Homebuyers as Financial Creditors under the IBC: Judicial Evolution, Thresholds, and Equity in Insolvency Resolution

When homebuyers became creditors — justice found its voice under the IBC.

Homebuyers in India’s real estate sector often face serious risks. Many invest their life savings in projects that stall due to developer defaults. The Insolvency and Bankruptcy Code, 2016 (IBC) has evolved through amendments and judicial scrutiny to protect these homebuyers.

The recognition of homebuyers as financial creditors under the IBC ensures their participation in the Corporate Insolvency Resolution Process (CIRP). However, the system also includes threshold requirements to prevent misuse.

This article examines those thresholds, Section 238’s overriding effect on the Real Estate (Regulation and Development) Act, 2016 (RERA), key case laws, and their impact on equity in insolvency resolutions.

The Threshold for Initiating CIRP: Balancing Access and Preventing Frivolous Claims

The case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) was a turning point. It challenged the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, which explicitly included homebuyers (allottees) as financial creditors under Section 5(8)(f) of the IBC.

Developers argued that this violated constitutional rights under Articles 14, 19(1)(g), 21, and 300-A. They claimed it unfairly equated homebuyers with financial institutions and might lead to misuse of insolvency proceedings.

The Supreme Court, in a detailed judgment by Justice R.F. Nariman, dismissed these challenges. It held that the amendment was neither discriminatory nor arbitrary. The Court explained that payments made by homebuyers have the commercial effect of borrowing, as they fund projects upfront in return for future possession—similar to loans with interest implications.

This ruling closed a legal gap that had left homebuyers without remedies before the amendment. The Court recognized that most homebuyers are genuine investors seeking possession, not speculative gains.

The 2020 Amendment and the Minimum Threshold

The IBC (Amendment) Act, 2020 introduced a new threshold for homebuyers to file CIRP applications under Section 7.
It required at least 100 allottees or 10% of the total allottees in a project, whichever is lower.

This change aimed to filter out individual or frivolous claims that could disrupt developers and other stakeholders. Previously, even one homebuyer could trigger CIRP.

In Manish Kumar v. Union of India (2021), the Supreme Court upheld this threshold. The Court noted that homebuyers form a distinct class due to their socio-economic vulnerabilities. Unlike banks, they lack bargaining power and often invest without full knowledge.

The Court held that the rule is non-discriminatory because it applies equally to all homebuyers. It protects collective interests and reduces the risk of misuse by a small minority.

A transitional provision allowed pending cases below the threshold to be amended within 30 days. The Court also observed that the rule aligns with the IBC’s objectives—efficient resolution and value maximization.

Section 238: Establishing IBC’s Overriding Effect for a Unified Framework

Section 238 of the IBC includes a non-obstante clause, stating that its provisions override any conflicting laws.
This ensures the IBC’s primacy in insolvency matters, even over laws like RERA.

While RERA offers consumer protections such as refunds and compensation, it lacks a complete resolution mechanism. Section 238 prevents conflicting outcomes by stopping parallel proceedings under RERA once CIRP begins.

This creates a unified insolvency framework. Homebuyers’ status as financial creditors under Section 5(8)(f) remains valid, even if they hold RERA decrees.
The Supreme Court has reaffirmed this in multiple judgments, ensuring consistency and predictability.

Bikram Chatterji v. Union of India (2019): Strengthening Homebuyer Protections

In Bikram Chatterji v. Union of India (2019), over 42,000 homebuyers affected by the Amrapali Group’s fraud sought justice.
The Supreme Court found major irregularities, including fund diversion, misuse of RERA registrations, and collusion by banks.

The Court ordered cancellation of RERA registrations, attachment of assets, forensic audits, and criminal investigations.
It prioritized homebuyers’ interests by directing the National Buildings Construction Corporation (NBCC) to complete pending projects.

This judgment became a landmark, reaffirming that fraud cannot be perpetuated against vulnerable investors. It set strong precedents for protecting homebuyers and holding developers accountable.

Subsequent Rulings and Innovations: Reverse CIRP and Beyond

Later cases built on these principles. In Vishal Chelani v. Debashis Nanda (2023), the Supreme Court ruled that homebuyers with RERA refund decrees remain within the same creditor class under the IBC.
Differentiating them would be inequitable. The Court reaffirmed Section 238’s overriding effect, maintaining uniformity in insolvency proceedings.

Another major development was Reverse CIRP, first recognized in Flat Buyers Association v. Umang Realtech Pvt. Ltd. (2020).
This mechanism allows promoters or creditors to fund project completion without full insolvency, focusing on protecting homebuyers’ interests.

In Indiabulls ARC v. Ram Kishore Arora (2023), this principle extended to project-wise resolutions, balancing creditor rights and preventing contagion.
However, in Arun Kumar v. Sripriya Kumar (2023), the Court restricted its use when promoters were responsible for delays.

The 2025 IBBI Amendments: Strengthening the Framework

The 2025 IBBI Amendments further improved homebuyer protections.
Key updates include:

  • Regulation 4E: RPs can hand over possession during CIRP with CoC approval.

  • Regulations 16C and 16D: Introduced facilitators for homebuyer sub-classes, ensuring better representation.

  • Regulation 18(4): Authorities like GNIDA can attend CoC meetings as non-voting participants.

  • Regulation 30C: Mandates timely reporting on development rights.

  • Regulation 38(4): Establishes Monitoring Committees for implementation oversight.

These reforms enhance transparency, accountability, and efficiency in insolvency processes.

Implications for Equity in CIRP

Recognizing homebuyers as financial creditors ensures that vulnerable investors gain representation in the CoC and a voice in resolution plans.
This approach shifts focus from liquidation to revival and equitable recovery.

However, as unsecured creditors, homebuyers often rank below secured lenders.
Judicial interventions continue to address this imbalance and ensure fairness.

Overall, the evolving legal framework builds trust in the real estate sector while promoting balanced stakeholder protection.

Conclusion: Building a Fairer Framework for Homebuyers

The evolution of homebuyers’ rights under the IBC marks a defining chapter in India’s real estate and corporate law.
From being powerless victims to empowered creditors, their journey reflects judicial and legislative progress.

Landmark cases like Pioneer Urban, Manish Kumar, and Bikram Chatterji shaped the foundation of a fair and functional system.
The introduction of thresholds and the overriding effect of Section 238 promote collective action and legal clarity.

Innovations like Reverse CIRP and the 2025 IBBI Amendments further reinforce transparency and accountability.
Although challenges remain, the IBC framework today stands as a robust mechanism aimed at protecting homebuyers and restoring faith in India’s real estate ecosystem.

References

  • Insolvency and Bankruptcy Code, 2016, § 7, as amended by the Insolvency and Bankruptcy Code (Amendment) Act, 2020

  • Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416

  • Manish Kumar v. Union of India (2021) 5 SCC 1

  • Insolvency and Bankruptcy Code, 2016, § 238

  • Vishal Chelani v. Debashis Nanda (2023) ibclaw.in 117 SC

  • Bikram Chatterji v. Union of India (2019) SCC OnLine SC 951

  • Flat Buyers Ass’n Winter Hills–77 v. Umang Realtech Pvt. Ltd. (2020) NCLAT

  • Indiabulls Asset Reconstruction Co. Ltd. v. Ram Kishore Arora (2023) NCLAT

  • Arun Kumar v. Sripriya Kumar (2023) NCLAT

 

Article Written by:
Aditya Kumar, 5th year BBA LLB (Hons.)
Kirit P. Mehta School of Law, Narsee Monjee Institute of Management Studies, Mumbai