When Reserve Bank of India (RBI) directed banks to initiate insolvency proceedings against the country’s largest corporate defaulters, Jaypee Infratech Ltd (JIL) became one of the earliest and most prominent cases under the Insolvency and Bankruptcy Code (IBC), 2016. What made JIL different, however, was not just its financial exposure—it was the human cost. Thousands of home-buyers, who had invested their life savings in incomplete projects, suddenly found themselves without either possession or legal standing in the resolution process. Their plight led to one of the most consequential shifts in India’s insolvency regime: the recognition of real estate allottees as financial creditors under IBC.
Originally, IBC had classified the creditors into two categories, i.e., financial creditor and operational creditor. As per IBC, financial creditor means a person to whom a financial debt (as defined) is owed and includes any person to whom such debt has been legally assigned or transferred. The operational creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. The operational debt means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central government, any state government or any local authority. Thus, any debt in relation to operations of a company is operational debt. Notably, until 17 August 2017, the real estate allottees were neither recognised as the creditors of a company nor, consequently, was there any claim form to be filed by them during the corporate insolvency resolution process (CIRP) of a company.
Due to protest by the real estate allottees in 2017, after initiation of the CIRP of JIL, wherein a demand was made that the real estate allottees be made financial creditors to participate in the committee of creditors (CoC) that takes a decision with respect to the resolution of a company under IBC. Thus, a special treatment was given to the real estate allottees when, firstly, the Insolvency & Bankruptcy Board of India (IBBI), on 17 August 2017, inserted ‘Form F’ in the Insolvency And Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (CIRP Regulations) that was to be filed by other creditor (means a creditor other than a financial creditor or operational creditor).
However, still, only financial creditor and operational creditor were entitled to file an application to initiate CIRP under IBC of a corporate debtor and, thus, no such rights were available to the ‘other creditor’. Therefore, the Indian government amended IBC, with effect from 6 June 2018, to make the real estate allottees a ‘financial creditor’ under IBC by amending the definition of ‘financial debt’. Consequently, the ‘Form CA’ and other regulations to facilitate the appointment of the representatives of real estate allottees were enacted by IBBI in CIRP Regulations on 3 July 2018. The definition of ‘financial creditor’ was also amended to include the 'allottee' of 'real estate project' as defined in the Real Estate (Regulation and Development) Act, 2016 (RERA).
When Buyer Funds Become Project Finance: Understanding the Role of Customer Advances
The customer advance is one of the sources to finance the business operations in any industry but in project-specific real estate companies, customer advance is the main source of revenue/ funding.
The position of customer finance in real estate projects is, however, somewhat different. This includes seller company (seller company), the lender to the seller company who provides project finance to the seller (project lender), the allottee, i.e., buyer of flat/ real estate unit (allottee) and the bank/ financial institution finances the purchase of unit by the allottee (allottee’ bank).
As a practice, when an allottee takes a loan from the allottee bank to finance the purchase of his unit in a real estate project, often a tripartite agreement is entered amongst the seller company, the allottee and the allottee’s bank whereby the seller company confirms that the allottee’ bank has charge over the unit. For this purpose, a no-objection certificate (NOC) is issued by the project lender to the allottee/ allottee’ bank thereby creating the allottee’s rights over the unit agreed to be purchased.
In this regard, it is pertinent to see the definition of ‘security interest’ given in Section 3(21) of IBC as under:
“(31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person:
Provided that security interest shall not include a performance guarantee.”
Thus, from the date of such a unit being purchased by an allottee wherein an NOC has been issued by the project lender to an allottee/ allottee’s bank, the said allottee/ allottee’s bank has security interest in the unit purchased by him. In such a case, the rights of an allottees on the unit purchased by him are pari-passu (if not superior to that of the project lender) provided that is no default in payment by the allottee as per agreed contract. Consequently, in such a case, the allottee is a secured creditor under IBC with respect to the unit purchased by him.
Are Home-buyers Truly Protected? The Legal Paradox of Being a ‘Financial Creditor’
The decision of the Indian government to classify the allottee as the financial creditor was challenged before the Supreme Court in a number of petitions. The Supreme Court, while examining the constitutional validity of the said IBC amendment in case of “Pioneer Urban Land and Infrastructure Limited & Anr. v/s Union of India & Ors. [Writ Petition (Civil) No. 43 of 2019]”, made an observation (but without proper adjudication) that “True, allottees are unsecured creditors, but they have a vital interest in amounts that are advanced for completion of the project, maybe to the extent of 100% of the project being funded by them alone.”. Most importantly, in “Pioneer Urban Land (supra)” the Supreme Court completely ignored the existing contract between the allottees, seller company and the allottee’ banks as discussed hereinabove that resulted in diluting the contractual rights of the allottees without giving any hearing to the allottees.
Notably, whereas basis the decision of the Supreme Court in “Pioneer Urban Land (supra)”, everyone started classifying the allottee as ‘unsecured creditor’, but nobody conveniently identified the “speculative investor” and misuse of IBC by them until recently in the matter of “Mansi Brar Fernandes v/s Shubha Sharma And Anr. [Civil Appeal No. 3826 of 2020]”.
