How the Insolvency and Bankruptcy Code reshaped the position of homebuyers in distressed real estate projects — and what it means in practice.
The Insolvency and Bankruptcy Code, 2016 (IBC) recognises homebuyers as financial creditors in real estate insolvency proceedings in India. This means homebuyers can participate in the Corporate Insolvency Resolution Process (CIRP), vote through an authorised representative in the Committee of Creditors (CoC), and influence decisions about the fate of a stalled project. The recognition follows the Supreme Court’s ruling in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), which held that advance payments by homebuyers have the commercial effect of borrowing and qualify as financial debt under Section 5(8)(f) of the IBC. While homebuyer rights have significantly strengthened, insolvency proceedings in real estate remain complex — balancing the competing interests of lenders, developers, and large groups of purchasers — with project completion increasingly preferred over liquidation.
This Article is a part of our The Complete Guide to NCLT in India: Powers, Structure, and Jurisdiction Blogpost.
The Indian real estate sector has witnessed significant growth over the last decade, but it has also faced financial distress. Delayed projects, funding shortages, regulatory challenges, and developer insolvencies have left thousands of homebuyers uncertain about the fate of their investments. For many individuals, purchasing a home represents a lifetime of savings, making the consequences of a stalled project particularly severe.
The introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) fundamentally changed the landscape of real estate insolvency in India. The Real Estate (Regulation and Development) Act, 2016 (RERA), enacted in the same year, introduced complementary protections including mandatory project registration, ring-fenced escrow accounts for project funds, and statutory remedies for allottees; developments that must be read alongside the IBC framework. One of its most significant developments was the recognition of homebuyers as financial creditors, granting them a meaningful voice in insolvency proceedings involving real estate developers.
This shift has reshaped the relationship between developers, lenders, investors, and homebuyers, while influencing how distressed real estate projects are resolved.
Why Were Homebuyers Recognised as Financial Creditors?
Before the legislative changes under the IBC, homebuyers often found themselves in a difficult position when developers defaulted. Although they had invested substantial amounts into a project, they lacked effective participation in insolvency proceedings and had limited influence over decisions affecting the project’s future.
To address these concerns, the law was amended to clarify that amounts raised from homebuyers in a real estate project would be treated as financial debt under Section 5(8)(f) of the IBC. This meant that homebuyers were no longer viewed merely as purchasers awaiting possession but as stakeholders whose funds had contributed to financing the project. However, the subsequent Insolvency and Bankruptcy Code (Amendment) Act, 2020 introduced an important procedural threshold under Section 7(4A): insolvency applications by allottees may only be filed by a minimum of 100 allottees or 10% of the total number of allottees of that real estate project, whichever is lower. This threshold was introduced to prevent vexatious filings but has been criticised as an unreasonable barrier to access for individual homebuyers.
The rationale behind this recognition was subsequently affirmed by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), where the Court upheld the constitutional validity of the amendment recognising homebuyers as financial creditors. The Court observed that the amounts paid by allottees are often used by developers as a significant source of financing for construction and project development, thereby justifying their classification as financial creditors under the IBC.
The amendment recognised a commercial reality: developers frequently rely on advance payments from purchasers to fund construction and development. Consequently, homebuyers have a legitimate financial interest in the outcome of the resolution process and are entitled to participate in insolvency proceedings affecting the projects in which they have invested.
What Does This Mean for Homebuyers?
The recognition of homebuyers as financial creditors significantly strengthened their position during insolvency proceedings.
Most importantly, homebuyers gained the ability to participate in the Corporate Insolvency Resolution Process (CIRP) and influence decisions regarding the future of the project. They are also represented in the Committee of Creditors (CoC), which evaluates and approves resolution plans. Importantly, under Section 25A of the IBC, homebuyers exercise their CoC voting rights through an authorised representative appointed by the Insolvency and Bankruptcy Board of India (IBBI), rather than directly. Their collective voting share reflects the aggregate financial debt owed to the class of allottees, which may be significantly diluted where institutional lenders hold larger debt positions.
Homebuyers are entitled to receive updates regarding the insolvency process and proposed resolution plans, improving transparency and reducing uncertainty.
While these rights have improved their position, insolvency proceedings remain complex and often involve balancing competing interests among multiple stakeholder groups.
Balancing the Interests of Homebuyers, Lenders and Developers
Real estate insolvency presents unique challenges because a single project may involve banks, financial institutions, investors, contractors, and hundreds or even thousands of homebuyers.
Financial institutions typically focus on maximising recovery, while homebuyers often prioritise obtaining possession of their homes rather than receiving refunds. Developers may seek restructuring solutions that preserve project viability.
Indian courts have repeatedly emphasised that insolvency proceedings should not be viewed solely as debt recovery mechanisms. Instead, the objective is to achieve a resolution that maximises value for stakeholders and, wherever possible, ensures project completion.
This approach is particularly important in real estate, where unfinished projects often lose substantial value and liquidation rarely benefits any stakeholder group.
