Inclusion of Homebuyers as Financial Creditors & Increasing the Threshold: Bridging the RERA and IB

This article has been written by Naman Sharma, pursuing B.A. LL.B (Hons) from Institute of Law Nirma University, Ahmedabad.


The primary consideration shall be given to the fact that why IBC came into being and what are the major areas it deals with. It is necessary to understand that prior to the advent of the Code there were multiple and overlapping laws which dealt with the issues pertaining to the financial failures and insolvencies of companies and individuals. There was also a multiplicity of forums that were present at such times.

The resultant of the same only led to chaos and problems as there was no lucidity in the laws pertaining to the subject and the multiplicity of forums only added to the chaos. It was pursuant to these problems that the reforms in the insolvency sector were thought over by the experts and thence was the Insolvency and Bankruptcy Bill introduced in the year 2015. The Bill was drafted by an expert committee named Bankruptcy Law Reforms Committee under the Ministry of Finance.

The Bill was cleared from both the houses and took the form of the Insolvency and Bankruptcy Code which became the law of the land in the year 2016. It led to the clubbing and consolidation of all the laws pertaining to the insolvency of partnership firms, companies and individuals and along with the same aims at providing rime bound resolution of insolvency and bankruptcy issues through limited forums. Now, it becomes pertinent to move to the main issue of the research article which is the inclusion of homebuyers in the IBC.

The whole problem pertaining to the homebuyers and the issue of them being included in the Code arose when many of the homebuyers were left without any redressal and help due to them not getting their dream homes on time even after the whole of their money was given into such projects. It certainly shall be attributed to the lacunas on the side of the developers and builders who failed to perform their duty and denied the homebuyers from timely possession of their homes. The classic case for the same was the Jaypee Infratech Project case in which there were thousands of people who invested their money but were left in the lurch after neither were they provided timely possession of their houses nor were they left with any recourse.

Many of these homebuyers moved to NCLT, some chose the path of moving to the Apex Court where they rightly claimed that if insolvency proceedings are initiated against the Jaypee Infratech they will get nothing in their hands as they are the ones who will be the last in the list of beneficiaries from such insolvency proceedings. Pursuant to this, there was stay imposed by the Apex Court on the initiation of insolvency proceedings. The main issue here was that the homebuyers who have put their hard-earned money in such projects and have paid the major chunk of money out of the total sum are not treated as secured creditors nor as financial or operational creditors thus they shall be among the last people whose claims will only be fulfilled after all the other claims are being addressed. Hence this concern led the people in total dismay and pain.

A similar thing happened in the case of Amrapali Group Projects, where around 41,000 buyers moved the Supreme Court in a similar fashion where the Amrapali Group failed to give timely possession to the buyers. The SC in this case asked the Developer to devise out a plan to provide timely possession to the homebuyers. These are the cases which have always had a deep impact on the homebuyers who are only left with agony and pain after their hard-earned money is just wasted.

Inclusion of Homebuyers in the IBC

After collection of a significant amount of money from the homebuyers, the resultant what they got was nothing but only a place at the end of the queue in case the company got liquidated. It is the lacuna pertaining to the vulnerable situation of the homebuyers that has led to the wave of resentment among the homebuyers and has also led to the formation of the Insolvency Law Committee.

They released a report in March 2018 which was the first time when there was a recommendation that the definition of Financial Creditors shall be inclusive of the homebuyers. Thus, it was the first instance when the widening of the definition of Financial Creditors was brought into the picture. The ordinance for the same was passed by the President on 6th June 2018 and from then on the Homebuyers are included in the definition of Financial Creditors. It becomes pertinent to understand as to what the meaning of financial creditors is and what impact has the inclusion of homebuyers in the definition of financial creditors brought.

It is necessary for the same to primarily know as to how the term “Creditors”, “Debt” and “Financial Debt” are defined under the IBC, 2016.

  • Firstly, the definition of Creditor is present u/s 3(10) which states as - “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

  • Secondly, Section 3(11) defines Debt which means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

  • Lastly, moving on to the definition of Financial Creditors, the same is present under section 5(7) of the code and it states that those who have “disbursed the money to the corporate debtor against the consideration for the time value of money” are the financial creditors.

On the other hand, the operational creditors as defined under Section 5(20) of the Code state that those who have established certain relation with the debtor company as that of the provider of services etc.

It shall be understood that prior to the amendment the homebuyers were considered neither the financial nor the operational creditors and hence their claims in case of insolvency or liquidation were settled at the bottom of the list. The inclusion has certainly led them above many of the claimants in such scenarios however the question persists as to whether it was a right move on the part of the legislature (if the very definition is given rightful consideration). There seems a possibility that the homebuyers would have been better suited under the definition of operational creditors.

