Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 1

Introduction

The Indian real estate sector has long been plagued by delays in project completion, leaving thousands of homebuyers in financial distress. When the Insolvency and Bankruptcy Code was enacted in 2016, it provided a new framework for resolving corporate insolvency but initially offered little protection to homebuyers who had invested their life savings in under-construction properties. The legislative journey that followed reflects a continuous balancing act between protecting homebuyer interests and preventing abuse of insolvency proceedings. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, promulgated on December 28, 2019, marked a significant shift in this landscape by introducing threshold requirements for homebuyers seeking to initiate insolvency proceedings against real estate developers.

This amendment was born out of practical concerns that emerged after homebuyers gained recognition as financial creditors. While initially celebrated as a victory for consumer protection, the reality proved more complex when individual homebuyers began filing applications that threatened viable projects and created an overwhelming burden on adjudicating authorities. The 2019 IBC (Amendment) Ordinance, later replaced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, attempted to address these concerns while maintaining homebuyers protection within the framework of both the Insolvency and Bankruptcy Code and the Real Estate Regulation and Development Act, 2016.

Evolution of Homebuyer Rights Under the Insolvency Framework

Initial Position Before 2018 Amendments

When the Insolvency and Bankruptcy Code was first enacted in 2016, homebuyers found themselves in a precarious position with no clear status under the legislation. The Code defined two categories of creditors: financial creditors who had extended loans or financial credit, and operational creditors who had provided goods or services. Homebuyers did not fit neatly into either category, leaving them without the ability to initiate Corporate Insolvency Resolution Process against defaulting developers or participate in the Committee of Creditors that made critical decisions about resolution plans.

This legal vacuum became starkly apparent in the Jaypee Infratech Limited case, where thousands of homebuyers who had paid substantial advances for their apartments found themselves excluded from insolvency proceedings initiated against the developer. The distressed buyers approached the Supreme Court, arguing that despite being vital stakeholders who had contributed more to the project than many financial institutions, they had no voice in determining the fate of their investments. The absence of any mechanism to protect their interests highlighted a fundamental flaw in the Code’s design when applied to real estate projects.

Recognition as Financial Creditors Through the 2018 Amendment

The Supreme Court’s intervention in Chitra Sharma v. Union of India [1] proved to be a turning point for homebuyer rights. In this case, which dealt with Jaypee Infratech Limited, the Court acknowledged that homebuyers were in an unjust position where their substantial financial contributions were not recognized under the insolvency framework. While the Code was being interpreted by tribunals, the Court took the extraordinary step of appointing a representative for homebuyers to participate in Committee of Creditors meetings, even though the law did not explicitly provide for such representation at that time.

This judicial recognition accelerated legislative action. The Insolvency Law Committee, constituted to examine issues with the Code’s implementation, concluded after extensive consultation that amounts paid by real estate allottees constituted a form of financial debt. The Committee found that delay in completion of apartments had become endemic in the Indian real estate sector, and that advances from homebuyers represented a significant source of project financing. This understanding led to the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which inserted an Explanation to the definition of financial debt under the Code to clarify that any amount raised from an allottee under a real estate project would be deemed financial debt.

The 2018 Amendment represented a watershed moment for homebuyers. By explicitly including them within the definition of financial creditors, the amendment granted them three critical rights: the ability to initiate insolvency proceedings under the Code against defaulting developers, the right to participate in the Committee of Creditors, and the guarantee of receiving at least the liquidation value under any resolution plan. This legislative change was grounded in the recognition that homebuyer advances function as a form of project financing, with the developer receiving the time value of money between payment and possession.

Judicial Validation in Pioneer Urban Land and Infrastructure Limited

The constitutional validity of treating homebuyers as financial creditors faced immediate challenge from real estate developers who argued that the 2018 Amendment was arbitrary and discriminatory. In Pioneer Urban Land and Infrastructure Limited v. Union of India [2], a three-judge bench of the Supreme Court examined these challenges and delivered a landmark judgment on August 9, 2019, that fundamentally shaped the rights of homebuyers under insolvency law.

