The recently enacted Insolvency and Bankruptcy Code, 2016 (‘IBC’ or ‘Code’), was aimed at restructuring the insolvency laws and regulations pertaining to corporates, partnerships, individuals and other entities in India, and providing an effective and time bound resolution process to the creditors. Multiple laws and adjudicating forums governing the financial failures in India, prior to enactment of IBC, were not able to alleviate the distressed credit market and provide a time bound and effective mechanism to the stakeholders to resolve the issue.

The structure of Insolvency and Bankruptcy Code, 2016 is laid down with an objective to maximize the value of the stakeholders; to restructure and consolidate the businesses; to balance the interest of all the stakeholders; to support the development of credit market; improving ease of doing business and facilitate more investment, leading to higher economic growth and development.

The objective of the new law is to generate a competitive revival or resolution plan, which benefits and maximizes the value of all the stakeholders. The aim was to restructure the businesses, if viable, rather than liquidation. However, the Code has been considered by the financial institutions and other creditors as a fast recovery channel rather than considering the option of restructuring and revival of the businesses. In last two years of enactment of IBC, over 800 companies[1] have been going the liquidation process.

Amid financial institutions and other financial and operational creditors being successful in instituting insolvency resolution process against the corporate debtors, the plea of the home buyers for initiating the insolvency resolution process against the corporate debtors, being real estate developers was struck down by the Hon’ble National Company Law Tribunal (‘NCLT’).  In terms of the provisions of IBC, financial creditor, operation creditor and the corporate debtor itself can initiate the corporate insolvency resolution process. NCLT adjudicated that the home buyers who have invested their money in purchasing the real estate property are not operational creditors and not even financial creditors, hence their plea for initiation of insolvency resolution process cannot be accepted. One of the judgment of the NCLT in the catena of judgments with respect to claim of home buyers was of the Delhi Bench of NCLT in the case of Nikhil Mehta & Sons (HUF) v. AMR Infrastructure Ltd.[2], wherein the Hon’ble Bench held that where the transaction was a pure and simple agreement of sale or purchase of piece of property, such a transaction would not acquire the status of a ‘financial debt’ as the transaction did not have consideration for time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of expression ‘financial debt’. In other words, Hon’ble Bench held that, to qualify as a financial debt and thus as a financial creditor, in terms of the provisions of IBC, what is important that the money has been advanced for a consideration for time value of money. However, in the case of home buyers, the money was advanced for purchase of property and not with a consideration for return of any time value of money.

Further, Hon’ble Delhi Bench of NCLT in the case of Col. Vinod Awasthy v. AMR Infrastructures Ltd.[3]  adjudicated that the home buyers also do not fall within the realms of ‘Operational Creditor’. Hon’ble NCLT held that since the home buyer has not supplied any ‘goods’ or ‘services’ to the real estate company, the home buyer can not be considered as an Operational Creditor and hence cannot initiate insolvency resolution process against the Corporate Debtor. As per the decision of Hon’ble NCLT, the definition of Operational Creditor means the creditor whose amount is due from the Corporate Debtor on account of rendition of any service or supply of any goods. Further, Hon’ble NCLT in the case of Pawan Dubey & Ors v. J.B.K Developers[4], referred to its earlier decision in the case of Col. Vinod Awasthy v. AMR Infrastructures Ltd3 and held that the provisions of Section pertaining to Operational Creditor cannot be construed so widely so as to include within its ambit the situations wherein the dues are on account of advance made to purchase the flat or any other property to be constructed by the real estate developer. Hon’ble NCLT held that the home buyer cannot be considered as an Operational Creditor especially when the home buyer has remedy available under the Consumer Protection Act and the general law of the land. In an appeal preferred against this order of Hon’ble NCLT, Hon’ble National Company Law Appellate Tribunal (‘NCLAT’), categorically held that the home buyers are mere allottees of the flats and thus do not come within the meaning of Operational Creditor in terms of the provision of Code.

However, NCLAT in an appeal filed by the petitioner Nikhil Mehta & Sons (HUF) against the order of NCLT2  reversed the decision of Hon’ble NCLT and held the home buyer to be Financial Creditor in view of the peculiar facts of the case.  Hon’ble NCLAT on review of the sale-purchase agreement of the flat between Nikhil Mehta and AMR Infrastructures Ltd., noticed that the agreement contained a committed assured return plan, wherein an assured return will be provided to the home buyer till the possession of the flat. Further it was brought to the notice of the Hon’ble NCLAT that the real estate developer did pay the assured committed return to the appellant and deducted tax on the said amount. Furthermore, on verification of the financial statements of the real estate developer, it was noticed that the real estate developer itself treated the amount paid to the home buyer as commitment charges under the head financial cost. Hon’ble NCLAT after considering all the facts of the case, held that the amount received by the real estate developer from the home buyer by way of sale and purchase agreement have a commercial effect of ‘borrowing’ and hence it is clear that the amount was paid by the home buyer against the consideration for time value of money. Hon’ble NCLAT held the home buyer to be the Financial Creditor eligible for instating insolvency resolution process against the real estate developer.

