Guest column | Economy

How the RERA and the IBC will help homebuyers

Shot in the arm: Earlier, homebuyers were treated as unsecured creditors and hence could not initiate insolvency proceedings against a defaulting developer .   | Photo Credit: Suat Gürsözlü

The Insolvency and Bankruptcy Amendment (Ordinance) Act, 2018 received the President’s assent on June 6. The amendment to the Code was brought about with a view to balance the interests of various stakeholders, especially the interests of home buyers.

In the context of insolvency proceedings of a company involved in real estate development, this ordinance benefits homebuyers by treating such buyers as financial creditors under the Code.

Prior to the amendment, homebuyers were neither treated as financial creditors nor as operational creditors but as an ‘unsecured creditor’, because of which they were not able to initiate insolvency proceedings against a defaulting developer.

In case of a developer facing liquidation, as per the liquidation waterfall, homebuyers would get only the balance proceeds after paying off insolvency costs, workmen dues, financial creditors and government dues.


By virtue of the amendment, homebuyers are now classified as an ‘allottee’ under a ‘real estate project’. The two terms have their respective meanings as defined under Real Estate (Regulation and Development) Act, 2016 (RERA).

Any amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing. Therefore, under the Code, the amounts paid by homebuyers to a developer will be treated as financial debt and homebuyers will be categorised as financial creditors.

In the position of a financial creditor, homebuyers can jointly or individually file a petition to initiate insolvency proceedings against a defaulting developer company.

Default defined

Though the amendment has classified the homebuyer as a financial creditor, the definition of the term ‘default’ vis-à-vis a homebuyer has not been amended. Hence, to detect when the default has occurred, we will have to take recourse to RERA.

Section 18 of RERA provides a choice to homebuyers to either choose the possession of a house or to seek a refund.

The section, among other things, states that a developer is liable to refund the amount received by him in respect of the apartment, with interest, or he must pay interest for every month of delay till possession is handed over, on demand by the allottee. The section further contemplates compensation to be paid to homebuyers in cases where the real estate project has a defective title or the developer fails to discharge his obligations under RERA.

Notifications to the rules by States add to the clarity. For example, Rule 19 of the Tamil Nadu Real Estate (Regulation and Development) Rules, 2017, prescribes the timelines for refund, and lays down that the refund shall be given by the developer within 90 days from the date on which it becomes due.

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

Financial debt

The term ‘financial debt’ as defined under the Code has been amended to include any amount raised by a developer from an allotee under a real estate project and these amounts are deemed to have the commercial effect of a borrowing. Therefore, transactions entered into by homebuyers with developers would fall under the definition of ‘financial debt’ and the default contemplated under RERA will entitle home buyers to initiate proceedings under the Code.

After the initiation of the insolvency proceedings against the developer ,the homebuyer can submit his claim to the appointed interim resolution professional.

Also, homebuyers as a class of creditors can be represented through an authorised representative at the meetings of the Committee of Creditors.

Though the objective of the legislation is resolution and not recovery, it is possible for the real estate developer company to go under the process of liquidation. In such a case, the position of the homebuyer in the liquidation waterfall has been elevated, where they would be treated on par with other financial creditors.

(The writers are lawyers with A.K. Mylsamy & Associates LLP)

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Printable version | Nov 27, 2020 12:46:05 AM |

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