The Court held that the legislative classification of homebuyers as financial creditors served a legitimate purpose and was not manifestly arbitrary. Drawing upon the principle established in Swiss Ribbons Pvt. Ltd. v. Union of India, the Court emphasized that the legislature must be given considerable deference in economic legislation. The judgment recognized that delay in delivering apartments had become a widespread problem, with records showing that out of 782 construction projects monitored by government authorities, a substantial number were delayed beyond their scheduled completion dates.

The Court found that amounts raised from homebuyers contributed significantly to financing construction projects, giving these advances the commercial character of borrowing. The judgment explicitly stated that the definition of financial debt under the Code was purposefully broad to encompass various forms of commercial borrowing, and homebuyer advances fell squarely within this definition. The Court also addressed concerns about discrimination, noting that the differential treatment of homebuyers compared to other creditors was based on intelligible differentia and served the rational objective of protecting consumer interests while ensuring efficient insolvency resolution.

Importantly, the Pioneer judgment also clarified the relationship between the Insolvency and Bankruptcy Code and the Real Estate Regulation and Development Act, 2016. The Court held that these statutes operate in different spheres. While the Code deals with proceedings in rem aimed at rehabilitating the corporate debtor through change of management, the Real Estate Act protects individual investor interests through compensation or delivery mechanisms. The Court found no inherent conflict between these regimes, noting that they serve complementary rather than contradictory purposes.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Circumstances Leading to the Amendment

Following the recognition of homebuyers as financial creditors, a new problem emerged that threatened the effectiveness of the insolvency framework for real estate projects. Individual homebuyers, empowered by their new status, began filing applications to initiate insolvency proceedings against developers in large numbers. While many of these applications addressed genuine grievances, the sheer volume created practical difficulties. A single disgruntled homebuyer could potentially push an otherwise viable project into insolvency proceedings, affecting hundreds or thousands of other allottees who might prefer the developer to complete the project rather than face the uncertainties of insolvency resolution.

Real estate developers raised concerns that they were being subjected to pressure tactics by individual buyers who threatened insolvency proceedings to extract settlements or refunds. The adjudicating authorities, already facing a heavy caseload, found themselves overwhelmed with applications filed by single homebuyers, many involving disputed claims that required detailed examination. This situation appeared contrary to the Code’s objective of providing time-bound resolution of genuine insolvency cases.

The Insolvency Law Committee, reconvened to examine these emerging issues, noted that classes of financial creditors like homebuyers, debenture holders, and deposit holders were characterized by their numerosity, heterogeneity, and independent decision-making. Unlike traditional financial creditors such as banks that conduct due diligence before lending and coordinate their actions, individual homebuyers operate independently and may have divergent interests. One homebuyer might seek immediate refund while others might prefer project completion, even if delayed. The Committee concluded that allowing any single member of these creditor classes to initiate insolvency proceedings could jeopardize the interests of other creditors who did not favor such action.

Key Provisions of the Amendment Ordinance

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, promulgated on December 28, 2019, introduced several significant changes to address these concerns. The most impactful was the insertion of a proviso to the Code mandating a minimum threshold for certain classes of financial creditors to initiate insolvency proceedings. For real estate allottees, the Ordinance required that an application for initiating Corporate Insolvency Resolution Process be filed jointly by not less than one hundred allottees under the same real estate project, or not less than ten percent of the total number of allottees under the same real estate project, whichever is less.

This threshold requirement applied prospectively to new applications and retrospectively to pending applications. The Ordinance specified that applications already filed by individual homebuyers but not yet admitted by the adjudicating authority would need to be amended within thirty days to meet the threshold requirement. Failure to comply would result in these applications being deemed withdrawn. This provision attracted considerable controversy, as homebuyers who had legitimately filed applications before the amendment suddenly found their cases potentially dismissed unless they could coordinate with sufficient fellow allottees within the stipulated timeframe.

