Placing Homebuyers Under the Category of Secured Financial Creditors Under The IBC, 2016

By Ranu Tiwari

The Background

The Insolvency and Bankruptcy Code (Amendment) Ordinance 2018 has brought home buyers under the ambit of ‘financial creditors’. The Insolvency Law Committee (March 2018) concluded that the current definition of ‘financial debt’ is sufficient to include the amounts raised from home buyers/allottees under a real estate project, and hence, they are to be treated as financial creditors under the Code. Therefore, an explanation to section 5(8)(f) was inserted in the Insolvency and Bankruptcy Code, 2016 [“the Code”]. Accordingly, in the Corporate Insolvency Resolution Process [“CIRP”], they will be a part of the Committee of Creditors, will be represented in a specified manner and in the event of liquidation, they will fall within the relevant entry in the liquidation waterfall under section 53. This amendment was a result of a slew of cases wherein the homebuyers invested large sums of money in real estate projects but they could not get the possession. Few examples include the Amrapali case, Jaypee Infratech case and the Supertech case.[i]  The move by the government is laudable but there are certain issues of concern especially when insolvency proceedings commence against the project developers.

The home buyers are the worst affected in these situations wherein they would be left without a remedy if the term of moratorium under section 14 of the Code has commenced because now the only way to recover their investments would be through the CIRP. The liquidation proceedings become the last resort for the homebuyers who had put in their hard-earned investments to secure a home for themselves in such cases. A home for the family is a basic human yearning and has been held by the Supreme Court to be a part of the right to life, as a fundamental constitutional guarantee.[ii]

The Supreme Court while recognising the homebuyers as financial creditors, has left the question open as to whether the homebuyers are secured or unsecured creditors.[iii] Injeti Srinivas, the Chairman of the Committee that brought about the above discussed amendment, has said that the onus to prove themselves as secured or unsecured creditors will lie upon the homebuyers.[iv] Certain experts have pointed out that the nature of contract with the builder will determine the position of the homebuyers.[v] M.S Sahoo, the chairman of IBBI, also supports this view, holding that the buyer builder agreement will determine the nature of rights which will be conferred upon the homebuyer.[vi] This is important because if they are treated as unsecured financial creditors, then the proceeds after the insolvency process might not reach them, as banks and other secured lenders stand atop the unsecured creditors as per section 53. The government should clarify their position by making a suitable amendment in the relevant sections in the Code, i.e., section 2(31) which defines security interest and section 53 (distribution of assets). While this might take time, the question regarding the ongoing cases remains the same.

Decoding the Existing Provisions in the IBC

The author argues that homebuyers can be brought under the category of secured financial creditors in various ways. The biggest recourse is provided in the Code itself.

The Code exhaustively defines security interest.[vii] The intent behind the creation of a security interest is to secure the payment and also to “secure the performance of an obligation”. Performance of an obligation may be described as “a promise by a party or all parties in a contract between the parties to perform their part under the contract”.[viii] Performance of an obligation may include the supply of goods or services, assets or funds or even liability under a contract or to do something or refrain from doing something for consideration.[ix] The possibility to create all-encompassing security is further underlined by the subsequent recommendations, according to which the secured obligation may be present or future, determined or determinable, conditional or fluctuating, while a security agreement may encumber any type of asset, present or future.[x] A security interest may be perfected in one of two ways: by possession, and by filing.[xi]

The difficulty here that is encountered is the absence of collateral or the security interest. One way of resolving this could be through considering the real estate allottees as charge-holders of the lands on which the project is proposed by the builder. Charge on an immovable property is created to secure payment of money.[xii] It does not amount to any transfer of interest.[xiii] It can be created by the act of parties or by operation of law.[xiv] So, when a homebuyer finances a housing project, the law can make such an interpretation to realize their claims.

Following this, if there exists an agreement between the builder and the buyer, it can help in perfecting the security interest. An agreement to construct houses in return for money can be said to be the performance of an obligation and can be brought under the ambit of security interest.

