Homebuyers and Other Consumers under the IBC: Why the Law Treats Them Differently

A family that has paid instalments for an apartment and a traveller who has paid for an airline ticket are both, in ordinary language, consumers who paid in advance for something they never received. If the developer or the airline enters insolvency, however, the Insolvency and Bankruptcy Code, 2016 (“IBC”) treats them very differently. Homebuyers are financial creditors under the IBC and have a voice in the committee of creditors (“CoC”); most other consumers do not.

How Homebuyers Became Financial Creditors

Early uncertainty. The original IBC did not expressly classify allottees of real estate projects. In Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd. (NCLAT, 21 July 2017), the Appellate Tribunal held that buyers under an arrangement providing assured returns had advanced money having the commercial effect of a borrowing and could be financial creditors. Ordinary allottees without such arrangements remained uncertain of their status.

The 2018 amendment. Following concerns highlighted in large real estate insolvencies, including proceedings before the Supreme Court in Chitra Sharma v. Union of India (2018), Parliament enacted the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. It inserted an Explanation to Section 5(8)(f), providing that an amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing. Allottees thereby became financial creditors.

Constitutional validity. In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 (9 August 2019), the Supreme Court upheld the amendment. It held that allottees provide finance for construction, that the classification was reasonable, and that where the Real Estate (Regulation and Development) Act, 2016 (“RERA”) and the IBC conflict, the IBC prevails, with the remedies under both statutes otherwise being concurrent. The Court also indicated safeguards against misuse by speculative allottees and defaulting allottees.

Limits on Individual Homebuyer Applications

The Insolvency and Bankruptcy Code (Amendment) Act, 2020, effective from 28 December 2019, added provisos to Section 7(1). Allottees under a real estate project may initiate a corporate insolvency resolution process only if the application is filed jointly by at least one hundred allottees of the same project or ten per cent of the total allottees of that project, whichever is less. The Supreme Court upheld these thresholds in Manish Kumar v. Union of India, (2021) 5 SCC 1.

Because allottees are usually numerous, the IBC provides for their collective representation in the CoC through an authorised representative under Sections 21(6A) and 25A.

Genuine Homebuyers and Speculative Investors

In Mansi Brar Fernandes v. Shubha Sharma, 2025 INSC 1110 (Supreme Court, 12 September 2025), the Court drew a distinction between genuine homebuyers, who seek possession of a home, and speculative investors, whose arrangements are designed principally for assured financial returns, for example through buy-back clauses. The Court held that speculative investors cannot use the IBC as a recovery mechanism, while noting that they retain remedies before consumer fora, RERA authorities or civil courts. Indicators discussed in the judgment include refusal to accept possession, insistence on refunds with high interest and arrangements that depart from standard allotment terms.

Regulatory Changes for Real Estate Insolvencies

Amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, notified in February 2025, introduced measures aimed at real estate cases, as reported. These include enabling the resolution professional, with CoC approval, to hand over possession of units to allottees during the process, permitting relevant development authorities to attend CoC meetings without a vote, and providing for facilitators to assist large creditor classes. Readers should consult the current text of the regulations for the precise conditions.

The 2026 amendments to the IBC, in force from 26 May 2026, add further tools relevant to projects:

• Asset-wise and project-wise resolution. The Explanation to Section 5(26) now recognises that a resolution plan may include the sale of one or more assets through one or more plans by one or more resolution applicants.
• Protection of approvals. New Section 31(5) provides that licences, permits, registrations, concessions and clearances associated with an approved resolution plan shall not be suspended or terminated for their remaining period if the relevant obligations are complied with.
• Minimum payment to dissenting financial creditors. New Section 30(2)(ba) prescribes the minimum payable to financial creditors, including allottees, who do not vote for the plan: the lower of their liquidation entitlement or their share if the plan value were distributed according to the Section 53(1) waterfall.

Are Other Consumers Financial Creditors under the IBC?

Unlike homebuyers, most other consumers are not treated as financial creditors under the IBC.

Not financial creditors. A “financial debt” under Section 5(8) is a debt disbursed against the consideration for the time value of money. A customer paying in advance for a flight, a course or goods does not ordinarily provide money in that sense, and no statutory deeming provision equivalent to the allottee Explanation exists for them.

Operational creditors or other creditors. Depending on the nature of the claim, such consumers may be treated as operational creditors, whose debt arises from the provision of goods or services under Section 5(21), or may file claims as other creditors under Regulation 9A of the CIRP Regulations. Either way:

• they do not have voting rights in the CoC, which consists of financial creditors under Section 21; and
• their minimum entitlement under a resolution plan is governed by Section 30(2)(b), which requires payment of not less than the higher of what operational creditors would receive in liquidation or what they would receive if the plan value were distributed under Section 53(1).

In liquidation, unsecured claims of such consumers generally fall within the residuary category of “remaining debts and dues” in Section 53(1)(f), ranking below insolvency and liquidation costs, secured creditors, workmen’s and certain employee dues, unsecured financial creditors and Government dues for the two years preceding liquidation.

Why the Difference Exists

The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 upheld the distinction between financial and operational creditors, reasoning that financial creditors are generally involved in assessing viability from the outset and are better placed to evaluate restructuring. Pioneer Urban Land extended the financial creditor category to allottees because of their role in financing construction. Whether other classes of consumers who make substantial advance payments should receive comparable protection is a policy question for Parliament; as on 16 September 2026, the IBC contains no such provision.

Practical Summary

Frequently Asked Questions

1. Are homebuyers financial creditors under the IBC?
Yes. Homebuyers or real-estate allottees are treated as financial creditors under Section 5(8)(f) of the IBC.

2. Can a homebuyer initiate insolvency proceedings against a developer?
Yes, subject to the Section 7 threshold requiring at least 100 allottees or 10% of the total allottees of the same project, whichever is less.

3. Do homebuyers have voting rights in the CoC?
Yes. Homebuyers participate in the Committee of Creditors through an authorised representative.

4. Are other consumers financial creditors under the IBC?
Generally, no. Consumers who pay in advance for goods or services are not covered by the specific deeming provision applicable to real-estate allottees.

5. Can consumers file claims in insolvency proceedings?
Yes. Depending on the nature of their claim, they may be treated as operational creditors or other creditors and can submit claims in the insolvency process.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. Insolvency and Bankruptcy Code, 2016 — Sections 5(8), 5(21), 5(26), 7(1), 21, 25A, 30(2), 31(5), 53 (as amended) — IBBI – Legal Framework
2. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
3. Insolvency and Bankruptcy Code (Second Amendment) Act, 2018; Insolvency and Bankruptcy Code (Amendment) Act, 2020
4. IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, including Regulation 9A and the amendments of February 2025 — IBBI – Regulations
5. Real Estate (Regulation and Development) Act, 2016 — Section 88
6. Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd., NCLAT, 21 July 2017
7. Chitra Sharma v. Union of India, Supreme Court of India, 2018
8. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, Supreme Court of India, 9 August 2019
9. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, Supreme Court of India, 25 January 2019
10. Manish Kumar v. Union of India, (2021) 5 SCC 1, Supreme Court of India, 19 January 2021
11. Mansi Brar Fernandes v. Shubha Sharma, 2025 INSC 1110, Civil Appeal No. 3826 of 2020, Supreme Court of India, 12 September 2025 — Indian Kanoon