In “Mansi Brar Fernandes (supra)”, the Supreme Court reiterated that speculative investors cannot initiate the CIRP of a company under Section 7 of IBC. However, such speculative investors are entitled to file a claim before the resolution professional during the CIRP of a company to claim their dues from the company. Notably, under Section 50 of IBC, a resolution professional can challenge extortionate transactions during the period within two years preceding the insolvency commencement date (now proposed as two years from insolvency initiation date, i.e., date of filing the insolvency petition). Pertinently, most the speculative investment transactions take place at the initial stage of the project. Thus, neither this judgement nor Section 50 of IBC shall help in controlling the extortionate credit which sometimes become a reason for making a real estate project unviable.
The worst part of Section 50 of IBC is that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall, in no event, be considered as an extortionate credit transaction. This clearly shows an impractical approach because only a service provider can provide legitimate debt and RBI does not regulate the rate of interest in financial transactions. Thus, any party regulated by RBI or the Securities Exchange Board of India (SEBI) can fund a project at a higher rate of return and such a transaction will remain outside the scope of Section 50 of IBC. It has been observed that certain investment funds and non-banking financial companies (NBFCs) which extend facilities to real estate companies do charge interest rates and penal charges on default which can exceed even 50% per annum; however, the same cannot be termed as extortionate since these entities are regulated. It is therefore recommended that extortionate transactions even from the regulated entities, which have a disproportionate claim over the project, should not be allowed.
The Supreme Court in “Mansi Brar Fernandes (supra)” again reaffirmed that the ‘Right to Shelter’ is an integral part of the right to life under Article 21 of the Constitution of India. The Supreme Court also empathised with allottees having invested their lifelong savings in pursuit of a home, many are compelled to shoulder a double burden – servicing EMIs on one hand, and paying rent on the other – only to find their 'dream home' reduced to an unfinished building. In some cases, construction has not even commenced despite full or substantial payment.
In another case of “Himanshu Singh & Ors versus Union of India & Ors [Special Leave to Appeal (C) No(s).7649/2023,29-04-2025]”, the Supreme Court has ordered the registration of an FIR by the central bureau of investigation (CBI) after investigation into a builder-banks nexus exploiting homebuyers in the national capital region of Delhi, on petitions filed by homebuyers who claimed that they were being forced by banks to pay EMIs without having obtained possession of flats due to a delay by the builders/ developers. It is pertinent to note that project lenders evaluate the project and have an arrangement with the seller company. However, the individual buyer (allottee) suffers as his financial record becomes poor in the CIBIL record if he chooses not to pay EMIs to the allottee’s bank. At the same time, the possession of the unit for the amount paid remains only a distant dream.
Flawed Protection: How CIRP Implementation Undermines Home-buyer Rights
Under IBC, a resolution professional is required to run the operations of a company on a going concern basis. Further, even a resolution plan under IBC is made on a going concern basis wherein the business is to be carried on and in case of real estate companies, the project is to be completed and existing buyers be given their constructed unit. Of course, such a resolution plan must offer the unit to the allottees on a pre-agreed price, but, in most of the cases of IBC, it is not so. This is nothing but a fraud on the allottees wherein they are forced to pay extra money for no reason attributable to the allottees.
Now, after several years of IBC, in February 2025, IBBI has inserted regulation 4-E in the CIRP Regulations to state that the resolution professional, after obtaining the approval of the CoC with not less than sixty-six percent of total votes, shall hand over the possession of the plot, apartment, or building or any instruments agreed to be transferred under the real estate project and facilitate registration, where the allottee has requested for the same and has performed his part under the agreement. This is another fraud on the allottee wherein the permission of CoC is being imposed whereas during the CIRP the business is carried on by the resolution professional on a going concern basis which requires handing over/ registration of completed units. This is nothing but another hurdle created for the allottees to give undue advantage to the project lender who often controls the CoC.
More importantly, unlike the allottees, the project lender funding to a real estate company, is required to monitor the cash-flow and, thus, for any fraud/ diversion, such a project lender must be held accountable and responsible. But the current regime under IBC has protected such project lenders (and gives them more power to squeeze the allottees) by allowing them to participate and control CoC and the allottees are being left to suffer for, if not fraud, then definitely, the negligence of the project lender who lent money to real estate companies.
Notably, most of the companies under IBC are cases of mismatch in assets & liabilities whether caused by fraud. Further, since the allottees were classified as the unsecured creditors, they were told they are not entitled to any liquidation value as in most cases the secured creditors, i.e., project lenders are not paid in full. This, definitely, placed the allottees in a disadvantageous position even though they were made part of the COC.
