top of page

Homebuyers as Financial Creditors under IBC: An Analysis of Pioneer Urban Case

The author is Harshit, a fourth year student at National Law School of India University, Bangalore.


The matter of homebuyer rights in relation to insolvency proceedings has been the subject of scrutiny for some time now, and there has been considerable uncertainty surrounding this issue. In 2018, the Insolvency and Bankruptcy (Second Amendment) Act 2018 was passed by the Parliament of India. The said amendment introduced a deeming fiction that expanded the scope of the definition of "financial creditor" to include "allottees" of a real estate project under its ambit. To achieve this, the amendment added an "Explanation" under clause (f) of sub-Section (8) of Section 5, which defines "financial debt".

Despite being challenged, the aforementioned amendment was upheld by the Supreme Court in Pioneer Urban Land and Infrastructure Limited vs. Union of India (“Pioneer”). The court declared the amendment constitutional and affirmed the inclusion of real estate allottees as financial creditors. In this article, I argue against the reasoning employed by the court to justify the inclusion of real estate allottees as financial creditors. Part I of the article argues that the court has diluted the definition of financial debt and has used irrational reasoning to differentiate allottees from operational creditors. Part II of the article highlights the practical implications and unanswered questions that have arisen as a result of the Supreme Court of India's reasoning in the said case.

The Inclusion of Allottees as Financial Creditors: Evaluating the Conceptual Framework

Section 5(8) provides for the requirement of “time value of money” to characterize a certain debt as financial debt. In Pioneer, the respondents argued that the transaction, which is in the nature of an advance payment, between the allottees and the real estate developers satisfies the criterion of the time value of money. The argument was accepted by the court based on the reasoning that the allottees were required to pay less in the form of an advance payment compared to what they would have had to pay for a completed apartment, thereby accruing a gain in terms of the time value of money. However, this understanding of the "time value of money" goes against the established meaning of the term. In Nikhil Mehta & Sons (HUF) & Others V AMR Infrastructure Limited (“Nikhil Mehta”), the tribunal expounded on the meaning of “time value of money” and held that it has to do with the price of postponing the use of money's purchasing power in the future. The reasoning of the NCLT was that future earnings are discounted, thereby compensating the investor or lender for surrendering their money and delaying its utilisation until a later time (when it is repaid). Examples of such transactions include loan transactions, investment maturities etc.

But in the case of property developers, the amount obtained through advance payment is intended for purchasing the apartment. Consequently, there is no deferment in the spending power of money as the allottees are not awaiting the return of the money but the apartment. The time value of money cannot be equated with saving money on a transaction. Nevertheless, the court has deemed these two concepts to be equivalent. Employing the court's line of reasoning, any prepayment made with the intention of securing future savings would be construed as acquiring the "time value of money." ” In Nikhil Mehta, the NCLAT clarified this by holding that not all forward sale agreements and advance payments are “financial debts”. The appellate tribunal held that an extra component is required to transform such payments into financial debts and identified "committed returns" as satisfying the requirement of that extra component. The Pioneer case, nonetheless, sees all homebuyers as financial creditors, independent of the presence of "committed returns", and as a result, goes against the accepted notion of the "time value of money."

Furthermore, Pioneer emphasized on the unique features of the transaction between homebuyers and real estate developers, distinguishing it from an operational creditor transaction, to conclude that allottees are more closely aligned with the definition of financial creditors. The initial differentiation highlighted was that, in contrast to operational creditors, the dynamics are inverted in scenarios involving buyers and developers, with the real estate developer being the supplier of goods and services. Generally, operational creditors are the ones who supply goods and services and operational debtors are the ones who default on the payment. Regarding the particular issue of whether recipients of goods and services are eligible to be classified as operational creditors, the NCLAT, in the case of Overseas Infrastructure Alliance (India) Pvt. Ltd. v. Kay Bouvet Engineering Ltd., responded in the affirmative. The NCLAT concluded that individuals who receive goods and services and have made advance payments are capable of being categorized as operational creditors in certain situations. However, when a similar argument was raised in Pioneer, the court rejected the argument without giving it due consideration.

The second difference highlighted by the court was that allottees differ from typical operational creditors. Operational creditors typically prioritize the prompt recovery of their payments, reflecting their short-term interests. Conversely, financial creditors tend to prioritize the long-term financial sustainability of the debtor for continued returns. The court used this difference to say that allottees unlike the operation creditors have a significant interest in the long term financial viability of the real estate developer, as the completion of the project hinges on the developer's financial viability. However, the court failed while making the aforementioned observation failed to appreciate the difference between the interest of allotees and financial creditors in general. To give an example, it is doubtful that allottees would agree to the developer discontinuing a project in which they hold a stake (even if it meant that their money would be returned) if the developer's financial sustainability conflicts with its capacity to finish all projects. This is due to the fact that allottees' interests go beyond just pecuniary ones. Pioneer fails to effectively address the distinction between the kind of long-term interests that financial creditors often have and those of allottees.