The Ordinance also introduced provisions regarding continuation of essential supplies during the moratorium period. It empowered resolution professionals to require suppliers of critical goods and services to continue their supplies during insolvency proceedings, provided that current dues arising during the moratorium period were paid. This provision aimed to ensure that essential utilities and services necessary for completing projects would not be disrupted during the resolution process.

Another significant provision concerned criminal liability. The Ordinance inserted a new section providing that if a resolution plan approved by the adjudicating authority results in a change of management or control of the corporate debtor, the corporate debtor would not be liable for offenses committed prior to the commencement of insolvency proceedings. This immunity was intended to encourage prospective resolution applicants by ensuring they would not inherit criminal liability for actions of previous management, though it raised questions about accountability for fraud and other serious offenses.

Rationale and Objectives

The legislative intent behind the threshold requirement centered on preventing frivolous litigation and protecting the interests of the broader class of homebuyers who might not want insolvency proceedings initiated. The Insolvency Law Committee’s report accompanying the Ordinance explained that requiring a critical mass of homebuyers to jointly file an application would serve as a natural filter, ensuring that only cases with genuine widespread concern would proceed. This approach recognized that real estate projects involve numerous stakeholders whose interests might not align, and that one person’s decision should not unilaterally determine the fate of an entire project affecting hundreds or thousands of others.

The threshold was designed to strike a balance between access to justice and preventing abuse of process. By requiring either one hundred allottees or ten percent of total allottees to join the application, whichever is less, the provision attempted to be flexible. For large projects with thousands of units, ten percent would be a substantial number but potentially achievable. For smaller projects with fewer than one thousand units, the absolute number of one hundred might be the governing threshold, though this could represent a significant portion of total allottees.

The Committee also emphasized that homebuyers who could not meet the threshold for initiating insolvency proceedings would not be left without remedies. They would retain access to forums under the Real Estate Regulation and Development Act, 2016, consumer protection laws, and civil courts. These alternative remedies could provide relief specific to individual grievances, such as refunds, compensation for delays, or enforcement of contractual obligations, without requiring the drastic step of initiating insolvency proceedings against the developer.

Legal Challenges and Constitutional Validation

Arguments Against the Threshold Requirement

The threshold requirement introduced by the 2019 Ordinance faced immediate constitutional challenges through multiple writ petitions filed before the Supreme Court. The petitioners, primarily individual homebuyers, argued that the amendment violated fundamental rights guaranteed by the Constitution of India. Their primary contention centered on Article 14, which guarantees equality before law. They argued that creating a class within a class by imposing threshold requirements only on homebuyers, while other financial creditors could file individual applications, constituted arbitrary and discriminatory classification without intelligible differentia.

Petitioners pointed to the Supreme Court’s own judgment in Pioneer Urban Land and Infrastructure Limited, which had recognized homebuyers as financial creditors entitled to the same rights as other creditors. They argued that the government was estopped from now taking a contradictory position that would effectively nullify rights that had been judicially recognized and validated. The sudden imposition of threshold requirements appeared to be a retreat from the position taken during the Pioneer case, where the government had defended homebuyer rights.

Practical difficulties formed another major ground of challenge. Petitioners highlighted the absence of any central repository or information-sharing mechanism that would enable homebuyers to identify and contact fellow allottees to meet the threshold requirement. Real estate developers held information about all allottees but were not required to disclose it, making coordination extremely difficult. Additionally, different homebuyers entered into agreements at different times, meaning default dates would vary, creating confusion about when and how to collectively file an application.

The thirty-day deadline for amending pending applications was challenged as manifestly arbitrary. Homebuyers who had filed applications in good faith, relying on established law, suddenly found themselves required to coordinate with numerous other allottees within an unreasonably short timeframe or lose their legal remedy entirely. Petitioners argued that this retrospective application was particularly harsh and violated principles of natural justice.

