Insolvency and Bankruptcy Code and the Plight of Home-Buyers

This article aims at highlighting the problems faced by the home-buyers under the Code with the help of decisions of various judicial forums write Mohit Khandelwal and Purvi Nanda. The article is a detailed analysis of the judicial decisions and legislative actions that have culminated into the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 and henceforth, addressed and resolved the plight of millions of home-buyers who were otherwise remediless and status-less under the insolvency law of the country. Furthermore, the article has succinctly discussed the rights available with the home-buyers by the virtue of the Ordinance.

  • Mohit Khandelwal
  • Purvi Nanda

Out of many contentious issues relating to implementation of the mechanism prescribed under the Insolvency Bankruptcy Code, 2016 [hereinafter referred to as “the Code”], one of them deals with the issues pertaining to initiation of insolvency proceedings against the companies operating in the real-estate sector. Apart from the financials arranged from the banks and other similar lenders, the real-estate sector companies are also receiving advance funds from the home-buyers, at the time of booking flat, against the promise of delivery of the possession of the flats on the completion of the project. Therefore, the issue pertaining to the status of home-buyers has been discussed and argued extensively at various judicial forums and has attracted the focus of the regulators and the legislature.


The code recognizes two kinds of creditors, i.e. operational and financial creditors. In this regard, the status of home-buyers is discussed hereunder:

a) Operational creditors – The term “operational debt” as defined under Section 5(21) of the Code means a claim in respect of the provision of goods or services. However, neither supplied goods nor had rendered any services to acquire the status of an ‘Operational Creditor’. Hon’ble National Company Law Appellate Tribunal [hereinafter referred to as “the Appellate Tribunal”] in the case of Col. Vinod Awasthy v. AMR Infrastructure Limited 1 clarified that “given the time line in the code it is not possible to construe section 9 read with section 5(20) & (21) of the Code so widely to include within its scope even the cases where dues are on account of advance made to purchase the flat or a commercial site from a construction company like the Respondent in the present case especially when the Petitioner has remedy available under the Consumer Protection Act and the General Law of the land. Therefore, we are not inclined to admit the petition.”. Thereby, it has been conclusively concluded that home-buyers do not fall under the definition of Operational Creditor2.

b) Financial Creditors - Section 5(8) of the Code envisages the list of debts which shall qualify as financial debt. Further, the “time value of money” is the essential requirement to qualify as financial debt. However, the home-buyers do not qualify as financial creditors as the advance amount paid by them neither involves the time value of money nor the assured returns. Howbeit, in exceptional cases where the agreement between the builder and the home-buyers provides for assured returns to the home-buyer, the debt can be regarded as financial debt, as held in the case of Nikhil Mehta & Sons v. AMR Infrastructures Ltd 3.


Since it had been held by the Appellate Tribunal that the home-buyers are neither financial creditors nor operational creditors, there existed a debate regarding rights of home-buyers to seek recourse under the Code. Furthermore, regarding the insolvency proceedings initiate against the companies operating in real-estate sector, on the application made by other financial or operational creditors of such company, the home-buyers were broadly facing two major difficulties, i.e.

a) For the purpose of submitting the claim before the Interim Resolution Professional [hereinafter referred to as “the IRP”], the person must be a financial creditor or an operational creditor or an employee. However, the home-buyers did not fall in any of the three categories and thereby, were ineligible to raise the claims before the IRP.

b) The home-buyers are regarded as unsecured creditors and as per Section 53 of the Code they are ranked very low in the preference list of payments in case of liquidation. Since in the most of the cases the net assets are not even sufficient to satisfy the demands of the financial creditors or the banks, there exists very meagre probability that the home-buyers would get any share in the liquidation amount.

