Homebuyers as Financial Creditors Under the IBC After 2018

Vikrant D. Shetty

Oct 2

11 min read

Updated: Oct 21

Homebuyer Classification as Financial Creditors: Post Amendment CoC Representation

Homebuyers who pay advance amounts to a developer are recognised as financial creditors under Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016, following the Explanation inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The Supreme Court upheld this classification in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, confirming it applies retrospectively to pending insolvency proceedings. Because homebuyers in a project are numerous, they participate in the committee of creditors as a class through an authorised representative. This article traces the amendment's history and its effect on resolution plan negotiations.

The Legislative Journey: From Section 5(8)(f) to the 2019 Amendment

Before 2018, homebuyers who had paid advance amounts to developers against the promise of delivery of apartments were not explicitly recognised as financial creditors under the Insolvency and Bankruptcy Code, 2016. The definition of financial debt in Section 5(8) of the Code lists a range of instruments and transactions that carry the commercial effect of a borrowing. Section 5(8)(f) includes amounts raised under any other transaction having the commercial effect of a borrowing, which proved to be the interpretive gateway for homebuyers.

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 inserted an Explanation to Section 5(8) of the Code, deeming allottees under real estate projects to be financial creditors. The explanation clarified that the amount raised from allottees is deemed to be an amount having the commercial effect of a borrowing. Simultaneously, Section 21(6A)(b) was inserted, providing for the appointment of an authorised representative for a class of at least ten financial creditors. This was necessary because the logistical challenge of convening CoC meetings with potentially thousands of homebuyers would otherwise render the process unworkable.

Pioneer Urban Land: The Supreme Court's Validation

The constitutional validity of the 2018 amendment was challenged by real estate developers before the Supreme Court. In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, 2019 SCC OnLine SC 1005, decided on 9 August 2019, a three-judge bench comprising R.F. Nariman, Sanjiv Khanna, and Surya Kant JJ. upheld the amendment in its entirety. The Court held that amounts raised from allottees have the commercial effect of a borrowing because developers use those funds for construction, creating a debtor-creditor relationship. The constitutional challenge based on the argument that allottees are not lenders in the traditional sense was rejected.

The judgment also addressed the temporal scope of the amendment, confirming that it applied retrospectively to CIRPs pending at the time of enactment. This meant that homebuyers who had not previously been classified as financial creditors could assert their status in ongoing proceedings. The Pioneer judgment effectively opened the CoC of every insolvent real estate developer to homebuyer participation, fundamentally altering the dynamics of resolution plan negotiations in those CIRPs.

What Is the Minimum Threshold for a Homebuyer's Section 7 Application?

The Insolvency and Bankruptcy Code (Amendment) Act, 2020, which gave effect to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, introduced a threshold requirement for homebuyer applications. Under Section 7 of the Code, an application by a financial creditor who is an allottee under a real estate project requires that not less than one hundred of the allottees or not less than ten per cent of the total number of allottees under the same real estate project, whichever is lower, must join the application. This threshold was introduced to prevent individual homebuyers from triggering a CIRP and to ensure that insolvency proceedings are initiated only where there is a meaningful body of aggrieved allottees.

The threshold does not apply once a CIRP has been admitted and homebuyers seek to participate as members of the CoC. The threshold is a gateway condition for the triggering of insolvency proceedings, not a condition on participation in the creditor committee. Individual homebuyers who did not join the initial application may still file their claims with the resolution professional during the CIRP and become part of the class of financial creditors for representation purposes.

Authorised Representative Mechanism: How It Works in Practice

Who Is Appointed as the Authorised Representative for Homebuyers?

Where a class of financial creditors has more than ten members, Section 21(6A)(b) requires the NCLT to appoint an insolvency professional as the authorised representative of that class to attend CoC meetings and vote on their behalf. The authorised representative does not exercise independent judgment on how to vote. Under Regulation 16A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the authorised representative must circulate each agenda item and resolution to all members of the class before the CoC meeting and record their individual votes. The authorised representative then votes in the CoC in proportion to the instructions received from the class members.

Quorum and Voting Share Computation

The voting share of the homebuyer class in the CoC is determined by the aggregate financial debt owed to all allottees as a proportion of the total financial debt admitted in the CIRP. Where homebuyers represent a large proportion of the total admitted debt, their aggregate voting share can materially influence or even determine the outcome of CoC votes, including votes on resolution plans. In high-value real estate CIRPs involving major developers, homebuyers have constituted a majority or near-majority of the CoC by voting share.

