RERA and the IBC to the rescue of homebuyers


The Insolvency and Bankruptcy Code (Amendment) Bill 2017  was passed by the Lok Sabha to form the base for covering loopholes in prevailing code and to increase the effectiveness of the resolution. The Bill tends to amend the Insolvency and Bankruptcy Code (IBC), 2016, and acts as a substitute to an Ordinance promulgated in November 2017.

The Insolvency and Bankruptcy Amendment (Ordinance) Act, 2018 got the approval of President on June 6. With a view to balance the interests of different stakeholders, particularly the interests of home purchasers, the amendment to the code was brought about.

With regards to insolvency procedures of an organization engaged with real estate development, this amendment benefits homebuyers by treating such purchasers as financial creditors under the Code.

Preceding the Ordinance, homebuyers were treated as an ‘unsecured creditors’ and not regarded as financial creditors or as operational creditors, on account of which they were not ready to initiate insolvency proceedings against a defaulting builder.

If there should arise an occurrence of a builder confronting liquidation, according to the liquidation waterfall, homebuyers would get just the balance proceeds subsequent to paying off insolvency costs, financial creditors, workmen dues and government dues.


By virtue of this ordinance, homebuyers are presently delegated as an ‘allottee’ under a ‘real estate project’. The two terms have their particular implications as defined under Real Estate (Regulation and Development) Act, 2016 (RERA).

Any sum raised from an allottee under a real estate project is considered to be a sum having the commercial impact of a borrowing. In this way, under the Code, the sums paid by homebuyers to a builder will be dealt with as financial debt and homebuyers will be categorized as financial creditors.

In the shoes of a financial creditor, home purchasers can individually or jointly file a petition to start insolvency proceedings against a defaulting builder company.

Default Defined

Despite the fact that the amendment has categorized the homebuyer as a financial creditor, the meaning of the term ‘default’ opposite a homebuyer has not been revised. Subsequently, to identify when the default has happened, we should take recourse to RERA.

Section 18 of RERA gives a decision to homebuyers to either pick the ownership of a house or to look for a refund.

Section 18, in addition to other things, expresses that a builder is at risk to refund the sum got by him in regard to the apartment, with interest, or he should pay interest for each month of postponement till ownership is handed over, on request by the allottee. The section additionally contemplates compensation to be paid to homebuyers in situations where the real estate venture has a faulty title or the builder neglects to fulfill his obligations under RERA.

Notification to the guidelines by States add to the lucidity. For instance, Rule 19 of the Tamil Nadu Real Estate (Regulation and Development) Rules, 2017, endorses the courses of events for refund, and sets out that the refund might be given by the builder within 90 days from the date on which it becomes due.

Thus, a default could be said to happen on the completion of 90 days from date of demand of refund or interest becoming due.

Financial debt

The word ‘financial debt’ well-defined under the Code has been amended to incorporate any sum raised by a builder from an allotee under a real estate projects and these sums are regarded to have the commercial impact of a borrowing. In this manner, contract entered into by homebuyers with builders would fall under the meaning of ‘financial debt’ and the default envisaged under RERA will qualify home purchasers to start proceedings under the Code.

After the commencement of the insolvency proceedings against the builder ,the homebuyer can present his claim to the selected interim resolution professional.

Additionally, any authorized representative elected at the meeting of the Committee of Creditors can represent homebuyers as a category of creditors.

In spite of the fact that the target of the legislation is determination and not recovery, it is workable for the real estate developer organization to go under the procedure of liquidation. In such a case, the place of the homebuyer in the liquidation cascade has been raised, where they would be dealt on par with the other financial creditors.

Disclaimer – The readers are expected to take expert opinion before placing reliance on it.

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