Treating Homebuyer’s As A Financial Creditor: Builder’s Perspective

Recently, the Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. [“Pioneer Judgment”] has dealt with the rights of the homebuyers in real estate transactions and has ruled in favour of the homebuyers by treating them as financial creditors. This particular case was dealing with the constitutionality of the explanation added to Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 [“IBC”]. This explanation grants the status of the financial creditors to the homebuyers, which further empowers them to become a part of the Committee of Creditors [“CoC”] and take part in corporate insolvency resolution process. The court while dismissing the plea of the developers said that everyone who grants money for the purpose of giving financial credit or cost incurred in raising loan to the developers will be considered as a financial creditor.

The builders in this particular ruling contended that the entitlement of the right of the financial creditors to the homebuyers violates Article 14 of the Constitution as the unequals i.e. the homebuyers are treated at par with the equals i.e. the banks and financial institutions. Further, the developers also argued that the homebuyers do not match with the characteristics of the financial creditors mentioned by the Supreme Court. The Supreme Court while rejecting all the contentions of the petitioners has held that no violation of Article 14 has occurred as the homebuyers are in the same position as of the debenture holders and fixed deposit holders who have funded the projects of the builder. The abovementioned premise can be questioned as the court does not consider the amount of interest taken by the debenture-holders and the fixed deposit holders which in the case of homebuyers are not accounted and no interest is paid on the advance given by the homebuyers.

The Court also took the help of the rule of harmonious construction to balance out the possibility of dual remedy available in the IBC, 2016 and the Real Estate (Regulation and Development) Act, 2016 [“RERA”] respectively. The author contends that the present factual matrix pertaining to homebuyers has to be viewed in light of the existing provisions and statutes. Section 89 of the RERA, 2016 provides for the overriding effect in the case of conflict and thus, by giving more weight to the IBC, 2016 over the RERA will defeat the provision and purpose of RERA enshrined under Section 89. Moreover, another remedy in form of the Consumer Protection Act, 2019 is available for the homebuyers which empower the allottees to claim remedy in case of default by the developers. The court should have considered the confusion of jurisdiction which might arise when the homebuyers will approach the different courts/tribunals/forums for different remedies. This will cause delay in justice and will give rise to overlap in remedies, thereby making the whole process convoluted.

Further, it should also be observed that the relationship between the allottee and the builder is more or less the same as relationship between debtor and operational creditor. This issue has gone unnoticed in the case as there is hardly any relationship of the financial nature. It can be considered that the money taken from the homebuyers are used for financing the business but the homebuyers are paid no interest for it. Further, the money taken from the customers in case of sale of goods and services can also be used for financing but they are treated as operational creditors. The relationship of the homebuyers with the builders is of the similar nature as mentioned above as per section 2(c) and 2(d) of the RERA 2016. Thus, they cannot be regarded as financial creditors.

Homebuyers as a Financial Creditor: Consequences

Insolvency Code comprises of the feature which includes Committee of Creditors to take out the corporate insolvency resolution process and this committee consists of only financial creditors. This particular feature presupposes that resolution process is a technical task and only financial creditors like banks and financial institutions have the capability to carry out this resolution process as they are experts in taking financial steps like this process. These institutions have unique capability to carry out the resolution plans and scrutinize the liabilities arising out in these plans as they regularly indulge in such type of activities because of their operations. On the other hand, allottees like homebuyers have no such experience and capabilities for carrying out these resolution plans. Further, it is highly improbable that they can come to any consensus or at the same decisions which can lead to delay in carrying out such resolution plans and thus makes the insolvency resolution process more complex. Furthermore, if the allottees came to an informed decision making then also these types of decisions cannot be replaced as an alternative to the trenchant decisions taken by banks because of the inexperience of the homebuyers. The decisions by the allottees for resolution plans will also not be fruitful as they have no technical expertise in carrying out insolvency proposals. Considering the large number of homebuyers, it can also be inferred that the decision of the homebuyers can override the decisions of the institutions which will cause overlapping of decisions leading to failure of resolution plans.

Read – Why IBC Was Introduced And How It Different From The Earlier Regime? 

In addition to the above mentioned premise, case of NCLT Allahabad is also to be observed where the tribunal has noticed that the allotees cannot be considered as a financial creditor where a tripartite agreement is formed in which the banks forms the agreement with the allotee for subrogation of interest. In this type of agreement, banks form the agreement with the allottee and the builder for subrogation of interest of the allottee while giving loans to the allottee for flat booking. The allottees then cannot ask for any interest and then cannot be regarded as a financial creditor as they have transferred their interest. Thus the present ruling in the case of Pioneer judgment does not determine the issues pertaining to subrogation of interest and this issue of tripartite agreement will create more complexity while carrying out resolution prospects.

Moreover, the Supreme Court in its current ruling has considered homebuyers as unsecured financial creditors. The homebuyers will receive their debts after the payment of debts to the banks and the financial institutions which are secured financial creditors. This will defeat the purpose for which the amendment was made so as to protect the right of homebuyers. Considering the homebuyers as unsecured financial creditors, the allottees will not be treated at par with other financial creditors because they will receive payment after the secured financial creditors.

Moreover, this particular amendment gives power to the allottees to invoke insolvency resolution process by making an application to the National Company Law Tribunal [“NCLT”]. This right can be exercised maliciously as an extorting tool against the developers to complete the transaction regardless of the ability of the business to complete the transaction. The above mentioned instance will encroach over the right of other homebuyers as prejudice will be shown by the developers in completing the transactions of selective group of allottees. It will further lead to mismanagement of funds taken as a loan from the banks and thus will endanger the rights of the banks and financial institution of time-bound repayment of debts.

Is the amendment fruitful?

The inclusion of the homebuyers in the CoC serves only one of the two fold purpose for which the amendment was done i.e. firstly, the delivery of the completed flats and secondly, getting the refund of money. The inclusion will not be of much help in the case where the allottees want the completed flats as the liquidation will stop the delivery and they have to only use the process till resolution to take measures for the revival of the business. Moreover, if the ultimate aim of the allottees is to get their money back then they will be suffering the most as they are offered the seat of unsecured financial creditors, thus making their position weaker in terms of priority of payment.


The recent amendments done to the IBC will promote the existing position of the homebuyers as they will be treated at par with other financial institutions such as banks, financial institutions, debenture holder, etc. This particular stance will now ensure the security of the homebuyer’s interest especially by the other financial creditors and will increase more cautiousness of the financial creditors towards the rights of the allottees. But the author firmly believes that no good can be done to the homebuyers as they are in the position of the unsecured financial creditors having no technical expertise in the CIRP where the banks and other financial creditors are technically sound. Thus, new amendment is required so as to make homebuyers a secured creditor but with no say in resolution process due to the non-consensus problem and absence of technical knowledge in the resolution process.

1. Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors., 2019 SCC OnLine SC 1005.
2. Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
3. Article 14 of the Constitution of India.
4. Swiss Ribbons v. Union of India, (2019) 4 SCC 17.
5. Section 89 of the Real Estate (Regulation and Development) Act, 2016
6. Section 2(47)(viii) Consumer Protection Act, 2019.
7. Section 21(2) of the Insolvency and Bankruptcy Code, 2016.
8. Supra note 4.
9. Ajay Walia V. M/s. Sunworld Residency Private Limited, (2018) 210 CompCas 0405.
10. Supra note 1.


Author –

Keshav Khandelwal, Student of Student of National Law University, Jodhpur

Law Corner

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