Home Buyers as Financial Creditors under IBC : The Secured v. Unsecured Conundrum

Image source : Centrik

The Insolvency and Bankruptcy Code, 2016 (“the Code”) was introduced with a view to overhaul the overlapping laws and adjudicatory bodies that dealt with the insolvency and bankruptcy of corporates and individuals. It offers a comprehensive process, overriding all other legislations on the subject and therefore provides a smooth resolution process. Despite these obvious advantages among many others, the Code has historically failed to fully appreciate the concerns of Home Buyers when it comes to insolvency resolution or liquidation of companies that deal with real estate projects.

The question of whether Home Buyers should be treated as financial creditors or operational creditors has very often come up as the subject of discussion among members of the bar and the bench alike. The Amrapali judgment[1] The Jaypee Infratech Judgment [2] and the Supertech judgment [3] are some major cases where the position of Home Buyers vis-a-visother creditors was analysed by the Apex Court.

In light of the position of Home Buyers under the Code, a much needed relief came in the form of The Second Amendment to the Act, [4] which introduced the explanation following Section 5(8)(f) of the Code. [5] The said explanation provided that any sum of money raised from an allottee under a real estate project, i.e. a Home Buyer; shall be deemed to be a borrowing in its commercial sense and shall have the same effect as well. In another welcome move, the provisions of Section 7 of the Code were amended to introduce three provisos, wherein the second proviso provided that allottees under a real estate project shall be financial creditors and be entitled to initiate Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor (“CD”). However, not less than 100 such allottees (Home Buyers) or not less than 10% of the allottees, whichever is lesser, must file the application jointly in order to initiate CIRP. [6]

While the judgments passed by the Hon’ble Supreme Court and the amendments to the Code, over the years have made it absolutely clear that Home Buyers shall be treated as financial creditors for the purpose of the Code, what is not very clear is that whether they shall be treated as secured or unsecured financial creditors.Most recently, in Pioneer Urban Land and Infrastructure v. Union of India[7] while dealing with the constitutional validity of the amendments to the Code, the Hon’ble Supreme Court observed that real estate allottees are unsecured creditors. The following paragraphs make an attempt to analyse the existing literature available on this subject, including statutory provisions and judgments in order to determine whether there is enough ground to treat Home Buyers as secured financial creditors.

It had also dealt with the same question inChitra Sharma v. Union of India[8] in a fleeting manner and while the Court thought it was best not to decide the question of whether Home Buyers should be treated as secured or unsecured creditors, it did go into a short and informative discussion.It was admitted on record that Home Buyers rely on statements made by developers and invest in real estate projects. While a handful of these Home Buyers have sufficient funds at their disposal, most Home Buyers, avail of loan/ credit facilities from various banks and financial institutions; it is these Home Buyers who suffer the worst fate, on one hand, they are deprived of the property promised to them and on the other, the banks/ financial institutions chase them for repayment of the loan/ credit availed.

The Hon’ble Supreme Court further went to state that Home Buyers have made valuable investment of their hard-earned money in hope of having a roof over their heads, which is also a basic human need (food, shelter and clothing). It further recognised the Home Buyers’ right to have representation on the Committee of Creditors (“CoC”), in accordance with Regulation 16A[9] However, despite having almost made a case for Home Buyers to be treated as secured financial creditors, the Court decided to keep the question open and not give a final verdict upon it.

While the judgment in Chitra Sharma, [10] did not give a concrete solution, it did acknowledge the fact that Home Buyers are almost invariably put in a precarious situation and their rights haven’t yet been protected to the extent they should have been. In this light, it is important to note the provisions of Article 300A of the Constitution, [11] which guarantees a right to property and states that no person may be deprived of this right, unless such deprivation is backed by appropriate legal sanction/ authority. While the right to property under Article 300A does not have the sanctity of a fundamental right, it is not just a constitutional right; it is more in the nature of a human right. [12] In this context the judgment of the Hon’ble Supreme Court in M/s Shantistar Builders v. Narayan Khimalal Totame [13] must be brought to the fore. In this judgement, the Hon’ble Supreme Court held that “A reasonable residence is indispensable for fulfilling the constitutional goals in the matter of development of man and should be taken as included in ‘life’ in Article 21.” Therefore, on a combined reading of the judgements cited above and the provisions of Article 300A, it may be conclusively stated that though Article 300A is not a fundamental right, it is, as a matter of fact, fundamental to the very existence of every person and therefore makes an extremely strong case in favour of Home Buyers for preferential treatment during the CIRP.

It is also pertinent to look into the provisions of RERA [14] which confer certain rights upon Home Buyers. Section 18 (1) provides that:

“… in case the promoter fails to complete the construction or give possession of the apartment to the allottee (a) in accordance with the terms of the agreement for sale; or (b) due to discontinuance of his business as a developer, suspension or revocation of registration under RERA or for any other reason;”

the promoter shall be liable to return to the allottee the entire amount received by him with interest at the prescribed rate, without prejudice to any other remedy available to the allottee. In the event that the allottee does not wish to withdraw from the project, the promoter must pay interest at the prescribed rate, for every month of delay till such time that the possession is handed over to the allottee.

