The Status of Homebuyers as Financial Creditors: Is the Law Clear?

By Ayushi Bhutra, Student at National Law University, Nagpur

The rights of homebuyers under insolvency proceedings have been under the scanner for a while. Earlier, the homebuyers were under the head ‘other creditors’ and they did not fall under the category of ‘financial’ or ‘operational creditor’. However, the legislature through the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018 has brought the allottees as per RERA under the category of Financial Creditors. This was constitutionally challenged before the Supreme Court of India in the case of Pioneer Urban Land & Infrastructure v. Union of India. However, the Supreme Court has upheld the validity of the amendment and stated that there is nothing wrong in this classification. Through this article, I argue in disagreement with the Supreme Court judgment and will also lay down the reasons of such disagreement.

The Fiction

The amendment act has inserted an explanation to Section 5(8)(f) and created a fiction that all amounts that are raised from the allottees shall be ‘deemed’ to be having commercial effect of borrowing. As interpreted by the Supreme Court, the advance payments made by the allottees qualifies as financial debt, however, if that was the case, this explanation which creates a deemed effect was not required.

In cases where the developer is financing its project through funding obtained through the financial institutions or banks in the form of loans and the money obtained by the allottees to pay off those loans, then in such cases, the advance payment by allottees ideally should not be considered  financial debt. It is because the money will not contribute directly towards financing of a construction project rather that money would be used to pay off the loans.

Therefore, this deeming effect will cause the classification of all the payments made by an allottee as a financial debt under Section 5(8) irrespective of the use of such funds because of the deemed fiction clause.

Why Allottees Should Not Be Considered Financial Creditors?

The pre-requisite to qualify as a financial creditor is that it should be owed towards a financial debt that means against the time value of money. The money paid as advance payments made by the allottees does not qualify as financial debt. In the case of Nikhil Mehta &Sons v. AMR Infrastructure, NCLAT held the committed returns as consideration of time value. The reasoning given was that the committed returns that was paid till the time of transfer of possession was to be considered as returns for the advance payments made by the allottees.

However, in the Pioneer Case, the Supreme Court has defined the term ‘time value of money’ in an erroneous way. They have defined the phrase in dissonance with the authorities that they cited themselves. For instance, the definition as provided in Black Law’s Dictionary, which stated “price associated with the length of time that an investor must wait before an investment matures or the related income is earned. Therefore, according to this definition, the primary intention of a creditor in financial debt is to earn money on money with time. However, in case of real estate allottees, the money paid by them majorly is for purchasing of property. Merely because the allottee obtains a better deal when it pays in advance would not classify it as against time value of money. The main objective of allottees is to obtain a flat rather than money or consideration for the advance money paid by them.

If the interpretation of this phrase is to be adopted, it would dilute the differentiation between a financial and operational creditor completely. It is to be noted that every business transaction would include transactions which would qualify as ‘against time value of money’ if this is to be considered as per this interpretation given in the Pioneer Case. For instance, when advance payment is taken to sell goods. In such cases, there might be some discount given but it would still not be classified in the group ‘against the time value of money’ because the intention was to purchase goods rather than earn something on the payment. If this logic of the Court is to be accepted, then tomorrow the insurers would seek protection under IBC as financial creditors as the premium charged can be compared to as advance payments. Both of these payments are to secure something of higher value than the value paid.

Therefore, the judgment has erred in upholding the classification of allottees under RERA as Financial Creditors.

Secured or Unsecured Creditor?

Although the amendment act and the Pioneer case has classified the allottees under RERA as financial creditors. However, whether these financial creditors were to be considered as secured or unsecured creditor was left open. Therefore, the allottees will have to prove in front of NCLT based on the agreement between the developer and allottee whether they fall under the category of secured or unsecured creditor. This point is of specific importance because this would decide the hierarchy of payments at the time of liquidation as per Section 53 of IBC. If the allottees are to be considered as unsecured creditors, they will stand much lower in the line than the secured financial creditor.

As per Section 3(30) of the IBC, a creditor is a person in whose favour a security interest is created. Security interest as per Section 3(31) of the IBC is creation of any right, title, interest or claim to property created in favour of a secured creditor in any form. As per the definition, it can be inferred that homebuyers should be considered as secured creditors because a right, title, interest and claim is created on the flat to be allotted in the favor of the homebuyer.  

Meaning of Default

The definition of the term default in case of allottees is undefined and the Act has not been amended to cater to the specific needs of the allottees. Section 6 of the Act lays down that a financial creditor can initiate CIRP proceedings for any default. The meaning of default is referred as to default in payment of monies by the corporate debtor to the financial creditor. However, this meaning cannot be considered as relevant or applicable to allottees as generally the money is payable to the allottees when the developer terminates the agreement. However, this does not happen if the developer has caused delay. Moreover, the definition of default comes into play when the allottee demands money. Therefore, this is an open-ended problem which has not been addressed by the Act.

Misuse & Excessive Litigation– Amendment Act, 2020

The amendment and subsequently the Pioneer Judgment has recognized the allottees as financial creditors. After the homebuyers/allottees endured this status, a total of 1,821 cases have been filed by them against the developers for alleged defaults. The developers have claimed that the allottees were misusing the laws and filing fraudulent petitions.

Hence, the Insolvency and Bankruptcy Code (Amendment)Act, 2020 came into effect which provided a threshold limit for allottees to file the application. Section 7 of the act laid down that for initiating CIRP process by allottees, the application has to be jointly filed by at least 100 or 10% of the allottees under the same real estate project. However, the practical challenges with such amendment are huge and real.

One of the arguments against this amendment is that this would effectively bar the jurisdiction of the NCLT to initiate proceedings. There are less number of allottees who actually take the legal route and hence, this threshold would be problematic for those who want to initiate the legal proceedings. Moreover, the costs involved in conducting search for data for all those who want to file a CIRP and to coordinate would be a huge challenge. Hence, this amendment practically will bring down and limit the remedy provided in the IBC and Pioneer case to a large extent.


The amendment including the allottees as a financial creditor was a step to boast the remedies available to them. However, the reasoning given by the Supreme Court in Pioneer case to include the debts of allottees as financial debts was unsustainable because of the interpretation of the phrase ‘against the time value of money’. Moreover, the amendment act failed to consider important questions as to whether the allottees would be considered as secured or unsecured financial creditors and the meaning of default and whether it would include delay in handing of the possession. Hence, there is a need for further amendments to clarify these points.

Moreover, due to the problem of misuse of the law and excessive litigation, the threshold in the 2020 Amendment Act would deprive the allottees to file an application under IBC. This would indirectly bar the allottees to file an application because the threshold set is too high. In conclusion, the developers will benefit from this amendment since the number of applications under the IBC would be considerably low and the allottees would be left to choose other remedies. Therefore, there is a need for clarity by the Parliament and judiciary with respect to homebuyer’s rights.