The Judicial Shift Towards Homebuyer Protection
The evolution of homebuyer rights has been shaped by both legislative reform and judicial intervention.
In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, the Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which recognised allottees in real estate projects as financial creditors. The Court held that amounts raised from homebuyers have the commercial effect of borrowing and therefore fall within the definition of “financial debt” under Section 5(8)(f) of the IBC.
Similarly, in Chitra Sharma v. Union of India, arising from the insolvency of Jaypee Infratech Limited, the Supreme Court emphasised the need to safeguard the interests of thousands of homebuyers who had invested their life savings in delayed housing projects. The decision highlighted the vulnerability of homebuyers and the necessity of ensuring their meaningful participation in the resolution process. The RERA-IBC jurisdictional interface was further addressed by the Supreme Court in Union Bank of India v. Rajasthan Real Estate Regulatory Authority (2022), where it held that once a CIRP is admitted by the NCLT, the IBC framework operates with primacy, and RERA authorities cannot issue directions inconsistent with the moratorium under Section 14 of the IBC. This ruling has significant commercial implications for lenders, developers, and resolution professionals navigating concurrent regulatory regimes.
The insolvency proceedings involving Jaypee Infratech Limited, culminating in Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd., demonstrated the complexities of resolving distressed real estate projects. While the Supreme Court did not approve the proposed resolution plan, it instead reverted the matter back to the Committee of Creditors (CoC) to seek fresh bids. It firmly established that project completion is preferable to liquidation.
Together, these developments have strengthened homebuyer protection under the IBC while preserving the broader objective of value maximisation.
Challenges That Continue to Affect Real Estate Insolvency
Despite these developments, real estate insolvency remains one of the most challenging areas within the insolvency framework.
A major challenge is the sheer number of stakeholders involved. Coordinating the interests of large groups of homebuyers alongside institutional lenders and other creditors can complicate decision-making.
Project delays create additional difficulties. By the time insolvency proceedings commence, construction may have been halted for years, approvals may have lapsed, and funding requirements may have increased significantly.
Valuation is another challenge. Incomplete projects often have limited immediate value despite substantial investments already having been made. As a result, liquidation is generally viewed as an undesirable outcome.
Implementing an approved resolution plan can also be difficult, requiring fresh funding, regulatory approvals, and effective stakeholder coordination. A further structural challenge is the CIRP timeline. The IBC prescribes a 180-day resolution period, extendable to 330 days in exceptional cases under Section 12, but real estate insolvency proceedings have consistently exceeded these limits due to the complexity of large multi-creditor processes. Protracted proceedings erode project value, increase carrying costs, and worsen outcomes for all stakeholders. The NCLT’s capacity constraints and the volume of real estate CIRP cases have amplified these delays in practice.
Recent Trends in Real Estate Insolvency
Recent developments indicate a growing focus on project completion rather than liquidation.
Courts and regulators increasingly recognise that completing construction and handing over possession to homebuyers is often the most effective solution for distressed projects. This approach protects purchasers while preserving value for lenders and investors.
There is also greater scrutiny of developers’ financial practices, project management, and utilisation of customer funds. Transparency, governance, and regulatory compliance have become increasingly important.
Another emerging trend is the growing role of investors and resolution applicants willing to revive stalled projects through restructuring and fresh capital.
Practical Takeaways for Stakeholders
For Homebuyers: Homebuyers should stay informed about project developments and the financial position of developers. Active participation in insolvency proceedings can help protect their interests. Homebuyers should also consider whether RERA-based remedies including the right to seek refund with interest under Section 18 of RERA in the event of the developer’s failure to deliver possession may be more appropriate in their specific circumstances. The choice between pursuing RERA remedies and initiating or participating in CIRP proceedings under the IBC involves material trade-offs and specialist legal advice is strongly recommended before committing to a procedural path.
For Developers: Developers should treat insolvency risk as a governance concern. Transparent fund utilisation, regulatory compliance, and effective stakeholder communication can reduce disputes and financial distress.
For Financial Institutions: Lenders should consider homebuyer interests when assessing risk exposure. Due diligence should cover project execution, compliance, and stakeholder management.
For Investors: Investors in distressed real estate should recognise that successful resolutions often depend on project completion and stakeholder cooperation rather than liquidation.
Looking Ahead
The recognition of homebuyers as financial creditors represents one of the most significant developments in India’s insolvency framework. It reflects an evolving approach that balances commercial realities with consumer protection.
While challenges remain, courts, regulators, and market participants are increasingly prioritising solutions that preserve value, facilitate project completion, and protect stakeholder interests.
For developers, lenders, investors, and homebuyers alike, the modern real estate insolvency framework underscores an important principle: successful resolution is most likely when the interests of all stakeholders are considered collectively rather than in isolation. As the sector continues to evolve, insolvency proceedings are expected to become more structured, transparent, and focused on delivering practical outcomes for all parties involved.