Practical Difficulties in Class Voting

The authorised representative mechanism functions imperfectly in large CIRPs with thousands of homebuyers. Participation rates in class votes are typically low, with many allottees failing to respond to circulars or being unreachable. Low response rates mean that the authorised representative may cast votes that do not reflect the preferences of the majority of the class. The IBBI has progressively refined the Regulations to improve participation, including through digital voting mechanisms, but the fundamental challenge of engaging a dispersed class of creditors on complex resolution plan terms remains unresolved.

Homebuyers in the CoC: Impact on Resolution Plan Dynamics

The inclusion of homebuyers in the CoC has had significant implications for resolution plan negotiations in real estate CIRPs. Unlike institutional financial creditors such as banks, homebuyers typically seek delivery of their apartments or flats rather than a monetary haircut. Resolution plans that propose to complete construction and deliver units are therefore more likely to receive homebuyer support than plans that offer only cash payments at a discount. Resolution applicants who present plans centred on project completion have used homebuyer voting strength to outmanoeuvre institutional creditors who may prefer a liquidation or asset sale.

How the Supreme Court Settled the Question

The classification of homebuyers was tested and upheld at the highest level. In Pioneer Urban Land and Infrastructure Ltd. v. Union of India [(2019) 8 SCC 416], the Supreme Court upheld the amendment that expressly treats allottees under a real-estate project as financial creditors, rejecting the developers' challenge and confirming that money paid by a homebuyer towards a flat has the commercial effect of a borrowing and is a financial debt. The decision cemented the homebuyer's right to trigger the corporate insolvency resolution process against a defaulting developer and to sit, through a representative, on the committee of creditors, and it remains the anchor authority whenever a developer disputes an allottee's standing.

How Homebuyers Exercise Their Rights in CIRP

Because homebuyers in a project are typically numerous, the law provides for them to participate as a class through an authorised representative rather than individually, so that their collective voice is heard on the committee of creditors without paralysing the process. The authorised representative votes on their behalf in accordance with the instructions of the class, giving allottees real influence over the approval of a resolution plan and the fate of the project. This class mechanism balances the practical need for a workable committee against the homebuyers' legitimate interest in the outcome, and it is what allows a large body of individual purchasers to function as an effective creditor constituency.

Can a Homebuyer Pursue RERA and Insolvency Remedies Together?

The recognition of homebuyers as financial creditors sits alongside, rather than replaces, their remedies under the real-estate regulatory regime, and an allottee may in principle pursue relief before the real-estate regulator or invoke the insolvency process, subject to the rule against pursuing inconsistent remedies to a double recovery. The choice between the two routes depends on what the homebuyer wants: possession or completion of the project may be better served in some cases by the regulatory route, while insolvency may be appropriate where the developer has collapsed. Understanding how the two regimes fit together is essential for an allottee deciding how best to protect a substantial investment in a stalled project.

Frequently Asked Questions

Do homebuyers need to form a group to file a Section 7 application against a developer?

Yes. Under Section 7 of the IBC as amended by the 2019 Ordinance, an application by allottees under a real estate project must be joined by at least 100 allottees or at least 10 per cent of the total number of allottees under the same real estate project, whichever is lower. An individual homebuyer cannot independently trigger a CIRP against a developer.

Can a homebuyer who did not join the Section 7 application still participate in the CoC?

Yes. The threshold condition applies only to the filing of the Section 7 application. Homebuyers who did not join the application may file their claims with the resolution professional during the CIRP and become part of the homebuyer class for authorised representative purposes. Their admitted claims will form part of the aggregate voting share of the class.

What is the voting share of homebuyers in the CoC?

The voting share of the homebuyer class is determined by the total financial debt admitted in favour of all allottees as a proportion of the aggregate financial debt admitted in the CIRP. There is no cap on the homebuyer class's voting share, and in some real estate CIRPs homebuyers hold a majority of the CoC voting share.

Can homebuyers vote to reject a resolution plan?

Yes. A resolution plan requires approval by not less than 66 per cent of the voting share of financial creditors. Homebuyers, through their authorised representative, can vote against a plan and, if their aggregate voting share exceeds 34 per cent, can block its approval. Homebuyers can also vote in favour of a plan, potentially overriding institutional creditor opposition.

What relief can a homebuyer seek if no resolution plan is approved and the developer goes into liquidation?

In liquidation, homebuyers are classified as unsecured financial creditors and rank below the IBBI resolution process costs, workmen dues for 24 months, and secured financial creditors in the Section 53 waterfall. Their recovery in a liquidation is therefore typically limited. Homebuyers may also have rights under the Real Estate (Regulation and Development) Act, 2016 (RERA) and may approach RERA authorities in parallel, though the interaction between IBC and RERA jurisdiction is itself a contested area.

