Following the judgment rendered by the Hon’ble Supreme Court discussing the status of homebuyers, the government established an Insolvency Law Committee led by Injeti Srinivas. The Committee recognized that the non-inclusion of homebuyers within the ambit of either financial creditors or operational creditors deprived them of significant rights, including the right to initiate a Corporate Insolvency Resolution Process (CIRP), representation on the Committee of Creditors, and, in the event of liquidation of the corporate debtor, the guarantee of receiving at least the liquidation value under the resolution plan.
The Insolvency and Bankruptcy Code underwent its first major amendment in 2018 wherein a pivotal change was the introduction of a specific explanation under Section 5(8)(f), explicitly recognizing homebuyers who have made payments against the allotment of a unit in a real estate project as “financial creditors.” This empowerment enabled them to initiate the CIRP against defaulting developers.
The amendment also conferred upon homebuyers to be included in the Committee of Creditors, a pivotal decision-making body during CIRP. This allowed them to participate in formulating a resolution plan for distressed developers, potentially leading to project completion or the recuperation of their investments.
Furthermore, the amendment expanded the definition of financial debt under Section 5(8) to include an explanation stipulating the amount/ money raised from allottees of real estate projects would be deemed financial debts.
Subsequently, this amendment faced a challenge by a consortium of builders/ real estate developers before the Hon’ble Supreme Court through Writ Petition No. 43 of 2019 titled Pioneer Urban Land and Infrastructure Limited and Ors. Vs. Union of India and Ors, wherein it was upheld that the 2018 amendment was constitutionally valid.
Source: Barandbench