While the RERA provides for express rights to the allottees in terms of refund of money or interest till the time of handover of apartment, plot etc. followed by actual possession of the same being delivered to the allottee, the Code seems to attack these rights at their very core. Section 14 [15] of the Code strictly prohibits the initiation and/ or continuation of any proceedings against the Corporate Debtor (“CD”) during the CIRP. Therefore, the enforceability of the rights under Section 18(1) of the RERA comes to be questioned. Further Section 238 [16] provides that in case of a conflict of any provision of the Code with any provision of any other statute for the time being in force, the provisions of the Code shall prevail over the provisions of the concerned statute. A conjoint reading of these two Sections makes it absolutely clear that despite the existence of rights of Home Buyers/ allottees under the RERA, those rights cannot be enforced.

The interpretation of Section 238 above has been affirmed by the Courts in a plethora of judgments, the most notable of them being Innoventive Industries Limited v. ICICI Bank Limited, [17]Bank of India v. Ketan Parekh [18] and Sterling SEZ Infrastructure Ltd. v. Deputy Director, Directorate of Enforcement, Prevention of Money Laundering Act[19] In Pr Commissioner of India v. Monnet Ispat and Energy Limited[20] the Hon’ble Supreme Court confirmed that Section 238 of the Code will override anything inconsistent contained in any other enactment, including the Income Tax Act. Further, in Pioneer[21] the Hon’ble Supreme Court categorically held that “…RERA and the Code must be held to co-exist, and in the event of a clash, RERA must give way to the Code.”

Another important point of view arises from the Transfer of Property Act, 1882 (“the Act”). Section 55(6)(b) of the Act explicitly states that the buyer of a property is entitled to a charge on it. This charge of the buyer is to the extent of purchase money paid by the buyer and the interest thereon; and can be exercised against the seller as well as all persons claiming under the seller. Therefore, even under the Act, Home Buyers have a charge on the property, against the seller. Such charge should qualify as a right of security interest under Section 2(31) of the Code, thereby according to the status of secured financial creditors to Home Buyers.

Further, In Rajesh Goyal v. Babita Gupta[22] the NCLAT while disagreeably holding Home Buyers to be unsecured creditors, held that no creditor can be given preference over Home Buyers, as the project has been approved for them and therefore the property/ flat/ apartment must be used to satisfy the claims of the Home Buyers. The protection of the interests of Home Buyers has been consistently upheld by the Supreme Court of India as well as the NCLAT. [23] Treating them as secured creditors is only in line with the same principle of protection of the interests of Home Buyers.

It is also pertinent to note that while the rights available to Home Buyers under RERA, Transfer of Property Act and the Constitution are suspended by virtue of Section 14 and 238, the Code hardly addresses their concerns. While on one hand, Constitutional as well as statutory provisions along with consistent judicial decisions make a strong case for special preferential treatment for Home Buyers, on the other hand, the Code seeks to take away such treatment. In light of the foregoing analysis, it would only be fair to treat Home Buyers as secured creditors under the Code, having an undivided security interest in the land and/or plot which was part of the real estate project under which they were allottees. This would ensure, that in the event the CD goes into liquidation, Home Buyers will have access to certain rights under Section 52 [24]. In case they decide to not relinquish their security interest they will have priority over other financial creditors in the waterfall mechanism provided in Section 53 of the Code.


[1] Bikram Chatterji & Ors. v. Union of India & Ors., Supreme Court of India, Writ Petition (C) No. 940 of 2017.

[2] Anuj Jain v. Axis Bank Limited Etc. Etc., Supreme Court of India, Civil Appeal No.s 8512-8527 of 2019.

[3] M/s Supertech Ltd. v. Rajni Goyal, Supreme Court of India, Civil Appeal No.s 6649-50 of 2018.

[4] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.

[5] Section 5 (8) (f) of the Insolvency and Bankruptcy Code, 2016.

[6] Proviso 2 to Section 7 of the Insolvency and Bankruptcy Code, 2016. Inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2020.

[7] 2019 SCC OnLine SC 1005.

[8] Chitra Sharma and Ors. v. Union of India and Ors., Writ Petition (Civil) No. 744 of 2017.

[9] Regulation 16A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

[10]Supra at 8.

[11] Article 300A of the Constitution of India, 1950.

[12] Indian Handicrafts Emporium v. Union of India, AIR 2003 SC 3240.

[13] AIR 1990 SC 630.

[14] The Real Estate (Regulation and Development) Act, 2016.

[15] Section 14 of the Insolvency and Bankruptcy Code, 2016.

[16] Section 238 of the Insolvency and Bankruptcy Code, 2016.

[17] NCLAT, Company Appeal (AT) Insolvency No. 1 & 2 of 2017.

[18] [2009] 92 SCL 309 (SC).

[19] Supreme Court of India, MA 1280 of 2018 in CP 405 of 2018.

[20] Supreme Court of India, Special Leave to Appeal (Civil) No. 6483 of 2018.

[21]Supra at 7.

[22] [2020] 117 taxmann.com 720 (NCLAT).

[23] P Dot G Constructions (P) Ltd. In re, [2019] 112 taxmann.com 271 [NCLT Chennai].

[24] Section 52 of the Insolvency and Bankruptcy Code, 2016.


"This article is written by Mr. Jay Kothari, you can reach out to him at jaykothari96@gmail.com" 

"Special thanks to Ms. Shruti Shirke for editing this article"

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