1. Col. Vinod Awasthy v. AMR Infrastructure Ltd., 2017 Indlaw NCLT 101.
2. Sajive Kanwar v. AMR Infrastructure, MANU/NC/0104/2017; Pawan Dubey & Anr. v. J.B.K. Developers Pvt. Ltd., IV (2017) BC 56 (NCLAT).
3. Nikhil Mehta & Sons v. AMR Infrastructures Ltd., 2017 Indlaw NCLAT 60; Anil Mahindroo & Anr. v. Earth Iconic Infrastructure Pvt. Ltd., 2017 Indlaw NCLAT 79.


Jaypee Infratech Ltd. was figured in the list of top 12 defaulters released by the RBI and thereafter, the IDBI Bank, which is leading the consortium of lender of Japyee Infratech, filed an insolvency application before the Allahabad Bench of the National Company Law Tribunal [hereinafter referred to as “the NCLT”]4. The application was accepted by the NCLT and it appointed an IRP. The IRP invited claims from the public by asking them to submit claims under Form-B or Form-C or Form-D. However, From-B deals with financial creditors, Form-C deals with operational creditors and Form-D deals with claims of employees. The claims of home-buyers were not covered in any of these forms as the Appellate Tribunal has already declared that the home-buyers are neither financial creditor5 nor operational creditor6. Such development induced hue and cry amongst millions of home-buyers buyers and widespread agitation throughout the country.

4. IDBI Bank Ltd. v. Jaypee Infratech Ltd., 2017 SCC OnLine NCLT 6302.
5. Nikhil Mehta & Sons v. AMR Infrastructures Ltd., 2017 Indlaw NCLAT 60.
6. Col. Vinod Awasthy v. AMR Infrastructure Ltd., 2017 Indlaw NCLT 101.


In order to address the plight of the home-buyers the government came out with the possible solution to the issue. The Insolvency and Bankruptcy Board of India [hereinafter referred to as “the IBBI”], while exercising its power under Section 240 of the Code, amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 by introducing Regulation 9-A titled as “claims of other creditors”. This regulation introduced the Form-F, under which the claimants not covered by Forms B, C, D or E could file their claims before the IRP. Thus, this form was specifically introduced to provide a remedy to the home-buyers of Jaypee Infratech and to make their claims admissible before the IRP.

Analytically, it is important to understand that these “other creditors” cannot initiate insolvency proceedings under the Code as they do not satisfy the criteria mentioned under Sections 7 and 9. Similarly, they do not have any say in the resolution process and are bound by the decisions of Committee of Creditors.


A Public Interest Litigation, titled as Chitra Sharma and Ors. v. Union of India7 [hereinafter referred to as “Chitra Sharma Case”], was filed before Hon’ble Supreme Court seeking redressal of the plight of the home-buyers having claim of Rs. 15,000 crores. The pleadings made in the PIL are summarized hereunder:

a) That the moratorium period imposed under Section 14 of the Code restrains the home-buyers from seeking remedy under other laws such as Consumer Protection Act, 1986 and the Real Estate (Regulation and Development) Act, 2016. Further, Hon’ble Supreme Court has already held in the case of Innoventive Industries v. ICICI Bank8 that the Code shall prevail in case of conflict between the Code and other laws. Thereby, the law is discriminatory and has rendered the home-buyers remediless.

b) That the home-buyers have legitimate apprehension that if the company goes in to liquidation, due to failure of resolution process, then in such case claims shall be settled in accordance with the order mentioned under Section 53 of the Code. Thereby, the home-buyers being the unsecured creditors will lie low in the list of claimants as their claim shall be subject to the satisfaction to the claims of secured creditors.

c) That the Code violates the fundamental rights of the home-buyers conferred by Articles 14, 21 and 19 of the Constitution of India.

Orders passed by the Supreme Court

Order dated 04.09.20179 – The Supreme Court stayed the proceedings pending before the NCLT, Allahabad.