The Need for Scheme

The interests of homebuyers cannot be jeopardised by putting them at a lower hierarchy of preferences in case of liquidation. The single step of putting the homebuyers over and above the banks in Section 53 of the Code will restore their shattered confidence and will pave the way for an increased FDI in this sector which is the need of the hour.[xv]

The judicial trend supports the case of homebuyers as well. In Jaypee Orchard Resident Welfare Society v. Union of India,[xvi] it is heartening to note that the Hon’ble Chief Justice of India assured that the Supreme Court would do everything possible to protect the interest of the homebuyers. The Chitra Sharma decision of the Apex Court has also highlighted the need for protection of homebuyers.[xvii] Taking a cue from the above decisions,, in the case of Amish Jaysukhlal Sanghrajka v. Akshar Shanti Realtors (P.) Ltd,[xviii] the Hon’ble Supreme Court reiterated a similar view wherein it advocated that the letter and spirit of the Ordinance, as well as pronouncements that have been made by the Apex Court, is that the homebuyers’ rights shall not be violated.

A tool of statutory interpretation can also be of great help here. In cases on the present issue, the principle of “purposive interpretation” or “purposive construction” can be invoked by the judiciary. This method is based on the understanding that the court is supposed to attach that meaning to the provisions which serve the “purpose” behind such a provision.[xix] To put it otherwise, by the interpretative process the court is supposed to realise the goal that the legal text is designed to realise. The provisions of the IBC can be purposively interpreted to sought the object of protecting the home buyers, as this aligns with the spirit of the Code as well as the various precedents set by the Courts.


The IBC is indeed a game changer in providing quick mechanisms in cases pertaining to insolvency. The recent amendment is a major policy decision which the government took after a few high profile cases highlighted the conundrum which the homebuyers have to deal with, after a builder goes bankrupt. Grave injustice is committed when the rightful property owners who often have to take loans and give in all their savings are left in a lurch with no hope of getting their money back. The need now is to strengthen the mechanism further by classifying these financial creditors as ‘secured creditors’ as well in cases wherein the contractual relationship establishes the creation of security interest. The security interest can be established by considering them as charge-holders of the land (the proposed site of the construction of their house). This move is needed to help the real drivers of the real estate business and address the injustice meted out to them.

The author is a 3rd year student, pursuing her law degree from the Maharashtra National Law University, Nagpur.

[i]No home, No vote vow angry home-buyers in Noida duped by builders, New Indian Express (Dec. 18, 2018),

[ii] M/s.Shantistar Builders v. Narayan Khimalal Totame, (1990) 1 SCC 520.

[iii] Chitra Sharma & Ors. v. Union of India and Ors., (2018) 18 SCC 575.

[iv] K. R Srivats, Why the Centre has not classified home buyers as ‘secured’ or ‘unsecured’ creditors under IBC, The Hindu Business Line (June 11, 2018), ibc/article24138323.ece.

[v] Id.

[vi] Banikinkar Pattanayak, Bankruptcy Code: Are homebuyers secured financial creditors? Read builder agreement carefully, Financial Express (July 12, 2018),

[vii] Ashish Makhija, Insolvency And Bankruptcy Code Of India, (2018).

[viii] Id.

[ix] Id.

[x]Anna Veneziano, Attachment/Creation of a Security Interest, 5 ECFR 113 (2008).

[xi] Perfection of the Security Interest, 19 S. C. L. Rev. 700 (1966).

[xii] Dr. R.K. Sinha, The Transfer Of Property Act 416 (19TH Ed. 2018).

[xiii] Id.

[xiv] Id at 418.

[xv] Sakal Bhushan, Should homebuyers be given liquidation preference under IBC?, Bar And Bench (Aug. 28, 2019),

[xvi] Jaypee Orchard Resident Welfare Society v. Union of India, Writ Petition (Civil) No. 854 of 2017.

[xvii] Chitra Sharma and Ors. v. Union of India, (2018) 18 SCC 575.

[xviii] Amish Jaysukhlal Sanghrajka v. Akshar Shanti Realtors (P.) Ltd, (2019) 104 344 (NCLT Mum).

[xix] Shailesh Dhairyawan v. Mohan Balkrishna Lulla, (2016) 3 SCC 619.

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