Supreme Court’s Reasoning in Manish Kumar v. Union of India

The Supreme Court addressed these constitutional challenges in Manish Kumar v. Union of India [3], delivering judgment on January 19, 2021. The bench, comprising Justices R.F. Nariman, Navin Sinha, and K.M. Joseph, with Justice Joseph authoring the judgment, comprehensively analyzed the issues and upheld the constitutional validity of the threshold provisions.

The Court began by reiterating the principle that the legislature enjoys wide latitude in economic legislation, and constitutional courts should exercise judicial restraint before striking down such laws. The judgment emphasized that the test for Article 14 violations requires showing not merely that a law could have been drafted better, but that it crosses constitutional limits by being manifestly arbitrary or lacking any reasonable basis. The Court found that the threshold requirement met this constitutional standard.

Addressing the classification argument, the Court held that homebuyers as a class were distinguishable from other financial creditors based on their numerosity, heterogeneity, and individual decision-making characteristics. Unlike banks or financial institutions that act as sophisticated lenders with coordinated approaches, homebuyers are numerous individuals with potentially divergent interests. One homebuyer might seek immediate refund while others might prefer project completion. The Court found it reasonable for the legislature to require that a minimum number of homebuyers agree on initiating the drastic step of insolvency proceedings, rather than allowing one individual’s decision to affect all others.

The judgment rejected the estoppel argument by clarifying that the amendment did not eliminate homebuyer status as financial creditors. Homebuyers remained financial creditors with all attendant rights, including participation in Committee of Creditors if insolvency proceedings were initiated by other creditors. The amendment merely regulated the manner in which homebuyers could themselves initiate proceedings, imposing a threshold that served legitimate policy objectives. This regulation of procedural requirements did not contradict the Pioneer judgment’s substantive recognition of homebuyer rights.

On practical difficulties, the Court acknowledged that coordination might pose challenges but held that such difficulties could not justify striking down legislation. The judgment noted that the Code itself provides mechanisms, including the resolution professional’s access to company records, that could facilitate identification of allottees. The Court also pointed out that state Real Estate Regulatory Authorities maintain project information that could assist homebuyers in coordinating their efforts.

Regarding alternative remedies, the Court emphasized that homebuyers who could not meet the threshold were not left remediless. They retained access to remedies under the Real Estate Regulation and Development Act, 2016, which was specifically designed to protect homebuyer interests through state regulatory authorities and appellate tribunals. Consumer protection forums and civil courts also remained available for adjudicating individual disputes and providing appropriate relief. The Court found that the availability of these alternative remedies demonstrated that the threshold requirement did not violate constitutional rights.

The thirty-day deadline, while acknowledged as potentially challenging, was not found to be arbitrary per se. The Court reasoned that some time limit was necessary to provide certainty and prevent pending applications from indefinitely hanging over developers. However, recognizing the practical difficulties, the Court provided certain relaxations in its order, including extensions for specific categories of cases.

Interaction Between Insolvency and Bankruptcy Code and Real Estate Regulation and Development Act

Complementary Nature of the Two Regimes

The relationship between the Insolvency and Bankruptcy Code and the Real Estate Regulation and Development Act, 2016, represents a significant aspect of homebuyer protection that requires careful understanding. The Real Estate Act was enacted to bring transparency, accountability, and efficiency to the real estate sector, which had long been characterized by delayed projects, cost escalations, and lack of consumer protection. The Act established Real Estate Regulatory Authorities in each state to regulate real estate transactions, mandated registration of projects and agents, and created adjudicatory mechanisms for resolving disputes between promoters and allottees.

The Supreme Court in Pioneer Urban Land and Infrastructure Limited clarified that these two statutes operate in distinct spheres without inherent conflict. The Insolvency and Bankruptcy Code deals with proceedings in rem, focusing on the corporate debtor as an entity and seeking its rehabilitation or liquidation through a collective process involving all creditors. The objective is to preserve the corporate debtor as a going concern where possible, or to maximize asset value through orderly liquidation if revival is not feasible. Homebuyers participating in insolvency proceedings through the Committee of Creditors can influence decisions about resolution plans that might involve new management taking over and completing the project.