Lastly, the court held that the transaction between the allottees and the real estate developer has the "commercial effect of borrowing" as per Section 5(8)(f) and hence, it qualifies as a “financial debt”. However, the reasoning employed by the court stands on a shaky ground. The court in Pioneer accepted the definition of "borrowing" to mean a loan of money for temporary use. Despite this, the court held that advance payment made by the allottee amounts to borrowing by a real estate developer. The advance payment cannot be equated with loan/borrowing as in this case, allottees are making payment in order to get their apartment and not on request of the real estate developer to fulfil their temporary purpose i.e., completion of the construction project. Moreover, the court's own definition of "commercial" also fails to apply to this type of transaction. The court has stated that transactions with profit as their primary aim are considered “commercial.” However, the transaction between the allottee and the developer fails to satisfy the court's own definition of “commercial” because the said transaction does not have profit but rather the delivery of flat as its main aim.

Pioneer: Ramifications and Unanswered Questions

After critically analysing the court's reasoning in the Pioneer case, it is crucial to highlight the significant implications and unanswered questions that arise from this verdict. Firstly, the court has held that allottees are unsecured creditors like debenture holders. Being a financial creditor and being a secured one are two different things when it comes to liquidation under Section 53. By declaring allottees as unsecured creditors, the court has effectively relegated them to the fourth priority in the liquidation process. This means that allottees will only be paid after dues of all secured creditors, workers, employees, and government have been settled. Therefore, even though the court has upheld their classification as financial creditors, the eventual remedy under IBC might not be as effective as one might expect.

Secondly, Section 7 of the Insolvency and Bankruptcy Code (“IBC”) grants financial creditors the authority to initiate insolvency proceedings based on a "default". However, determining whether a default has occurred becomes complicated when considering the interests of allottees. Many allottees face grievances due to construction delays, leading to the question of whether such delays should be considered as defaults. It is generally argued that default should only be considered to have arisen when there is a termination of the allotment agreement or when the refund is demanded by the allottees. Even in Pawan Dubey v. J.B.K. Developers case, the National Company Law Tribunal rejected to classify "delay" as a default. The NCLT held that homebuyers can only ask for financial creditor recourse in the event that the developer failed to make timely payments of agreed returns. Hence, despite homebuyers being included under the definition of financial creditors, the idea of default is still unaltered, and the Pioneer case offers no specific direction in this matter.

Lastly, both the amendment and the court have overlooked the fact that there are instances where the developer may not be responsible for the delay. Factors beyond their control could contribute to the delay, or the default may arise from the allottees themselves failing to make timely payments. However, due to the impact of the amendment and the judgment in the case of M/s Innoventive Industries Ltd. vs. ICICI Bank, homebuyers can sustain their claims regardless of disputed debts. Consequently, in cases where the developer is not at fault and the claim is in dispute, the proceedings under the IBC may be exploited and abused as a legal process.


In conclusion, the issue of homebuyer rights in insolvency proceedings has been a subject of great scrutiny and uncertainty. The 2018 Amendment expanded the definition of "financial creditor" to include allottees, aiming to address cases where homebuyers faced delays and were unable to obtain possession of their properties. However, the reasoning employed by the court in the Pioneer case to justify the inclusion of allottees as financial creditors is flawed. The court dilutes the definition of financial debt and fails to distinguish between allottees and operational creditors properly. The practical implications and unanswered questions arising from the Pioneer case are significant. Allottees, despite being classified as financial creditors, are treated as unsecured creditors in the liquidation process, receiving payment only after other secured creditors. The determination of default in cases of delay remains ambiguous, and the court's reasoning does not provide clear guidance. Furthermore, the amendment and the court's approach overlook situations where the developer may not be at fault for delays. This may lead to the abuse of the insolvency process when the developer is not in default and the claim is disputed.

While the introduction of the amendment aimed to alleviate the dire situation faced by real estate allottees, the solution does not lie in tampering with the IBC regime but rather in enhancing the effectiveness of the RERA code. The 2018 Amendment undermines the fundamental coherence of the IBC. One of the key advantages of the IBC is the certainty it offers to financial creditors, enabling them to initiate proceedings, change management, and restructure debt. While the expeditious nature of this process may entice Parliament to utilize it for other sectors or issues, caution must be exercised to prevent compromising the integrity of the insolvency regime as a whole.

1,976 views0 comments


bottom of page