Who qualifies as an 'allottee' entitled to financial creditor status under the IBC?

An allottee is a person to whom a plot, apartment, or building has been allotted, sold, or otherwise transferred by a real estate developer, including a person who subsequently acquires the allotment by transfer, as defined in Section 2(d) of the Real Estate (Regulation and Development) Act, 2016, which the Explanation to Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 adopts by reference. A person who has merely expressed interest in booking a unit without a concluded allotment agreement and payment does not qualify, since the financial debt must arise from an amount actually raised from the allottee for the project.

Is there a limitation period for a homebuyer to file a Section 7 application?

Yes, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 is subject to the general three-year limitation period under Article 137 of the Limitation Act, 1963, running from the date of default, which for a homebuyer is typically the date the developer failed to deliver possession by the committed date under the allotment agreement. Where the developer has acknowledged the debt or the delivery date in writing within that period, the limitation period can restart from the date of that acknowledgment under Section 18 of the Limitation Act.

Does admission of a Section 7 application affect a homebuyer's flat under construction?

Once a Section 7 application is admitted, a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 comes into effect, which suspends new suits and the continuation of most legal proceedings against the developer, including proceedings a homebuyer might otherwise pursue for possession or a refund outside the insolvency process. The moratorium does not extinguish a homebuyer's underlying claim; it channels every homebuyer's claim, along with those of other creditors, into the single resolution process, where recovery depends on the terms of the resolution plan eventually approved.

Can a developer's bank lenders object to homebuyers being classified as financial creditors?

A secured lender can raise objections in specific proceedings, such as disputing the extent or genuineness of a particular allottee's claim, but the classification of homebuyers as financial creditors as a category is a matter of statute, following the Explanation to Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 inserted by the 2018 amendment, which the Supreme Court has upheld against constitutional challenge. A bank lender cannot have the entire homebuyer class re-classified as operational or unsecured creditors merely because it competes with them for a share of the resolution proceeds.

What happens to a homebuyer's earnest money if the developer is liquidated?

If no resolution plan is approved and the developer proceeds to liquidation, a homebuyer's claim, including money paid towards the unit, is proved before the liquidator and paid according to the statutory waterfall in Section 53 of the Insolvency and Bankruptcy Code, 2016, where homebuyers rank alongside other unsecured financial creditors after secured creditors, workmen's dues, and the costs of the liquidation process. In practice, unsecured creditors including homebuyers often recover only a fraction of what is owed in a liquidation, which is one reason a resolution plan that offers possession is usually preferable to liquidation for a homebuyer.

Can a homebuyer withdraw from the CIRP after a Section 7 application is admitted?

A homebuyer who is an applicant, or one of the applicants, can seek withdrawal under Section 12A of the Insolvency and Bankruptcy Code, 2016, but only with the approval of ninety percent of the voting share of the committee of creditors, which in a real estate CIRP with many homebuyers on the committee makes unilateral withdrawal by a single homebuyer difficult once the process has attracted other creditors' claims. A homebuyer who did not initiate the application and simply wishes to settle individually with the developer outside the CIRP generally cannot compel withdrawal of the whole proceeding.

Can a family member or nominee file a Section 7 application on a homebuyer's behalf?

A Section 7 application must be filed by the financial creditor itself or through a duly authorised representative holding a valid power of attorney or similar authorisation from the allottee, so a family member or nominee can sign and pursue the application only if properly authorised in writing; an unauthorised filing by a relative in their own name, without a valid assignment or authorisation from the actual allottee, is liable to be rejected for want of standing. Joint allottees named in the same allotment agreement can typically file together as co-applicants without a separate authorisation from each other.

Are homebuyers treated the same as institutional financial creditors when a resolution plan is approved?

Not entirely; while homebuyers vote on the committee of creditors alongside institutional lenders such as banks, a resolution plan can, and often does, propose different treatment for the homebuyer class, such as delivery of the unit, a revised completion date, or a partial refund, rather than the cash recovery percentage typically negotiated with a bank. The Insolvency and Bankruptcy Code, 2016 requires only that a resolution plan not pay a creditor less than it would receive in liquidation, so homebuyers and banks can lawfully receive different forms and amounts of recovery under the same plan.

What is the fee or cost of filing a Section 7 application against a developer?

The National Company Law Tribunal Rules prescribe a filing fee for a Section 7 application, which is a modest fixed amount rather than a percentage of the claim, though a homebuyer will typically incur additional cost for legal representation and for compiling the record of payments, the allotment agreement, and evidence of default that the application must annex. Where the application is filed jointly by the required minimum number of allottees, the cost of preparing the application is usually shared among the joint applicants rather than borne by one homebuyer alone.