Order dated 11.09.201710 – The Supreme Court lifted the stay and ordered that, inter alia:

a) The IRP shall forthwith take over the Management of Jaypee Infratech Ltd. (JIL). The IRP shall prepare and submit a Resolution Plan within 45 days before the Court. The Plan shall incorporate necessary provisions to protect the interests of the home-buyers.

b) It directed the Jaiprakash Associates Ltd. (JAL), holding company of Jaypee Infratech to deposit a sum of Rs. 2,000 crores before the Supreme Court on or before 27.10.2017. For the said purpose, if any assets or property of JAL have to be sold, that should be done after obtaining prior approval of this Court.

7. Chitra Sharma & Ors. v. Union of India & Ors., (2017) 143 SCL 680 (SC).
8. Innoventive Industries Ltd. v. ICICI Bank Ltd., (2017) 143 SCL 625 (SC).
9. Chitra Sharma & Ors. v. Union of India & Ors., (2017) 143 SCL 680 (SC).
10. Chitra Sharma & Ors. v. Union of India & Ors., (2017) 144 SCL 1 (SC).

Though the matter is still pending before the Supreme Court and is expected to continue for some more time, however, through its interim order, the Supreme Court has considered the plight of these home-buyers and while acting within the ambit of its power, the Supreme Court tried to protect the interest of the home-buyers. The final order of this case shall set the judicial precedent regarding the rights of home-buyers and also the range of the moratorium imposed under Section 14 of the Code.


The Ministry of Corporate Affairs constituted the Insolvency Law Committee through its order dated November 16, 2017. The Committee was chaired by Sh. Injeti Srinivas Secretary, Ministry of Corporate Affairs and had 13 other members. The committee was made with the intent to review the Code and to make changes to make it more effective and workable.

The Committee undertook comprehensive study regarding the plight of home-buyers and also the observations made by the Supreme Court in Chitra Sharma v. Union of India11 and Bikram Chatterji v. Union of India12. After undertaking the detailed analysis of current legal and factual position, the Committee concluded that the existing definition of ‘financial debt’ is sufficient to cover the claims of home-buyers and they should be treated as financial creditors. However, it recommended that for the purpose of clarification an explanation to Section 5(8)(f) of the Code may be inserted to specifically mention inclusion of home-buyers. Also, that resolution plans must be in consonance with applicable laws, like Real Estate (Regulation and Development) Act, 2016, which may be interpreted through Section 30(2)(e) of the Code.


To the respite of thousands of home-buyers, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 [hereinafter referred to as “the Ordinance”] has been promulgated on June 6, 2018, whereby the home-buyers have been recognised as financial creditors as recommended by the Insolvency Law Committee. Thereby, the home-buyers will have all the rights of the financial creditors conferred by the Code qua the real estate developers, especially, due representation in the committee of creditors. It is pertinent to note however, that the Ordinance does not specify whether they will be secured or unsecured creditor which is to be determined on the basis of the agreement between the home-buyer and the debtor company. Subsequently, the task of framing the enforcement mechanism has been handed to the IBBI.

11. Chitra Sharma & Ors. v. Union of India & Ors., (2017) 143 SCL 680 (SC).
12. Bikram Chatterji & Ors. v. Union of India & Ors., MANU/SCOR/17045/2018.
Rights of Home-Buyers as financial creditors of the Corporate Debtor

With the recognition of the status of the home-buyers as financial creditors of the corporate debtor, the Ordinance has ensured equitable participation of the home-buyers by giving them the right to initiate the Corporate Insolvency Resolution Process under Section 7 of the Code when a default is committed. Secondly, upon initiation of the CIRP by other creditor(s) the home-buyers have the right to submit their claim before the IRP as financial creditors under Form-C of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Thirdly, they are entitled to be on the committee of creditors with proportionate voting share. Fourthly, albeit their status as secured or unsecured creditor is subject to their agreement with the corporate debtor, they are entitled to the guarantee of receiving at least the liquidation value under the resolution plan, if approved.

Effect of non-obstante clause on the rights of home-buyers under the Consumer Protection Act

Section 238 of the Code is a non-obstante clause which postulates that the provisions of the Code are to have an overriding effect over any inconsistency contained in any other law or instrument in force13. Furthermore, Section 14 of the Code postulates that upon declaration of moratorium, institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority is prohibited.

