"The statutory collision between RERA's remedial focus and the IBC's resolution mandate continues to generate complex litigation, placing the financial security of homebuyers at the crux of corporate insolvency jurisprudence."
The Homebuyer as a Financial Creditor
The legislative amendment to the Insolvency and Bankruptcy Code (IBC), 2016, specifically including real estate allottees as 'Financial Creditors' under Section 5(8)(f), fundamentally altered the real estate landscape. Upheld by the Supreme Court in the landmark 'Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416', this classification empowered homebuyers to initiate Corporate Insolvency Resolution Processes (CIRP) against defaulting developers.
However, this empowerment created a dual-remedy paradox. Homebuyers now possess concurrent remedies: they can approach the Real Estate Regulatory Authority (RERA) for a refund/possession under the RERA Act, 2016, or approach the National Company Law Tribunal (NCLT) to drag the developer into insolvency.
The Supremacy of IBC over RERA
When proceedings are initiated under both statutes, the hierarchy of laws comes into question. Section 238 of the IBC provides it with an overriding effect over inconsistent laws. The Supreme Court has repeatedly clarified that proceedings under RERA cannot stall or override insolvency proceedings under the IBC.
A critical issue arises when a homebuyer obtains a favorable decree from RERA (e.g., an order for a refund) but the developer subsequently goes into CIRP. In 'Vishal Chelani v. Debashis Nanda (2023)', the Supreme Court addressed whether a homebuyer with a RERA decree becomes a standard 'decree holder' (an operational or other creditor) or remains a 'financial creditor'. The Court affirmatively held that the underlying nature of the transaction—an allotment of real estate—does not change merely because a RERA decree was obtained. Thus, the homebuyer retains their privileged status as a financial creditor within the Committee of Creditors (CoC).
Threshold Requirements and Reverse CIRP
To prevent frivolous insolvency petitions by isolated individuals, the IBC was amended to require a minimum threshold: an application under Section 7 by homebuyers must be filed jointly by at least 100 allottees or 10% of the total allottees of the same project, whichever is less.
Furthermore, recognizing that pushing an entire real estate company into insolvency for the default of a single project is counterproductive, the NCLAT and the Supreme Court have innovated the concept of 'Project-Wise Insolvency' or 'Reverse CIRP' (as seen in the 'Flat Buyers Association Winter Hills v. Umang Realtech' case). This allows the promoter to infuse funds to complete the specific stalled project outside the rigors of a complete corporate death, heavily prioritizing the actual delivery of homes over corporate liquidation.
Key Takeaways
- Homebuyers hold the status of 'Financial Creditors' under the IBC, allowing them to initiate insolvency proceedings.
- The IBC holds an overriding effect over RERA (Section 238 IBC); RERA proceedings are halted once CIRP commences via moratorium.
- A homebuyer holding a RERA refund decree retains their status as a financial creditor in the IBC process (Vishal Chelani Judgment).
- Project-wise insolvency (Reverse CIRP) is an evolving judicial mechanism aimed at completing stalled projects rather than liquidating developers.
Amrita Pritam
Legal Associate · Corporate Law & Arbitration