Introduction
The Insolvency and Bankruptcy Code, 2016 (‘Code’) passed on May 28th, 2016 did not explicitly have homebuyers designated as ‘Financial Creditors’. Subsequent amendment in 2018 stated what was already an accepted position by various courts in respect of homebuyers who purchase property under ‘assured returns/committed returns’
The recognition of Banks that have provided loans to Homebuyers of Corporate Debtor as a Financial Creditor would be instrumental to Banks in a few respects:
- Banks as Financial Creditors allay the risk wherein the Allottees or borrowers, who received the loan have not submitted any claims to the Resolution Professional owing to their lack of expertise in navigating through the Corporate Insolvency Resolution Process (‘CIRP’). Banks can represent their (homebuyers) interests effectively.
- Banks would no longer be required to file separate recovery suits against each homebuyer in case of any default or on failure of the builder/Corporate Debtor to have the project come into completion. Instead, they will have a swift remedy under IBC and be able to circumvent the otherwise tedious process they would have had to undergo to recover outstanding loan amounts.
Position of Homebuyers Under IBC
During the infancy of the Code, there was no legal framework in place to protect the interests of Homebuyers who had booked flats and paid the Corporate Debtor in advance. The National Company Law Tribunal (‘NCLT’) had initiated CIRP against Jaypee Infratech and the statutory duration of 180 days as well as the extended time period of 90 days had come to an end before the Ordinance recognizing Homebuyers as Financial Creditors came into force.
The Supreme Court in Chitra Sharma v Union of India (2018) opined that recourse to its power under Article 142 to do complete justice was warranted in the peculiar case at hand to prevent gross injustice against Homebuyers. Consequently, the Committee of Creditors (‘CoC’) was reconstituted as per the amended Code and Homebuyers were granted substantial voting power to effectively protect their interests.
Following the amendment, Explanation to Section 5(8)(f) was added that explicitly stated what in the courts view was already set in stone i.e. inclusion of homebuyers as Financial Creditors.
The constitutional validity of this amendment was challenged in Pioneer Urban Land and Infrastructure Limited and Ors. vs. Union of India (2019) wherein the Apex Court stressed that the explanation added to Section 5(8)(f) of the Code by the Amendment Act did not in fact enlarge the scope of the original Section and that it was merely clarificatory in nature.
Threshold to trigger CIRP by Homebuyers
To prevent misuse of inclusion of Homebuyers as Financial Creditors by giving an isolated Homebuyer an unbridled license to hold the Real estate project hostage, amendment to Section 7 was introduced.
Parliament vide the 2020 amendment to the Code amended Section 7 of the Code and established that for allottees under a real estate project at least 100 allottees or 10% of such allottees under the same project must jointly file an application to trigger CIRP against a Corporate Debtor.
This amendment was upheld by the Apex Court in Manish Kumar v Union of India (2021) wherein it expressed:
“It is to be noted also that it is not a case where the right of the allottee is completely taken away. All that has happened is a half-way house is built between extreme positions, viz., denying the right altogether to the allottee to move the application Under Section 7 of the Code and giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage to a proceeding under the Code.”
Position of Banks providing loans to Homebuyers who purchase property from Builder/Corporate Debtor: Are they also Financial Creditors?
In absence of a set precedent and legal framework, we turn our attention to judicial pronouncements in answering this proposition. It is important to note that there are conflicting views expressed by the National Company Law Appellate Tribunal (‘NCLAT’) via its judgements in 2021 & 2025.
In the case of Axis Bank Limited v Value Infracon Pvt. Ltd. (2022), the issue before the appellate tribunal was whether the appellant Bank can be considered a ‘Financial Creditor’ on account of having extended housing loans to allottees who have purchased Flats/units in the Project floated by the ‘Corporate Debtor’.
The tribunal relying on the earlier decision of the Apex Court in Pioneer Urban Land & Infrastructure Ltd. & Anr. (Supra) held that it is unquestionably, the Homebuyers who shall come within the purview of ‘Financial Creditors’ and not financiers of such Homebuyers.
The tribunal concluded that it was not the scope of the Code to include Banks/Financial Institutions that have advanced loans to allottees of a real estate project to be included as ‘Financial Creditor’ and included in the Coc and any interpretation to the contrary would defeat the very spirit and objective of the Code especially when on the perusal of the tripartite agreement, the liability to repay in case of a default fell solely on the Homebuyers.
Contrary View- Canara Bank
Although, it is a settled proposition that it is the Homebuyers who are considered Financial Creditors and not the Banks who have financed loans to such Homebuyers,
However, NCLAT in its recent judgment dated 09.01.2025 expressed a contrary stance from its previous view and held that Banks who have extended loans in respect of a real estate project can be considered Financial Creditors subject to the Tripartite agreement between the Bank, the borrower and the builder/Corporate Debtor.
In the case of Canara Bank v Sh. Vivek Kumar (2025), the NCLAT dealt with a similar scenario wherein a bank had financed loans to homebuyers in lieu of purchasing units in a real estate project of the builder/corporate debtor.
The tribunal distinguished the facts in the instant case in as much as the clause in the present tripartite agreement executed among the Bank, borrower and Corporate Debtor differs from the typical tripartite agreements wherein the complete obligation of repayment in case of default generally rested on the Borrower and the Corporate Debtor assumed no responsibility whatsoever as seen in NCLAT’s judgement of Value Infracon Pvt Ltd (Supra).
The tribunal while distinguishing the instant case from its prior judgement of Value Infracon Pvt Ltd. (Supra) observed that in the previous case, individual homebuyers received loans from the banks, and it was their sole responsibility to repay the loans to the banks in the event that the borrower or corporate debtor defaulted and the corporate debtor was not liable for any payments to the banks.
While in the present case, noting clause 16 of the tripartite agreement, NCLAT remarked “The clause of tripartite agreement in the present appeal is very categorical. Due to breach of any terms and conditions contained in the tripartite agreement “the entire advance by the bank on account of borrower shall be refunded by the builder to the bank” meaning in case of any default either by borrower or Corporate Debtor, liability rested upon the Corporate Debtor to refund all the advance extended on behalf of borrower to the Bank.
The NCLAT noted that the primary responsibility of repayment in the instant case fell on the Corporate Debtor and based on this the tribunal concluded,
“This indicates the relationship of the Appellant Bank and the Corporate Debtor to meet the stipulation of Section 5(8) of the Code regarding the financial debt. This aspect was not available in the case of Value Infracon India Private Limited (Supra)”
The tribunal also highlighted that the peculiar clause of the tripartite agreement had created rights of repayment in favor of the Appellant bank and on basis of such ‘claims’ under Section 3(6) of the Code, the appellant may be classified as ‘Financial Creditor’ under Section 5(7) of the Code in the instant case insofar as a financial debt is owed to the bank.
Conclusion
On a careful perusal of both the NCLAT decisions, we can infer that although under normal circumstances, it is clear that Banks who finance loans to homebuyers will not be considered Financial Creditors but this position may change depending on facts and circumstances of each case and it is here when the clauses of the tripartite agreement must be assessed thoroughly.This is clearly evident in the Canara Bank (Supra) judgement where the clauses in the tripartite agreement had placed the burden directly on the Corporate Debtor to satisfy a debt against the bank as defined in Section 5(8) hence rendering them as Financial Creditors as well.