In contrast, the Real Estate Regulation and Development Act focuses on proceedings in personam, addressing individual grievances of homebuyers against specific promoters. The Act provides remedies such as refunds with interest, compensation for delays, and specific performance of contractual obligations. Real Estate Regulatory Authorities can also take suo motu action against errant promoters, impose penalties, and even revoke project registrations in cases of serious violations. The Act empowers authorities to ensure project completion by alternative means if original promoters default.

Moratorium Impact and Forum Shopping Concerns

One area of tension between these regimes concerns the impact of moratorium imposed under the Insolvency and Bankruptcy Code. When Corporate Insolvency Resolution Process is initiated, the Code mandates a moratorium prohibiting institution or continuation of suits or proceedings against the corporate debtor. This moratorium serves the crucial purpose of providing breathing space for resolution efforts without the distraction and pressure of multiple litigation fronts. However, it also means that homebuyers cannot simultaneously pursue their claims before Real Estate Regulatory Authorities or consumer forums once moratorium is in effect.

Courts have consistently held that the moratorium under the Code overrides proceedings under the Real Estate Act. This position is based on the principle that insolvency proceedings are collective proceedings that must take priority over individual actions to prevent a race among creditors and to facilitate orderly resolution. However, this creates a practical problem for homebuyers who may have already filed complaints before Real Estate Regulatory Authorities when insolvency proceedings are initiated. Their cases get stayed, potentially for extended periods, while the resolution process unfolds.

The threshold requirement in the amended Code creates a strategic consideration for homebuyers. If they cannot meet the threshold for initiating insolvency proceedings themselves, they might instead focus on remedies under the Real Estate Act or consumer protection laws. However, if other creditors initiate insolvency proceedings against the developer, homebuyers’ cases before alternative forums will be stayed by the moratorium. This creates an asymmetry where homebuyers face barriers to initiating insolvency proceedings but can be affected by proceedings initiated by others.

Practical Considerations for Homebuyers

Homebuyers facing developer defaults must now navigate a complex legal landscape requiring careful strategic decisions. If a substantial number of allottees in a project share grievances and can coordinate effectively, initiating insolvency proceedings might be an option to consider, particularly if the developer appears insolvent and unable to complete the project. The insolvency route offers the possibility of attracting a resolution applicant who might complete the project or provide reasonable exits for homebuyers.

However, for individual homebuyers or smaller groups unable to meet the threshold, remedies under the Real Estate Regulation and Development Act offer a more accessible path. These forums are specifically designed to handle real estate disputes, have expertise in the sector, and can provide targeted relief. Real Estate Regulatory Authorities can direct refunds, award compensation, and impose penalties on developers without requiring the collective process of insolvency proceedings. The Act also provides for relatively quick resolution compared to the potentially lengthy insolvency process.

Consumer protection forums provide another avenue, particularly for homebuyers seeking compensation for deficiency in service. These forums have handled numerous cases involving delayed possession, poor construction quality, and unfair trade practices by developers. The Consumer Protection Act, 2019, expanded the scope of consumer protection and enhanced remedies available, making this an increasingly attractive option for individual grievances.

Regulatory Framework and Homebuyer Protection Mechanisms

Real Estate Regulatory Authority Functions

The Real Estate Regulation and Development Act, 2016, established Real Estate Regulatory Authorities as the primary regulatory bodies for the real estate sector. These authorities perform multiple critical functions aimed at protecting homebuyer interests. Registration of real estate projects is mandatory before developers can advertise, market, or sell units. The registration process requires developers to provide detailed project information, including land status, approvals obtained, project layout, number of units, and completion timelines. This information must be made publicly available on the authority’s website, enabling prospective buyers to make informed decisions.

The Act imposes strict obligations on promoters regarding project execution and fund management. Seventy percent of amounts received from allottees for a project must be deposited in a separate account maintained with a scheduled bank and used exclusively for construction costs and land payments for that specific project. This provision aims to prevent diversion of homebuyer funds to other projects or purposes, a practice that contributed to numerous project delays and defaults in the past.

