Home Buyers and the IBC (Amendment) Ordinance, 2019 – Part3

Introduction

The Arbitration and Conciliation Act, 1996 represents a watershed moment in India’s alternative dispute resolution landscape. At the heart of this legislative framework lies Section 11, which governs the appointment of arbitrators and serves as the gateway to arbitration proceedings. While arbitration primarily addresses private dispute resolution, its growing relevance in real estate disputes has significant implications for home buyers’ rights under IBC, particularly where contractual disputes intersect with insolvency proceedings against defaulting developers. The provision has undergone significant transformation through amendments in 2015 and 2019, reflecting the evolving jurisprudence and India’s commitment to establishing itself as an arbitration-friendly jurisdiction. This article examines the intricate mechanisms of Section 11, the legal principles it embodies, and the judicial interpretations that have shaped its application over nearly three decades.

Historical Background: Home Buyers Before 2018

When the Insolvency and Bankruptcy Code, 2016 (IBC) initially came into force, home buyers occupied a precarious position in the insolvency ecosystem. The IBC defined two primary categories of creditors—financial creditors under Section 5(8) and operational creditors under Section 5(20)—but home buyers did not clearly fall within either definition. [1] This legal ambiguity left thousands of home buyers with incomplete projects and defaulting developers, without any clear mechanism to protect their investments. The National Company Law Tribunal and National Company Law Appellate Tribunal initially struggled with classifying home buyers, leading to inconsistent decisions.

The breakthrough came through judicial intervention. The Supreme Court in Chitra Sharma v. Union of India recognized the vulnerable position of home buyers who had invested their life savings into incomplete projects. [2] The Court observed that delays in flat completion had become commonplace, causing immense financial and emotional distress. Similarly, in Bikram Chatterji v. Union of India, the Court emphasized how these delays violated home buyers’ fundamental right to shelter under Article 21 of the Constitution. These landmark cases prompted legislative action to clarify home buyers’ status under the IBC framework.

The Insolvency Law Committee, constituted in 2017, examined this issue and submitted its report in March 2018, observing that amounts raised from home buyers constitute significant financing for real estate projects and should be classified as financial debt. This recommendation laid the foundation for recognizing home buyers as financial creditors.

The 2018 Amendment: Recognition as Financial Creditors

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, receiving presidential assent on August 17, 2018, proved transformative for home buyers. [3] The IBC amendment inserted an Explanation to Section 5(8)(f) stating that “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.” This elevated home buyers to financial creditor status, granting them three crucial rights: initiating Corporate Insolvency Resolution Process against defaulting developers, representation in the Committee of Creditors through authorized representatives, and entitlement to at least liquidation value under resolution plans.

Real estate developers challenged this amendment’s constitutional validity in Pioneer Urban Land and Infrastructure Ltd. v. Union of India. [4] They argued that amounts paid by home buyers constituted sale consideration for apartments, not borrowing. However, the Supreme Court, in its August 9, 2019 judgment, upheld the amendment. The Court observed that developers use funds collected from home buyers to finance project construction, giving these amounts the commercial effect of borrowing. The Court emphasized legislative latitude in economic legislation and characterized the Code as beneficial legislation aimed at reviving corporate debtors in the interest of unsecured creditors like home buyers.

Following this amendment, home buyers could individually approach tribunals to initiate insolvency proceedings. This empowerment was exercised extensively, with numerous applications filed nationwide. While necessary for protecting home buyers, this revealed practical challenges. Single home buyers began initiating proceedings based on minor disputes, raising concerns about mechanism misuse and burden on adjudicating authorities.

The 2019 Ordinance: Introducing Collective Action Requirements

Recognizing the need to prevent frivolous litigation while ensuring insolvency proceedings reflected genuine financial distress, the President promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 on December 28, 2019. [5] The Ordinance introduced critical changes by adding provisos to Section 7, which governs applications by financial creditors for initiating Corporate Insolvency Resolution Process.

The most significant change required that applications by home buyers could only be filed jointly by not less than one hundred allottees of the particular project or not less than ten percent of total allottees under the same project, whichever was less. This threshold applied specifically to home buyers and holders of debentures and other securities, distinguishing them from other financial creditors who could individually initiate proceedings.

The second major provision addressed pending applications. Home buyers who had filed applications not yet admitted by adjudicating authorities received thirty days from the Ordinance’s commencement to comply with the new threshold. Failure meant applications would be deemed withdrawn. This retrospective application created immediate challenges for individual home buyers who had initiated proceedings in good faith but now faced dismissal unless they could mobilize sufficient fellow allottees within the stipulated timeframe.

