Recognition of homebuyers under IBC: Is amendment ordinance 2019 invalid per se?

Prior to the advent of the Insolvency and Bankruptcy Code 2016 (herein referred as IBC), the homebuyer(s) were aggrieved to attain timely justice against the real estate developers’ lethargic conduct in the form of delaying the delivery of the possession of flat/homes due to part-construction or other akin issues. Even though there are remedies available to the Homebuyers under RERA and Consumer law but those are not as effective and expeditious as IBC. In Swiss Ribbons Pvt. Ltd. v. Union Of India, the Hon’ble Mr. Justice Rohinton F. Nariman beautifully drew the comparisons between numerous economic legislations like Sick Industrial Companies (Special Provisions) Act 1985, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 & the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 with IBC and held that the IBC is much more efficacious and expeditious in terms of revival, rehabilitation or repayment of payment to creditors.


The homebuyers under IBC were first recognized in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure wherein the NCLAT on 21.07.2017 held that the amount raised by developers from the allottees were deemed to have the effect of ‘commercial effect of a borrowing’ as the amount raised was shown as commitment charges under financial cost, therefore, the court held the allottees to be financial creditors under the code.

The Insolvency and Bankruptcy Code (Amendment) Ordinance 2019 recognized homebuyers under the purview of financial creditors under Section 7 of IBC and gave them the right to be a part in the decision-making process by incorporating them in the committee of creditors (COC). The Apex court in Chitra Sharma and ors. v. Union of India and ors. protected the interests of Homebuyers who were left in lurch after the imposition of moratorium against the Jaypee Infratech Ltd. (JIL) by IDBI as the homebuyers had no locus standi in the CIRP. The court observed that the liquidation and disposal of corporate debtor’s assets would deprive the homebuyers of their right to own a home. Therefore, the court held the applicability of IBC (amendment) ordinance 2018 as prospective in nature and recognized homebuyers as financial creditors under IBC.

Subsequently, the real estate developers challenged the constitutional validity of the Insolvency and Bankruptcy (Second) Amendment 2018 and the Supreme court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India upheld the constitutional validity of the Second amendment to the IBC and subsumed allottees/homebuyers under Section 5 (8) (f) of the code. The court held that the amendment does not infringe Articles 14, 19(1)(g), Article 19(6) and Article 300-A of the Indian constitution. The court also widened the homebuyer’s horizon to avail distinct remedies under distinct statutes by observing that the remedies under RERA and Consumer law are concurrent in nature which must be harmoniously construed with IBC.


The Ministry of Law and Justice on 28.12.2019 introduced the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (herein referred as amendment ordinance) which imposed a minimum threshold on the aggrieved homebuyers under proviso 3 of the ordinance to initiate Corporate Insolvency Resolution Process (CIRP) by either 10% of the total homebuyers or 100 homebuyers (whichever is less) against the real-estate developer under that housing project.

This amendment ordinance was challenged in the Supreme court in Manish Kumar v. Union of India on the following grounds like a) violation of Article 14 and Article 21, b) creation of a class within a class under Section 7 of IBC which is unconstitutional and manifestly arbitrary, c) no intelligible differentia in the ordinance as there is no nexus with the object of the amendment ordinance, d) a sinister motive to overturn the law set out by this court for homebuyers. Subsequently, the court issued the notice to the challenge and directed a status quo on the amendment ordinance on 13.01.2020.


There are numerous grounds which are enumerated below which can invalidate the IBC amendment ordinance 2019:


The homebuyers are recognized under Section 5(8)(f) of the IBC 2016 which is also constitutionally upheld by the Apex court in Pioneer Urban Land and Infrastructure Ltd. (Supra) but the present amendment ordinance strives to create a separate class of financial creditor by unfairly treating homebuyers as a separate class of financial creditor by imposing a new condition on them which is in violation to Article 14. Any imposition of a condition in a class which separates them from the rest of the class is held to be ultra vires the constitution as evident from State of U.P and Ors. v/s Committee of Management, Mata Tapeshwari Saraswathi Vidya Mandir and Ors. (2010) 1 SCC 639.


The legislative intention behind the amendment ordinance 2019 for homebuyers looks to restrain the homebuyers to misuse the IBC 2016 against the real estate developers but the Apex court in Pioneer Urban Land and Infrastructure Ltd. (Supra) held that the IBC being a beneficial legislation can be triggered by the allottees to put the real estate allottees back on its feet. Therefore, this amendment is not in nexus with the object sought in the amendment ordinance 2019 and there seems no intelligible differentia.


A bar on a single or a certain number of homebuyers which are below the minimum threshold level to initiate insolvency proceedings against real estate developers as prescribed under the amendment ordinance 2019, deeply affects their right to seek expeditious justice. A certain number of homebuyers strive to purchase home from their hard-earned money so as to get roof on their heads and when a default or a delay in construction of the real estate project is committed by the developer, then it creates a situation of human distress to those and other homebuyers which evidently affects their right to own a home. As held in Chitra Sharma (supra), “A home for a family is a basic human yearning” and the right to own a home comes under the ambit of right to life as enshrined under Article 21.


The amendment ordinance 2019 seeks to apply on the pending proceedings initiated by the Homebuyers in NCLT, therefore, the amendment brings a retrospective effect which further puts on hold the disposal of plethora of homebuyer’s petitions including cases which are listed at final adjudication stage, therefore delaying the disposal of a pending case leads to delay in adjudicating justice.


The insertion of section 12-A in the IBC 2016 provides for the withdrawal of insolvency proceedings initiated against any corporate debtor by any class of creditor i.e., Financial creditor or Operational creditor prior to the initiation of expression of interest by the resolution professional on a settlement reached between the creditor and the corporate debtor.

Therefore, a genuine developer who seeks to stop the proceedings initiated by the homebuyer can settle with the homebuyer by repaying their hard-earned money prior to the initiation of expression of interest by the resolution professional.


The amendment ordinance 2019 unreasonably puts a minimum threshold on the homebuyers which not only creates a separate class within the financial creditors but also deprives them to the timely possession of the home or a refund of the amount paid by the homebuyer to the developer. The ordinance was introduced with the motive to restrict the misutilization of the code by the homebuyers against the developers but this issue was elaborately adjudicated in the Pioneer case and it was held that this is a beneficial legislation for homebuyers. The retrospective effect of the ordinance sets back a plethora of pending homebuyer’s cases and it contravenes the well settled principle of “Justice delayed is justice denied”. If the homebuyer unreasonably initiates the IBC proceedings against the developer, then the developer is always vested with the power to settle the dispute with the homebuyer and to withdraw the insolvency proceedings initiated against them under Section 12A of the code.

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