable and balanced negotiation, but they often reflect adhesion contracts, which are essentially prepared standardized documents enforced by developers with greater authority, leaving buyers with no genuine option but to sign or walk away. This trap is illustrated in Mansi Brar, where an MOU for four flats priced at ₹ 35 Lakh, with buyback and 25% returns, was seen as “Speculative”, thus making the appellant ineligible under section 7. This reasoning overlooks how adhesion contracts incorporate high penalties or concealed charges in pre-drafted clauses that take advantage of buyers’ urgency in cut-throat real estate markets.

In Central Inland Water Transport Corpn. V. Brojo Nath Ganguly, the court struck down unfair clauses in unequal bargains, holding them as unconscionable and oppressive to the employer. Further, in circumstances where one party dictates non-negotiable terms, enforcing these clauses contravenes public policy and is invalid under Section 23 of the Indian Contract Act. This principle is equally relevant in real estate scenarios, particularly where housing demands far exceed supply and buyers accept non-negotiable MOUs due to a lack of bargaining power.

Linking this with Innoventive Industries Ltd. V. ICICI Bank, where the NCLT has authority to probe “any question of law or fact” under Section 60(5)(c) while admitting section 7 applications. This provision allows for the examination of potentially exploitative clauses in contracts, including those found in real estate MOUs, thus providing a means to challenge and invalidate the terms that are unconscionable and against public policy.

UNSOLVED GRAY- AREAS BETWEEN IBC AND RERA

The introduction of the IBC and RERA in 2016 aimed to safeguard homebuyers and ensure faster and orderly debt recovery. Nonetheless, these two laws were never completely in coordination, resulting in systematic loopholes that developers now exploit. The primary concern is that IBC does not explicitly clarify its interaction with RERA. So, when a real estate company faces insolvency, tribunals often overlook the consumer protection intent under RERA and regard buyers solely as financial creditors and occasionally even exclude them if the contract includes a buyback or assured returns provision.

Secondly, Section 5(8) of the IBC broadly defines “financial debt” but does not acknowledge the mixed nature of housing transactions – both as an investment (economic security) and as a necessity (consumption). Developers exploit this by introducing terms that suggest the buyer’s capital was an investment, rather than a home payment, allowing them to evade accountability under IBC.

Third, section 7 lacks a clear standard for recognizing unfair or one-sided contracts during the admission stage, compelling buyers to engage in lengthy litigation merely to validate their status as genuine allottees. This procedural vacuum effectively transfers the burden of proof from the defaulting developer to the aggrieved consumer, contradicting the very consumer-centric purpose of the 2018 amendment that includes allottees in the IBC framework. Additionally, allowing tribunals to interpret “intent” subjectively leads to inconsistent precedents that diminish predictability and discourage homebuyers from pursuing insolvency remedies, thereby weakening both market confidence and the deterrent effect intended by the Code.

CONCLUSION – A BALANCED APPROACH

The debate sparked by Mansi Brar ultimately shows that India’s insolvency ecosystem continues to prioritize formal creditor arrangements over substantive consumer justice. The true challenge is not in preventing abuse of the Law but in understanding that the Individual homebuyers hold a distinct economic position where they are neither just investors nor mere traditional creditors, but individuals aiming for stability through property ownership. The lack of a differentiated standard for residential distress has enabled procedural rigidity to obscure fair and equitable recovery.

A prospective step must consequently integrate insolvency and consumer protection principles. This necessitates a shift from a “transactional” to a “relational” view of credit, where the homebuyers’ vulnerability, informational disadvantage, and dependency form the basis for categorization and relief. Ultimately, protecting homebuyers is not merely a gesture of kindness but is crucial for restoring trust in India’s real estate market and for achieving the IBC’s revivalist spirit.

Kindly extract all links:  

¹ https://realty.economictimes.indiatimes.com/news/industry/real-estate-budget-2025-swamih-fund-2-0-announced-to-revive-stalled-housing-projects/117823833

²  https://www.mondaq.com/india/real-estate/1621636/rera-and-builder-buyer-agreements-a-reformation-of-the-indian-real-estate-market

³ https://www.outlookbusiness.com/news/nearly-2000-housing-projects-stalled-across-42-cities-comprising-508-lakh-units-propequity

⁴ https://www.researchgate.net/publication/255709422_Information_Asymmetry_among_Buyers_and_Residential_Real_Estate_Prices

⁵ https://www.indiacode.nic.in/handle/123456789/2158?sam_handle=123456789/1362

⁶ https://www.bajajfinserv.in/section-3-of-rera-act

⁷https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Aug/Analysis%20of%20Pioneer%20Judgment%20of%20SC_2019-08-09%2023:48:30.pdf

⁸ https://www.pslchambers.com/wp-content/uploads/2020/04/Homebuyers-The-Amendments-to-IBC.pdf

⁹ https://ksandk.com/newsletter/sc-housing-a-right-distinguishes-homebuyers-from-investors/

¹⁰https://indiankanoon.org/doc/477313/

¹¹ https://lawinsider.in/judgment/landmark-judgement-central-inland-water-transport-corpn-v-brojo-nath-ganguly-1986

¹² https://www.juscorpus.com/public-policy-under-section-23/

¹³ https://www.taxmann.com/research/ibc/top-story/105010000000023789/a-comprehensive-exploration-of-section-605-of-the-insolvency-and-bankruptcy-code-experts-opinion

¹⁴ https://ijirl.com/wp-content/uploads/2025/06/IBC-VS-RERA-CONFLICTING-PATHS-TO-JUSTICE-FOR-CHEATED-HOMEBUYERS.pdf

¹⁵ https://www.pslchambers.com/wp-content/uploads/2020/04/Homebuyers-The-Amendments-to-IBC.pdf

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Article is been authored jointly by Ram Sundar Singh Akela and  Harshita Dhinwa