Legislative Rationale and Policy Objectives

The Insolvency Law Committee’s report articulated the legislative intent behind threshold requirements. The Committee noted that for certain financial creditor classes characterized by numerosity and heterogeneity—particularly home buyers, debenture holders, and deposit holders—genuine concern existed that insolvency proceedings could be initiated by one or few individuals following minor disputes. This could exert undue pressure on corporate debtors and jeopardize interests of other creditors not favoring insolvency proceedings.

The Committee emphasized that indiscriminate litigation by individual home buyers could cause docket explosion at National Company Law Tribunals already overburdened with cases. By requiring minimum thresholds, the legislature sought ensuring insolvency proceedings reflected collective determination by significant stakeholders that developers were genuinely financially distressed, rather than being weaponized by isolated individuals to extract settlements.

Furthermore, the threshold mechanism prevented single home buyers with potentially unique circumstances from placing entire real estate projects affecting hundreds of other home buyers into insolvency proceedings. The collective nature ensured that decisions to initiate such drastic measures would be taken by representative groups, reflecting broader consensus among affected stakeholders.

Constitutional Challenges and Judicial Validation

The Ordinance faced immediate constitutional challenges from home buyers arguing it violated fundamental rights. Multiple writ petitions were filed before the Supreme Court, most prominently Manish Kumar v. Union of India. [6] Petitioners contended the threshold requirement was arbitrary, discriminatory, and violated Article 14 (equality before law) and Article 21 (protection of life and personal liberty). They argued that having been recognized as financial creditors by Pioneer Urban judgment, imposing additional conditions amounted to taking away vested rights.

Petitioners highlighted practical difficulties in meeting threshold requirements. First, no centralized repository enabled home buyers to identify and contact other allottees under projects. Such information was typically held only by defaulting developers with no incentive to facilitate coordination among aggrieved buyers. Second, different home buyers entered agreements at different times, meaning default dates varied, making joint applications challenging. Third, in projects with fewer than one hundred allottees, even ten percent could be difficult to mobilize, effectively denying home buyers any remedy.

The Supreme Court, in its January 19, 2021 judgment, upheld the threshold requirement’s constitutional validity. [6] The three-judge bench delivered a judgment spanning over four hundred pages. The Court held that threshold requirements struck reasonable balance between protecting home buyers’ rights and preventing insolvency mechanism misuse. The Court observed that what distinguished home buyers from other financial creditors was their numerosity, heterogeneity, and individuality in decision-making. Given these characteristics, allowing single home buyers to initiate insolvency proceedings could potentially harm both corporate debtors and other home buyers preferring different remedies.

The Court rejected discrimination arguments, noting that classification was based on intelligible differentia with rational nexus to preventing frivolous litigation objectives. The judgment emphasized home buyers retained access to alternative forums under the Real Estate (Regulation and Development) Act, 2016 and Consumer Protection Act, 2019. These sector-specific laws provided mechanisms for individual home buyers seeking redress without threshold requirements.

Importantly, the Court clarified that threshold requirements did not disqualify home buyers as financial creditors. They remained financial creditors under Section 5(8) with all attendant rights including Committee of Creditors representation and liquidation value entitlement. Thresholds applied only to initiating insolvency proceedings under Section 7, not to creditor status itself.

Interplay with RERA: Complementary Remedies

The Real Estate (Regulation and Development) Act, 2016, commonly referred to as RERA, represents India’s primary legislative framework for regulating real estate and protecting home buyer interests. [7] Enacted contemporaneously with the Insolvency and Bankruptcy Code, RERA established Real Estate Regulatory Authorities in each state to oversee project registrations, ensure transparency, and provide speedy dispute resolution for home buyers.

RERA mandates registration of all real estate projects exceeding five hundred square meters or comprising eight apartments. Developers must deposit seventy percent of funds collected from home buyers in separate escrow accounts, preventing fund diversion to other projects. The Act prescribes severe penalties for developers failing to complete projects on time, including refunds with interest to home buyers. Real Estate Appellate Tribunals provide additional adjudication layers with sixty to ninety-day timelines for resolving complaints.

The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India clarified the relationship between RERA and the Insolvency and Bankruptcy Code. [4] The Court held these legislative frameworks operate in different spheres serving distinct purposes. RERA addresses rights in personam, focusing on individual home buyers’ rights to receive possession or obtain refunds with compensation for delays. The Code deals with rights in rem, concerning corporate debtors’ overall financial health and collective creditor interests.