In view of the decisions of the Hon’ble NCLT & Hon’ble NCLAT and considering that thousands of home buyers are stranded with respect to their claims against the real estate developers, The Insolvency & Bankruptcy Board of India vide notification dated August 16, 2017 brought an amendment to the regulations, wherein, creditors other than financial and operational creditors can file their claim before the interim resolution professional. For the said purpose a ‘Form F’ was introduced. Albeit, pursuant to the introduction of Form F home buyers could file their claim before the interim resolution professional, however because the home buyers are not ‘financial creditors’ and not even ‘operational creditors’, the home buyers would be paid only after the secured and operational creditors are repaid.

Amid this, a public interest litigation[5] was filed by the home buyers before the Hon’ble Supreme Court against the order of Hon’ble Allahabad Bench of NCLT in the case of IDBI Bank Ltd. v. Jaypee Infratech Limited [6], wherein the Allahabad Bench adjudicated IDBI Bank Limited to be a financial creditor and admitted its application for initiation of insolvency resolution process. Hon’ble Supreme Court considered the concerns of the home buyers and vide its order dated September 4, 2017[7] read with the order dated September 11, 2017[8] directed the Insolvency resolution professional to formulate and submit an interim resolution plan within 45 days before the Hon’ble Court and to make all necessary provisions to protect the interest of 30,000 home buyers. Further, Hon’ble Supreme Court also directed Jaypee to deposit a sum of Rs 2000 Crores (Rs. Two Thousand Crores) before the Hon’ble Court on or before October 27, 2017. However, on failure of Jaypee to deposit the sum of Rs. 2000 crores as directed, Hon’ble Supreme Court vide its order dated April 16, 2018[9] held that if the amount is not deposited as per the instalment plan given by the Court the personal properties of the directors would be attached.

Considering the position of millions of home buyers across India, the Insolvency and Bankruptcy Code review panel[10] in its 90-page report[11] submitted to the Finance Minister Mr. Arun Jaitley in March 2018, called for sweeping changes in the law and proposed to treat the home buyers as Financial Creditors while deeming the amount raised from them for real estate project as Financial Debt. The committee deliberated that the amounts so raised from the home buyers is eventually a means of financing for the real estate developers and should be considered a Financial Debt and the home buyers be considered as the Financial Creditors.

Basis the recommendation of the committee, the Cabinet on May 23, 2018 approved promulgation of an Ordinance to amend the new IBC, providing relief to the millions of home buyers by classifying home buyers as Financial Creditors and bringing them at par with the lenders. The Ordinance received the assent of the Hon’ble President on June 6, 2018.

This move of the government will indirectly benefit the real estate sector in long run as it will infuse confidence in the home buyers to invest their money as it will give them priority in the recovery of dues and an effective and time bound resolution process against the real estate developer. However, at the same time, this could negatively impact the position of lenders, as the recovery proceeds would now be shared and equally distributed amongst the home buyers having the similar position as that of the lenders. This may result in a higher borrowing cost for the real estate developers in future.

Now, it would be interesting to witness how the claim of the home buyers, would be addressed by the Insolvency Resolution Professionals and how the resolution process would be invoked. Either the real estate developer would settle with the home buyer or if the home buyers insist on possession of the flats, an option may be resolved where the projects of the developer are developed by another developer. However, if nothing works, the ultimate resolution would be to liquidate the real estate developer, which may not be a beneficial situation for the home buyers. Liquidation is a time-consuming process, involves lot of expenses and most important the half-finished projects of the developer may not fetch the right price when liquidated. This may result the home buyers taking a haircut to the amount they have invested long ago.

As of now, the amendment is a big reprieve to the home buyers, however, whether the same will mark an end of the saga of home buyers under IBC, only time will tell!!


[2] [2017] 78 302 (NCLT-New Delhi)

[3] [2017] 80 268 (NCLT)

[4] C.P. No. (IB)-19(PB)/2017

[5] Writ Petition (Civil) No. 744 of 2017

[6] [2017] 84 321 (NCLT-Allahabad)

[7] [2017] 85 66 (SC)

[8] [2017] 85 209 (SC)

[9] [2018] 92 265 (SC)

[10] 14-member committee headed by corporate affairs secretary Mr. Injeti Srinivas


Author Bio

Qualification: CA in Practice
Company: Ashok Pranshu & Co.
Location: New Delhi, New Delhi, IN
Member Since: 11 Jun 2018 | Total Posts: 1

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June 2021