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The recent slump in the real estate industry culminated in a grim situation where several major builders like Unitech, Jaypee Infratech and Amrapali are unable to complete their housing projects and hand over possession to their customers, leaving them in the lurch.

As is the usual practice, many of these customers have taken home loans, and they have to continue paying EMIs on their loans with no delivery date in sight. It has caused a lot of confusion and put many of them in dire straits financially. Banks will continue to demand EMI payments and if these customers default, the lenders can seize other assets to claim their dues. Recently, Jaypee homebuyers have started receiving notices that threaten to cancel the allotment of units in their name for defaulting on payment of EMIs (equated monthly instalments).

In order to pacify the Home Buyers, the Government has promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2018(“Ordinance”) on 6 June 2018 to implement the recommendations pursuant to the Insolvency Law Reform Committee Report dated 3 April 2018. One of the objectives of the Ordinance is to balance the interests of various stakeholders in the Insolvency and Bankruptcy Code, 2016 (“IBC”) including home buyers. This post analyses the issues that emanate from the amendment.

The position of home-buyers before the Ordinance

Prior to the Ordinance, there was no clarity regarding home-buyers rights, either as financial or operational creditors under IBC. Thus, home-buyers were unable to assert their rights for initiating an insolvency resolution process and participate in Committee of creditors (“CoC”). This ambiguity enabled real estate developers to sideline the claims of home-buyers.

Amid this, a public interest litigation Chitra Sharma v. Union of India [2018] 92 taxmann.com 265 (SC) 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 Ltd. wherein Hon’ble Supreme Court considered the concerns of the home buyers and vide its order dated September 4, 2017, 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 the failure of Jaypee to deposit the sum of Rs. 2000 crores as directed, the personal properties of the directors would be attached.

Hence, it becomes relevant to analyze the Pre-Ordinance status of home-buyers to gather a realistic and legal interpretation of the Ordinance amendments.

A) Home-buyers not operational creditors

Hon’ble Delhi Bench of NCLT in the case of Col. Vinod Awasthy v. AMR Infrastructures Ltd. [2017] 80 taxmann.com 268 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 cannot be considered as an Operational Creditor and hence cannot initiate insolvency resolution process against the Corporate Debtor. 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 expressed similar opinion in the case of Pawan Dubey v. J.B.K Developers C.P. 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. The home buyer cannot be considered as an Operational Creditor especially when the home buyer has a remedy available under the Consumer Protection Act and the general law of the land.

B) Home-buyers as financial creditors

Financial debt includes money borrowed against payment of interest, amounts raised under a credit facility and any other transaction having the commercial effect of a borrowing. For a debt to qualify as financial debt, it must have the following components:

  • there must be a liability or an obligation in respect of a claim which is due from any person;
  • the debt must be disbursed against consideration for the time value of money; and
  • it must be included in the illustrative list of financial debts or must arise from a transaction having the commercial effect of a borrowing.

As a general rule NCLAT has held that transactions wherein amounts are disbursed for sale of real estate in the future do not have the commercial effect of a borrowing and thus, are not financial debts.

In the case of Nikhil Mehta & Sons (HUF) v. AMR Infrastructure Ltd. [2017] 78 taxmann.com 302 (NCLT – New Delhi), 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 the time value of money. However, in the case of home buyers, the money was advanced for the purchase of property and not with a consideration for the return of any time value of money.

The position of home-buyers after the Ordinance

The Ordinance provides for home buyers under the ambit of financial creditors after insertion of an explanation to Section 5(8)(f) which defines a “financial debt”.

Financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes, inter alia, any amount raised under any other transaction having the commercial effect of borrowing.

Under the newly inserted Explanation

(i) any amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing;

The definition of “allottee” and “real estate project” are defined under the Real Estate (Regulation and Development) Act, 2016 (“RERA”).

 “Allottee” is defined under RERA in relation to a real estate project as a person to whom a plot, apartment or building has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter and includes a subsequent acquirer of such property.

“Real estate project” is defined under RERA inter alia as the development of a building or a building consisting of apartments or converting an existing building or a part thereof into apartments or the development of land into plots or apartments for the purpose of selling all or some of the said apartments or plots or building, as the case may be.

The Explanation results in the categorisation of home buyers as financial creditors under the IBC.


The categorisation of Home Buyers as Financial creditors is a certainly a big step but the entire issue continues to be enamoured with myriad practical issues as mentioned

below: –

a) Representation of Home Buyers

The representation in the case of bank lending is limited but the same shall not hold true for Home Buyers. In the case of Jaypee Infratech, a company has taken money from nearly 27,000 buyers. It does raise a pertinent question as to how many buyers be represented on the Committee of Creditors and amount of representation to be provided?

Apparently, there is a lack of clarity on the subject but it is believed that home buyers would form an association, and the association would select someone who represents them in the CoC.

b) Representation on the Committee of Creditors

After the amendment, there is uncertainty as to who shall attain a better representation on the Committee of Creditors whether Banks or home buyers? For instance, Jaypee Infratech had raised around Rs 13,500 crore from homebuyers by way of booking amount and instalments, which is far higher than the Rs 9,800 crore raised from banks. Whether representation shall be dependent on the sum owed?

3) Harmonise the Interest

How do you align the interest of banks and homebuyers? The banks will be inclined towards disposing of the company and retrieve the money at the discount. On the contrary, a section of the homebuyers may be interested in getting a home, given that prices have risen between the time they invested and now.

4) Status of Home Buyer as Unsecured Creditor?

Apart from the Financial tag, it is also important to be classified as a secured creditor. Pursuant to the Section 53 of the IBC, the priority is given to secured creditors. They are the ones who will get their money back. The banks are secured creditor as the debtor has given land as security for getting loans. Hence, secured creditor i.e. banks will continue to have a more favourable position. The resolution plan of most bidders takes care of only secured creditors.

Though it is envisaged that home buyers may be given a separate grade in waterfall mechanism under section 53 of the code. Waterfall mechanism refers to the order of priority in which the proceeds from the sale of liquidation assets are distributed. More relief is expected otherwise the Homebuyers would be left high and dry.

5) The distinction between Home Buyer and Purchase of Commercial Property

Moreover, the government needs to provide clarity whether there would be a distinction between home buyers and purchasers of the commercial real estate, as has been done in the case of the Consumer Protection Act, 1986.

6) Procedural Aspects

The ordinance has not provided with procedural aspect of handling Home Buyer application against the developer. As it stands, even a single home buyer could make such an application. The problems may surface if multiple home buyers from a single developer initiate multiple proceedings. This could clog the NCLT and lead to delays that are contrary to the time-bound process mandated by IBC.


Section 89 of RERA provides that the provisions of RERA shall have an effect, notwithstanding anything inconsistent contained in any other law for the time being in force.

Similarly, Section 238 of the IBC provides that the provisions of the IBC shall have an effect, notwithstanding, anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

For Instance, homebuyers approach a real estate regulator and at the same time, banks move the NCLT against the developer. The IBC law says all other proceedings will be halted when a company is admitted to the NCLT. It remains to be seen what will happen to the RERA proceeding under such circumstances: Will it be halted or not?


The amendments brought about by the Ordinance in relation to home buyers has left us with many unanswered questions which need to be addressed by the authorities. The efficacy of the IBC as a remedial mechanism for home buyers appears doubtful. Nevertheless, the stringent provisions in RERA Act and IBC shall serve as a deterrent from these errant developers who were enjoying a free ride with the public money.


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July 2024