The Court emphasized that remedies under RERA and the Code are concurrent, not mutually exclusive. Home buyers can pursue RERA remedies while participating in insolvency proceedings as financial creditors. However, in conflicts between statutes, the Code, being later and more specialized insolvency legislation, would prevail. This harmonious construction ensures both frameworks coexist, each serving intended purposes without undermining the other.

The threshold requirement thus complements RERA’s individual remedy mechanisms. Home buyers facing minor disputes or seeking personal remedies like refunds can approach RERA authorities without mobilizing other allottees. The insolvency route is reserved for situations where collective action by significant home buyer numbers indicates developer financial distress warranting restructuring or liquidation affecting all stakeholders.

Practical Implementation Challenges

Despite judicial validation, practical implementation has revealed several challenges affecting home buyers seeking IBC remedies. The fundamental challenge remains information asymmetry between home buyers and developers. Developers maintain allottee databases but have no obligation sharing this information with individual home buyers seeking to coordinate joint applications. While some tribunals have directed developers to upload allottee details on websites, compliance has been inconsistent without standardized mechanisms.

Home buyer heterogeneity within single projects presents another complication. Allottees may have entered agreements at different times, paid different amounts, and faced varied circumstances regarding possession delays or construction progress. Some may prefer pursuing refunds through RERA, while others might favor insolvency proceedings facilitating project completion by new developers. Building consensus among such diverse stakeholders requires coordination often difficult to achieve when individual home buyers lack organizational capacity or legal resources.

The thirty-day period provided for pending applications to comply with threshold requirements proved particularly challenging. Home buyers who filed individual applications in good faith suddenly faced case dismissal unless they could identify and persuade ninety-nine other allottees or nine percent of total allottees to join within a month.

Geographic dispersion adds complexity. In metropolitan projects, allottees may be scattered nationally or internationally, making physical coordination difficult. Language barriers, varying legal awareness levels, and differing financial capacities further complicate collective action efforts. While technology platforms and social media have facilitated some coordination, these remain ad hoc rather than institutionalized solutions.

Conclusion

The evolution of home buyers’ position under the Insolvency and Bankruptcy Code (IBC) reflects broader narratives of balancing individual rights with systemic efficiency in India’s insolvency resolution framework. The journey from unrecognized stakeholders to financial creditors, and subsequently to creditors subject to collective action requirements, demonstrates legislative and judicial efforts crafting frameworks protecting genuine grievances while preventing misuse.

The threshold requirement introduced by the  2019 Ordinance and validated by the Supreme Court represents considered judgment that collective action by significant home buyer numbers provides more reliable indicators of genuine financial distress than individual applications. While posing practical challenges particularly regarding information access and coordination, it serves important purposes preventing frivolous litigation and protecting other stakeholder interests, including home buyers not favoring insolvency proceedings.

Concurrent remedy availability under RERA and the Consumer Protection Act ensures home buyers are not left remediless. Individual home buyers facing project delays or seeking refunds can pursue sector-specific remedies without threshold requirements. The insolvency mechanism is reserved for situations where collective determination by substantial home buyer groups indicates developer financial conditions warrant comprehensive restructuring or liquidation.

References

[1] PRS Legislative Research. The Insolvency and Bankruptcy Code (Amendment) Bill, 2019. https://prsindia.org/billtrack/the-insolvency-and-bankruptcy-code-amendment-bill-2019 

[2] Indian Kanoon. Chitra Sharma & Ors. v. Union of India & Ors. https://indiankanoon.org/doc/96841176/ 

[3] India Filings. Insolvency & Bankruptcy Code Amendments 2019. https://www.indiafilings.com/learn/ibc-amendments-2019/ 

[4] Indian Kanoon. Pioneer Urban Land and Infrastructure Limited v. Union of India. https://indiankanoon.org/doc/118478827/ 

[5] PRS Legislative Research. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. https://prsindia.org/billtrack/the-insolvency-and-bankruptcy-code-amendment-ordinance-2019 

[6] Indian Kanoon. Manish Kumar v. Union of India. https://indiankanoon.org/doc/54883247/ 

[7] Drishti IAS. RERA Act, 2016. https://www.drishtiias.com/to-the-points/Paper2/rera-act-2016 

[8] IBC Laws. The Evolution of Home Buyers Role in India’s Insolvency Framework. https://ibclaw.in/the-evolution-of-home-buyers-role-in-indias-insolvency-framework-by-k-sushrutha-reddy-k-gowtham-satya-krishna-karthikeya/ 

[9] IBC Laws. From Spectators to Stakeholders: The Rise of Homebuyers under The IBC. https://ibclaw.blog/from-spectators-to-stakeholders-the-rise-of-homebuyers-under-the-ibc-by-priyanshi-jain/