Real Estate Regulatory Authorities also adjudicate disputes between promoters and allottees. Homebuyers can file complaints regarding delays, non-delivery, defects in construction, or any violation of the Act or rules. The authorities have powers to investigate complaints, summon parties, examine documents, and pass orders granting appropriate relief. Remedies available include directing refunds with interest, compensation for delays, and penalties for violations. Orders passed by Real Estate Regulatory Authorities are enforceable as decrees of civil courts.

The Act provides for Real Estate Appellate Tribunals to hear appeals against orders of Real Estate Regulatory Authorities. These tribunals must have technical expertise in real estate matters, ensuring specialized adjudication. The appellate mechanism provides an important check on regulatory decisions while maintaining focus on expeditious dispute resolution. However, implementation of the Act has been uneven across states, with some states yet to establish fully functional authorities and tribunals.

Escrow Account Requirements and Fund Protection

The requirement under the Real Estate Regulation and Development Act for maintaining separate bank accounts for each project represents a significant protection mechanism for homebuyers. By mandating that seventy percent of amounts received from allottees be kept in separate escrow accounts and used only for construction and land costs of the specific project, the Act addresses one of the primary causes of project delays: diversion of funds by developers to other projects or purposes unrelated to the specific project for which homebuyers paid.

This provision was designed based on experience showing that many developers engaged in the practice of funding new projects with advances from earlier projects, creating a chain where each project’s completion depended on success of subsequent projects. When market conditions deteriorated or projects faced difficulties, this interconnected funding model meant that defaults cascaded across multiple projects, leaving thousands of homebuyers in distress. The escrow mechanism aims to insulate each project from such cross-subsidization, ensuring that funds contributed by allottees of a particular project benefit that project specifically.

However, the effectiveness of this provision depends on strict enforcement. Real Estate Regulatory Authorities must actively monitor compliance through periodic audits and verification of account statements. Penalties for violations must be substantial enough to deter non-compliance. Some developers have raised concerns that the seventy percent requirement leaves insufficient funds for project management, marketing, and profit margins, but homebuyer advocates argue that this discipline is necessary to prevent the fund mismanagement that characterized the sector before regulation.

The interaction between escrow account requirements under the Real Estate Act and distribution priorities under the Insolvency and Bankruptcy Code raises complex questions. If a developer enters insolvency proceedings, to what extent are funds in project-specific escrow accounts protected from being part of the general pool of corporate debtor assets? While the Real Estate Act mandates segregation of these funds, insolvency proceedings involve collective treatment of all creditors, potentially creating conflict over whether escrow funds should be treated as trust property excluded from the insolvency estate or as general assets subject to distribution under the Code’s waterfall mechanism.

Critical Analysis and Future Directions

Effectiveness of Threshold Requirements

The threshold requirement introduced through the 2019 Ordinance reflects a policy choice that prioritizes preventing abuse of the insolvency process over maximizing individual access to insolvency remedies. From one perspective, this choice appears reasonable given the practical problems that emerged when individual homebuyers could independently trigger insolvency proceedings. The burden on adjudicating authorities, the potential for strategic pressure tactics, and the risk of viable projects being derailed by isolated disputes all suggested need for some filtering mechanism.

However, from the homebuyer perspective, the threshold creates significant practical obstacles that may effectively deny remedy in many situations. Coordinating one hundred people or ten percent of allottees, whichever is less, requires information about fellow allottees that is often not readily available. Developers are not required to share complete allottee lists, and privacy concerns complicate obtaining such information through other means. Even where homebuyers can identify each other, achieving consensus on initiating insolvency proceedings is challenging given the diverse circumstances and priorities of different allottees.

The requirement that all applicants must be from the same real estate project, while logical, creates further limitations. In cases where a developer has multiple projects with delays across all of them, homebuyers from different projects cannot aggregate to meet the threshold. Each project must independently gather the minimum number of applicants, even though the underlying insolvency issue affects the developer as a whole. This project-specific approach may not reflect the economic reality that a developer’s insolvency typically stems from overall financial distress rather than problems limited to one project.