Now, it becomes pertinent to note the changes that this amendment has brought to the rights and powers of the homebuyers other than them being moved up in the list of claimants in case the company gets into liquidation or insolvency.

  • Firstly, the buyers with them being recognised as the financial creditors will get the right to participate in the insolvency proceedings of a company and hence they are entitled to be in the panel of creditors and rightful holders of voting rights in the same.

  • Secondly, they are also entitled to initiate the CIRP under Section 7 of the Code, have chance to represent themselves in the CoC and have a far better chance to have their dues paid off by moving up in the list.

However the same certainly comes with certain drawbacks and the major one of them is the unexplained inclusion of the homebuyers in the list of financial creditors and not the operational creditors. The only reason that has been given for the act was that the definition for operational creditors has the provision of goods and services and it does not include immovable property. It must be noted that the definition of financial debt seems to be more remote as far as the relation between homebuyers and the developers is concerned and is certainly not a financial nature relationship. Hence, it becomes quite arbitrary on the part of the legislation to have an unexplained inclusion of the homebuyers in a particular definition just to accommodate their interests without even giving consideration to the other possibilities.

Also, when banks were present in the definition of financial creditors, in case of insolvency of a company, they allowed ‘haircut’, which led to timely disposal of insolvency cases, fulfilling the very purpose of the code. However, it is to be understood that homebuyers who are individuals who have spent their hard-earned money for fulfilment of their dreams will certainly not allow even a paisa of theirs to just settle up a matter and in almost all cases this will result in a deadlock situation contrary to a speedy resolution.

Hence, it is certain that inclusion of homebuyers under the umbrella of financial creditors seem beneficiary for the particular class as far as realisation of their money is concerned but the same also has certain disruptive possibilities which might turn the things against the very objective of the code.

The threshold for the Homebuyers

It was only after a tough fight being fought by the homebuyers that they were moved up in the list of the claimants and were included in the definition of Financial Creditors. It was only after the case of Pioneer Urban Land and Infrastructure Ltd. & Ors. v. Union of India that the rights for homebuyers were acknowledged in a complete manner. However, a setback to the same was brought when the Central Government through an ordinance passed in December 2019, (only within a limited span after the inclusion of homebuyers in the definition of Financial Creditors) through which a minimum threshold was set for the homebuyers that are minimum of 100 homebuyers or 10% of the total buyers in a project, whichever is less, shall be necessary to be congregated so as to initiate insolvency proceedings against the defaulting builder.

Thus, there has been a caveat that has been imposed on the homebuyers in exercising their right to bring the defaulting builder towards insolvency proceedings. The Forum for People’s Collective Efforts (FCPE) continuously argued the same to be arbitrary and takes away the rights of the homebuyers as even though the builder may be a defaulter but in case the number of the buyers fall short of the threshold, the builder shall be free from any duties and it will ultimately be the homebuyers who would suffer.

The very objective behind such ordinance as is provided by the Central government is that in the times when the real estate sector in the country is stuttering, it is necessary that primarily the debt of the corporate debtors be fulfilled and primary focus shall be towards the completion of the project and the fulfilment of the contract between the homebuyers and the builder which they have entered into at their initial stage.

Against the said ordinance there have been several writ petitions that are filed in the Hon’ble Apex Court. The main contention of the homebuyers through these petitions is that the said change brought in the IBC which sets a minimum threshold for initiation of insolvency proceedings by the homebuyers is arbitrary and discriminatory in nature.

In the petition, the homebuyers say that when the case was filed pertaining to the inclusion of homebuyers under the definition of financial creditors and providing them with their rightful due, the submission pertaining to minimum threshold was already brought in by the builders and the same was negated by the Apex Court thereto. Hence, bringing an amendment, even after negation by S.C. of the same, stands illegal and without any basis. The act seems mere circumvention of the decision of the S.C.

Thus, it is very clear that the recent amendment of bringing in a threshold for the homebuyers is not welcomed by the homebuyer fraternity and to a certain extent the same has some lacunas which need to be catered to for a better implementation of the Code in too.


At this juncture, it becomes necessary to bring both the amendments together and see them in light of each other. It shall be very clear that on one hand the previous amendment recognised the rights of the homebuyers to a very large extent and on the other hand, the latter amendment curtailed it to a certain extent. The policy decision of the government, as is stated, is taken in the wake of shackling position of the Real Estate Sector in the country. If this is the case it is very certain that there needs to be a curtailment on a few rights of the other side. However, the only problem that is floating on the surface of this contention is that why only restrict the homebuyers and why no caveat on the other stakeholders is imposed through such amendment.

The answers to these questions shall certainly be painful for the government to cater however, it is only after a lucid answer to such questions that the policy can be termed as fair and just.

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