Misuse of IBC for real estate companies has become evident from the fact that, as per the judgement of the Supreme Court in “Mansi Brar Fernandes (supra)”, the real estate section is the second largest sector in the IBC. It is not the case that the Indian government or IBBI is unaware of this problem which is evident from the fact that recently the Hon’ble Union housing & urban affairs minister, viz., Manohar Lal Khattar remarked that NCLT has not been able to improve the system, as was envisaged. Notably, NCLT alone cannot resolve this problem and it requires efforts from various other facets of the government, especially IBBI as hereinafter explained.
The real problem (or benefit of bringing a real estate company into IBC) is that the regulator/ IBBI is doing nothing (except self-praise activities) and IBC has become a washing machine of white-collar crime wherein after diverting funds, the real estate company is left in IBC and no criminal prosecution (for whatever reason) takes place under various criminal provisions of IBC which only the IBBI or the ministry of corporate affairs (MCA) can do. The best reason for the same is the non-availability of records which the promoter often does not provide to the resolution professional despite a duty under the IBC and the Companies Act, 2013 and IBBI remains a mute spectator despite effective provisions in the IBC like Section 70(1) of the IBC.
Other ongoing fraudulent practices in IBC include the valuation and denial of units to the allottees who failed to file their claim. This interlinked fraud is clarified with the help of the following illustration:
- ABC Ltd has gone into CIRP under IBC.
- ABC Ltd has a single project comprising 100 units.
- As part of his duties, the resolution professional will take stock of all sold/ unsold units.
- The details of such sold/ unsold units will be informed to the valuers too.
- The valuers will, while doing valuation, include only the net amount receivable from a sold unit for the purpose of valuation. Thus, both the resolution professional and the valuer know if the unit is sold/ unsold and if sold, the value of the project will be lower.
Thus, under these circumstances, it is unclear as to how a resolution professional can exclude an allottee as a ‘unit holder in real estate project’ while preparing the ‘information memorandum’ especially when details of such an allottee are already provided to the valuers and, consequently, the valuers have reduced the valuation of the project due to such sold units.
It is trite law that even after cancellation of the unit, an allottee remains an allottee under the RERA. Thus, it remains a puzzle as to how an allottee is being excluded as a financial creditor by the resolution professional during the CIRP of a company under the IBC simply for not filing the claim. More importantly, such a treatment in the resolution plan is discriminatory wherein persons in the same class of creditor are provided different treatment in the resolution plan. IBBI must take stock of the same as they have access to the entire data of the resolution professionals and the valuers so that corrective actions are being taken in this matter.
Presently, many resolution plans under IBC are providing no unit or lower refund to bona fide allottees who fail to file their claims under IBC whereas the resolution professional must know (or knows) about such an allottee as a unit was counted for the purpose of valuation of the company. This happens even when the valuation of a project has gone up on account of an increase in land prices or FAR. Such resolution plans are nothing but a double fraud on the allottees under the IBC as, on the one hand, value is reduced due to a sold unit and then such a buyer is not provided the unit simply for not filing the claim.
IBC also has impractical provisions relating to inadequate fees to the authorised representatives of the allottee. Again, the independence of such authorised representatives becomes a big question if they are also working as resolution professionals for other bankers who form part of the CoC.
CIRP Regulations allow interest at the rate of 8% per annum to allottees in cases where no interest rate is mentioned in the agreement between the allottee and the seller company. Recently, the Supreme Court in “Rajnesh Sharma v/s M/s Business Park Town Planners Ltd. [Civil Appeal No. 3988 of 2023]” advocated the same rate of interest for the allottee as was charged by the builder on the grounds of reasonableness in case of delays of project. This lower rate of interest of 8% to the allottees under IBC is completely unfair as the lenders’ interest at higher rates grows till the CIRP start date. It is necessary that this disadvantage to the allottees is remedied by matching it with the rate charged by the banks or as allowed by the Supreme Court in “Rajnesh Sharma (supra)”. This will also give a fair and level playing field to the allottees in the COC.
Call for Reform: Making IBC Work for Home-buyers, Not Just Creditors
Home-buyers, whose payments provide return on and return of the debt and equity capital, deserve a pedestal above secured financial creditors. Though the apex court has progressively created good precedents for homebuyers, IBC does not do justice to them as can be seen in “Mansi Brar Fernandes (supra)” where the SC’s directions for protecting the interest of the real estate allottees cannot be achieved until the regulators such as IBBI and RERA perform their duties effectively.
Further, the lack of information/ document sharing, deliberate or otherwise, by the promoter to the insolvency professional is an uncontrolled weapon used to make sure that nobody should be able to detect the wrongdoing of the promoters under the IBC. This has huge time and cost implications. IBBI has failed to address this problem. Hence, IBC for real estate needs to be revisited and amended for speedy resolutions where entities responsible for financial distress bear the brunt of the insolvency and the innocent home-buyers get their due.
(Jitender Kumar Jain is a Mumbai-based advocate with over two decades of practice in corporate and commercial laws, including insolvency law. Dr Rajendra M Ganatra, ex-MD&CEO of an ARC & an insolvency professional, has over four decades of experience in industry & financial services.)
