The Supreme Court of India, in October 2023, held that homebuyers cannot be treated differently from other financial creditors under the Insolvency and Bankruptcy Code, 2016 merely because they have obtained orders from the authority constituted under the Real Estate (Regulation and Development) Act, 2016 (RERA). The Bench of Justice S. Ravindra Bhat and Justice Aravind Kumar reaffirmed the parity principle for homebuyers who were recognised as financial creditors through the 2018 amendment to the IBC.
Background
The 2018 amendment to the IBC inserted an explanation to Section 5(8)(f), deeming amounts raised from allottees under a real estate project to be financial debts. This amendment, upheld by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), gave homebuyers the status of financial creditors with the right to initiate CIRP against defaulting real estate developers and participate in the Committee of Creditors.
A parallel remedy exists under RERA, which empowers state regulatory authorities to order refunds, compensation, and possession delivery to aggrieved homebuyers. The question arose whether homebuyers who had already obtained orders under RERA were precluded from exercising their rights as financial creditors under the IBC, or whether such RERA orders altered their status within the insolvency framework.
Corporate debtors (real estate developers) in several cases argued that homebuyers who had secured RERA orders for refund had effectively converted their claim into a determined debt, which should be pursued through RERA's execution mechanism rather than through CIRP.
Key Holdings
The Court addressed the intersection of RERA and IBC as follows:
No differential treatment: Homebuyers who have obtained RERA orders retain their status as financial creditors under the IBC. The existence of a RERA order does not downgrade their status or strip them of insolvency rights.
Complementary remedies: RERA and IBC operate in complementary spheres. RERA provides a regulatory remedy for individual homebuyer grievances, while the IBC provides a collective insolvency mechanism for resolution. The pursuit of one does not negate the availability of the other.
Financial debt status unaffected: A RERA order determining the amount of refund or compensation does not change the characterisation of the underlying debt as a financial debt under Section 5(8)(f). The statutory deeming provision operates independently of other regulatory orders.
Committee of Creditors participation: Homebuyers with RERA orders in their favour remain entitled to participate in the Committee of Creditors and vote on resolution plans, consistent with their status as financial creditors.
Implications for Practitioners
This ruling resolves a recurring jurisdictional conflict that real estate insolvency practitioners have navigated since the 2018 amendment. Lawyers advising homebuyer groups can now pursue RERA complaints for individual relief while simultaneously maintaining the option to initiate or participate in CIRP proceedings against the developer.
For resolution professionals in real estate insolvency cases, the judgment clarifies that RERA orders should be treated as evidence of admitted claims rather than a basis for excluding homebuyers from the insolvency process. This may simplify the claims verification process where RERA authorities have already adjudicated the amounts owed.
Real estate developers facing both RERA proceedings and CIRP should recalibrate their defence strategy. Arguing that RERA orders preclude IBC proceedings is no longer tenable, and settlement negotiations should account for the homebuyer group's collective leverage as financial creditors in the Committee of Creditors.