The author of this blog is Muskan Gupta, 4th year student at University School of Law and Legal Studies. G.G.S.I.P.U, Delhi

A legal system of a country represents how developed the nation is. If the legal process is well implemented and properly codified then it definitely portrays a strong background. India is one such nation which has a strong legal setting and Insolvency and Bankruptcy Code is one of such reform that was added to this setup in 2016. The code was enacted after a number of recommendations to change the existing insolvency regime. Earlier there were a number of overlapping legal recommendations to deal with insolvency and financial failures in companies, firms, individuals, etc. However, they were not sufficient enough to deal with the constant strain on the Indian credit system. And that is why IBC is considered as the second biggest economic reform after GST was implemented. The law is basically to cover corporate insolvencies, as also of individuals and firms, but above all of that, the code provided a creditor-controlled regime which empowered the status of creditors in the insolvency process, provided a collective time-bound procedure for insolvency resolution process and reduced the scope of judicial intervention.
The article will provide a dynamic view of the most important amendment in the IBC which was upheld by the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Limited and Ors. v. Union of India[1], as per my interpretation. In this judgment, home buyers were declared to be treated as “financial creditors” and they can now initiate Corporate Insolvency Resolution Process under Section 7 of the code. The amendment definitely empowered the home buyers or allottees in the whole insolvency process, but there is still a grey area left which concerns the scope of the definition of “allottee” in the RERA[2] and “position of homebuyers who cancel their allotment” in the resolution process.
Under Section 5(7) of IBC 2016[3], Financial Creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Earlier, homebuyers could take legal protection by filing a civil suit only but with the amendment, which was upheld in Pioneer Urban Land and Infrastructure Limited and Ors. v. Union of India, Homebuyers are now protected as financial creditors under IBC and is treated equivalent to “allottees” under RERA.
The amendment introduces home buyers into the category of financial creditors by adding an explanation to S. 5(8) (f) which defines the term financial debt. The definition is included in the act itself. Financial debt is defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes….” The explanation which is added in this section through the amendment states
For the purposes of this sub-clause, - (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing;
and (ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]”.
The whole purpose behind this amendment is to clarify that the homebuyers can now as financial creditors trigger the insolvency resolution process under Section 7 of the IBC. This amendment was recommended by the ILRC Report 2018[4], which recognise that the amounts which are raised under the contracts of the homebuyers are in effect for the purpose of raising finance and a means of raising finance and thus, the amount raised under a real estate project falls within entry (f) of Section 5(8).
Now obviously with this amendment Homebuyers can file an application to start CIRP under Section 7 against the defaulting builders. But what about those homebuyers who withdraw from the project because of default on the part of the builder to give possession of an apartment or plot or building. Whether they still are considered as financial creditors for the purpose of CIRP. Our Courts and Tribunals are not very much clear about it and there is no direct judgment which clarifies this issue. Therefore, this article makes an attempt to interpret the scope of such homebuyers so that they can also file an application under Section 7 easily.
Under Section 19 of the RERA 2016, an allottee or we can say homebuyer can withdraw from the project, without prejudice to any other remedy available, if the promoter fails to complete or is unable to give possession of an apartment or plot or building and it is the right of the allottee to claim the refund of the amount paid along with interest at such rate as may be prescribed and compensation from the promoter, in accordance with the act and the terms of the agreement. Provided that the allottee was making necessary payments in installments within the specified time in agreement for sale.
To come within the scope of Section 5(8)(f), first and foremost, there has to be a debt. In order to be a debt, there ought to be a liability in respect of a “claim” which is due from any person. “Claim” further means either a right to payment or a right to payment out of the breach of contract. Then comes “default” which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. The expression “payment” is again an expression which is elastic enough to include “recompense” and includes “repayment”[5]. The definition of financial debt also includes “disbursement” which would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression "disbursed" refers to money which has been paid against consideration for the "time value of money"[6]. In short, the "disbursal" must be money and must be against consideration for the "time value of money", meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee "disburses" money in the form of advance payments made towards construction of the real estate project.
After a detailed analysis of the relevant definitions, the Supreme Court also observed that the sale agreement between builder and home buyer would have the ‘commercial effect’ of a borrowing, which means that money is paid in advance for temporary use so that a flat or apartment is given back to the home buyer. Further, the Supreme Court clarified that both parties have ‘commercial’ interests in the same i.e., the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by such sale of the apartment. The Supreme Court thus came to the conclusion[7] that the amounts raised from the home buyers under real estate agreements, with profit as the main aim, are, in fact, subsumed within the definition of ‘financial debt’ under Section 5(8)(f) of the IBC, even without adverting to the explanation introduced by the Amendment Act.
This shows that even if a homebuyer who withdraws from the project due to the failure on the part of the builder, can still seek remedy as a financial creditor. Also, the expression “without prejudice to any other remedy available” in section 19 of RERA 2016 is wide enough to include an allottee who has cancelled his allotment and claiming the repayment of the advances as paid by him to the builder. The purpose of RERA is to check that real estate projects come to existence within the stated time period and to see that allottees of such projects are not left hanging and are able to realise their dream of a home, or to get compensation if such dream is not fulfilled, or at least get back their money that they have advanced towards the project with interest. The amendment was to protect the innocent homebuyers who have huge stakes in real estate projects from the tactics of corrupted builders and promoters. Recognizing them as financial creditors was essential, since they get duped by some real estate developers.
The Supreme Court by upholding the rights of the homebuyers as financial creditors has taken a significant leap in Indian Judiciary. Even the NCLT and the NCLAT are expeditiously disposing of the applications filed by homebuyers under the IBC. In most of the cases, these Tribunals have prioritised the rights of homebuyers over the builders and even if the homebuyer has cancelled its allotment, his/her application under Section 7 of IBC was still allowed.

[1] 77(IBC) 08/2019.
[2] Real Estate Regulation Act 2016, s 2(d).
[3] “Financial Creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

[4] Ministry of Corporate Affairs, “Report of the Insolvency Law Committee (2018)” available at: http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf. (last visited on May 10, 2020).
[5] H.P Housing & Urban Development Authorities & Anr v. Ranjit Singh Rana, (2012) 4 SCC 505.
[6] Nikhil Mehta & Sons v. AMR Infrastructure Ltd., (2017) 143 SCL 278 (NCLAT).
[7] Pioneer Urban Land and Infrastructure Limited and Ors. v. Union of India, 77(IBC) 08/2019.