Admittedly, home-buyers have the remedy to approach consumer courts for seeking remedy for delay in handing over the possession by the builders and can even file a class action suit before the National Consumer Disputes Redressal Commission, as recently ruled by Hon’ble Supreme Court in Amrapali Sapphire Developer v. Amrapali Sapphire Flat Buyers14. However, it is pertinent to note that the moratorium period imposed under Section 14 of the Code restrains the home-buyers from seeking remedy under other laws including the Consumer Protection Act, 1986. Thus, upon imposition of the moratorium by the Adjudication Authority under the Code, the home-buyers are restrained from instituting proceedings under the Consumer Protection Act. Similarly, any case pending under the Act cannot be continued with or any decree/order passed by the consumer court cannot be executed after imposition of moratorium. In such case, by the virtue of the Ordinance, the home-buyers have the right to submit their claims to the IRP as financial creditors. Similar situation arises while seeking remedy under the Real Estate (Regulation and Development) Act, 2016, as pleaded in Chitra Sharma Case15 [supra].

13. Innoventive Industries Ltd. v. ICICI Bank Ltd., (2017) 143 SCL 625 (SC).
14. M/s Amrapali Sapphire Developer Pvt. Ltd. v. M/s Amrapali Sapphire Flat Buyers Welfare Association, MANU/SCOR/07341/2017.


Other major amendments that have been introduced by the Ordinance include the following:

a) Benefits have been granted to the Micro, Small and Medium Enterprises [hereinafter referred to as “MSMEs”], whereby the promoter(s) of an MSME is not disqualified from bidding in the insolvency resolution process on the ground of insolvency16, provided he is not hit by other disqualifications. The Central Government is empowered to allow further exemptions to MSMEs if required in public interest.

b) The voting threshold for all major decisions has been lowered to 66% and for all routine decisions to 51% from earlier mandate of 75% to encourage resolution as against liquidation and to facilitate functioning of the corporate debtor as a going concern.

c) Pure play financial entities, who have been disqualified under Section 29A on account of a non-performing asset, are exempted by virtue of the Ordinance. Moreover, the NPAs acquired under the Code, will not disqualify the resolution application during the currency of the three-year grace period. Besides, the Resolution Applicant is now responsible for certifying its eligibility to bid by filing an affidavit before the NCLT.

d) The withdrawal procedure after admission of the CIRP application has been made more stringent by the Ordinance by making it subject to the approval of 90% voting share of the committee of creditors before publication of the notice inviting Expressions of Interest.

e) Minimum one-year grace period has been postulated by the Ordinance for the successful resolution applicant to fulfil various statutory obligations required under different laws.


Effective implementation and sustainable success of the Code will depend on a number of factors including meticulous transition planning. There are several key policy choices that influence the probability of effective implementation, both substantive and institutional. The Insolvency and Bankruptcy Code, 2016 is largely a sound piece of legislation and deserves to be applauded. The Code is a major policy shift from debtor-in-possession law under the Sick Industrial Company (Special Provisions) Act, 1985 to creditor-in-control mechanism. Along with other obstacles in effective implementation of the Code, the issue of the deprived home-buyers has been quite critical as the country witnessed massive protests and extensive litigation. The recommendations by the Insolvency Law Committee and the subsequent Ordinance are laudable in resolving the issue. The Ordinance has played a crucial and efficacious role by envisioning and legislating upon major issues which could have hindered and frustrated the objective of the Code.

15. Chitra Sharma & Ors. v. Union of India & Ors., (2017) 143 SCL 680 (SC).
16. Section 29A(a), Insolvency and Bankruptcy Code, 2016.
MOHIT KHANDELWAL is an Advocate practising in the Rajasthan High Court & PURVI NANDA is a student pursuing law from Rajiv Gandhi National University of Law, Patiala. They may be reached at and respectively.