Alternative approaches might have better balanced competing interests. A sliding scale threshold based on project size, with lower absolute numbers for smaller projects, could make the remedy more accessible while still filtering out truly isolated complaints. Greater emphasis on ensuring developers provide complete information about allottees to facilitate coordination would address practical obstacles. More flexible time limits for amending pending applications, rather than the rigid thirty-day deadline, would have reduced hardship from retrospective application of the threshold requirement.

Strengthening the Real Estate Regulatory Framework

Given the threshold barriers to accessing insolvency remedies, the effectiveness of the overall homebuyer protection regime depends heavily on robust implementation of the Real Estate Regulation and Development Act. Several measures would strengthen this regulatory framework. State Real Estate Regulatory Authorities need adequate resources, technical expertise, and personnel to handle the volume of cases and conduct effective oversight of the real estate sector. Many authorities currently face severe capacity constraints, leading to delays in adjudication and limited monitoring of ongoing projects.

Proactive supervision rather than reactive complaint resolution should characterize Real Estate Regulatory Authority functioning. Regular inspections of registered projects, verification of escrow account compliance, and monitoring of construction progress against approved timelines would enable early intervention before problems escalate to crisis levels. Authorities should also leverage technology for real-time tracking of projects and fund utilization, with dashboards providing transparency to allottees about their project’s status.

Penalties under the Real Estate Act must be enforced consistently and at levels that deter violations. If developers calculate that the cost of non-compliance is less than the benefit gained from diverting funds or delaying projects, regulatory provisions lose their deterrent effect. Authorities need to pursue strict enforcement, including project deregistration and prosecution in serious cases of fraud or willful default, to establish credible consequences for violations.

The Act provides that Real Estate Regulatory Authorities can take over project completion in cases of developer default, providing right of first refusal to associations of allottees. This provision has been underutilized, with authorities reluctant to take on the responsibilities and complexities of project management. However, creative use of this power, perhaps through appointment of independent project management consultants or competent developers to complete abandoned projects, could provide valuable relief to homebuyers without resorting to the insolvency process.

Balancing Stakeholder Interests

The evolution of homebuyer rights under the Insolvency and Bankruptcy Code illustrates the challenge of balancing multiple stakeholder interests within a single legislative framework. Homebuyers deserve protection given their vulnerability and the significant portion of their life savings invested in homes. However, developers argue that overly stringent regulation and easy triggers for insolvency proceedings can cripple viable businesses facing temporary difficulties, ultimately harming all stakeholders including homebuyers who might receive more value from project completion than from insolvency proceedings.

Financial institutions that provide construction finance have their own interests and priorities that may not align with homebuyers. Banks typically hold security interests in project land and assets, giving them senior status in liquidation scenarios. Their decisions in Committee of Creditors might favor resolution plans that maximize recovery of their debts rather than plans that prioritize project completion for homebuyers. The Code attempts to give all financial creditors, including homebuyers, equal voting rights in Committee of Creditors, but numerical superiority of institutional creditors often means their preferences dominate decision-making.

Workers, suppliers, and other operational creditors involved in construction projects also have legitimate claims when developers default. While the Code provides for minimum payments to operational creditors under resolution plans, they typically rank behind financial creditors in the priority waterfall, creating tensions when insufficient funds exist to satisfy all claims. The focus on financial creditor rights, including homebuyers, has sometimes overshadowed the equally deserving claims of these operational stakeholders.

Finding optimal balance among these competing interests requires nuanced policy-making that considers the unique characteristics of real estate projects. Unlike manufacturing or service businesses where company assets can be sold separately from ongoing operations, real estate projects represent partially constructed properties where value lies in completion rather than liquidation. This reality suggests that insolvency resolution for real estate should prioritize mechanisms that enable project completion, whether by original promoters under strict monitoring, by resolution applicants who assume developer obligations, or by alternative completion arrangements supervised by Real Estate Regulatory Authorities.

Conclusion

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, represents a significant recalibration in the legal framework governing homebuyer rights in insolvency proceedings. By introducing threshold requirements for homebuyers to initiate Corporate Insolvency Resolution Process, the amendment sought to address practical problems that emerged after homebuyers gained recognition as financial creditors. While this recalibration serves legitimate policy objectives of preventing frivolous litigation and ensuring that insolvency proceedings reflect broader creditor consensus rather than individual grievances, it also creates substantial barriers to access for individual homebuyers unable to meet coordination requirements.

The validation of these threshold requirements by the Supreme Court in Manish Kumar v. Union of India establishes their constitutional legitimacy while emphasizing that homebuyers retain alternative remedies through the Real Estate Regulation and Development Act and consumer protection forums. This judicial endorsement reflects deference to legislative policy choices in economic regulation, though questions remain about whether the specific threshold levels strike the optimal balance between access and abuse prevention.

Moving forward, the effectiveness of homebuyer protection depends not just on insolvency law provisions but on strengthening the broader regulatory ecosystem. Robust implementation of the Real Estate Regulation and Development Act, with well-resourced authorities exercising proactive supervision and consistent enforcement, provides a more tailored remedy for the types of disputes typically involving homebuyers and developers. The escrow account requirements, if strictly enforced, can prevent the fund diversion that leads to project delays and defaults. Enhanced transparency through technology-enabled tracking of projects and fund utilization empowers homebuyers with information to make informed decisions and take timely action when problems emerge.

The ultimate goal must be creating an environment where homebuyers rarely need to resort to insolvency proceedings because robust preventive regulation, adequate capitalization requirements for developers, and effective enforcement of contractual obligations ensure project completion as contracted. Where defaults do occur, multiple remedy pathways should be available, with the choice among them depending on specific circumstances rather than arbitrary barriers that effectively foreclose certain options. The threshold requirement, while serving valid purposes, should be periodically reviewed to ensure it does not become an insurmountable obstacle that leaves genuinely aggrieved homebuyers without effective recourse when insolvency proceedings would be the most appropriate remedy for their situation.

References

[1] Chitra Sharma & Ors. v. Union of India & Ors., W.P.(C) No. 744 of 2017, Supreme Court of India (August 9, 2018). Available at: https://indiankanoon.org/doc/106139450/ 

[2] Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors., W.P.(C) No. 43 of 2019, Supreme Court of India (August 9, 2019). Available at: https://indiankanoon.org/doc/118478827/ 

[3] Manish Kumar v. Union of India, W.P.(C) No. 26 of 2020, Supreme Court of India (January 19, 2021). Available at: https://indiankanoon.org/doc/54883247/ 

[4] PRS Legislative Research, “The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019,” December 28, 2019. Available at: https://prsindia.org/billtrack/the-insolvency-and-bankruptcy-code-amendment-ordinance-2019 

[5] Insolvency and Bankruptcy Board of India, “Analysis of Pioneer Judgment of SC,” August 9, 2019. Available at: https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Aug/Analysis%20of%20Pioneer%20Judgment%20of%20SC_2019-08-09%2023:48:30.pdf 

[6] The Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, Acts of Parliament (India). Available at: https://ibclaw.in/ 

[7] The Real Estate (Regulation and Development) Act, 2016, No. 16 of 2016, Acts of Parliament (India). Available at: https://up-rera.in/pdf/reraact.pdf 

[8] India Corporate Law, “Resetting the Clock: Supreme Court Sends Jaypee Infratech Limited Back to NCLT for CIRP,” August 2018. Available at: https://corporate.cyrilamarchandblogs.com/2018/08/resetting-clock-supreme-court-sends-jaypee-infratech-limited-back-nclt-cirp/ 

[9] IndiaFilings, “Insolvency & Bankruptcy Code Amendments 2019,” July 2025. Available at: https://www.indiafilings.com/learn/ibc-amendments-2019/ 

Published and Authorized by Sneh Purohit