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Insolvency and Bankruptcy Code, 2016

Homebuyers under IBC: Allottee Threshold and RERA Cases

Homebuyers are financial creditors, but they can initiate a CIRP only in numbers, and the developer can resist an application by showing that the allottee is a speculative investor. Questions on allottees usually involve a calculation of the threshold, the status of applications filed before 2020, the overlap with RERA, or how the class votes in the committee. Each is answered below in four steps.

1. The Law in Brief

  • Status. Amounts raised from allottees under a real estate project have the commercial effect of borrowing, so allottees are financial creditors (Explanation to section 5(8)(f); Pioneer Urban Land, 2019)
  • Threshold. Under the proviso to section 7(1), inserted in 2020, allottees under the same real estate project must apply jointly, being at least 100 or 10 per cent of the total allottees of that project, whichever is less.
  • Pending applications. Applications filed before the amendment had to be brought into compliance within thirty days, failing which they were deemed withdrawn; the Supreme Court upheld this in Manish Kumar v Union of India (2021)
  • Representation. Allottees form a class represented in the committee by an authorised representative (section 21(6A)), who votes the whole class's share according to the decision of more than 50 per cent of the voting share of class members who voted (section 25A(3A))

Is an allottees' application maintainable?

Figure 1: Is an allottees' application maintainable?

2. How Is the 100 Allottees or 10 Per Cent Threshold Computed?

Facts

T Developers Ltd has two projects, Green Towers with 400 allottees and Blue Heights with 1,500 allottees. Possession is four years overdue in both. Sixty allottees of Green Towers and thirty of Blue Heights file a joint application under section 7, alleging a default of ₹40 crore. T Developers argues that ninety allottees fall below the threshold. Decide.

  • Issue. How the threshold in the proviso to section 7(1) is computed where allottees from two projects apply together.
  • Law. The proviso requires at least 100 allottees or 10 per cent of the total allottees under the same real estate project, whichever is less. Allottees of different projects cannot be added together.
  • Application. For Green Towers, 10 per cent of 400 is 40, which is less than 100, so 40 allottees suffice; the 60 Green Towers applicants meet it. For Blue Heights, 10 per cent of 1,500 is 150, so the lesser figure is 100; the 30 Blue Heights applicants fall short.
  • Conclusion. The application is maintainable as an application by the Green Towers allottees, whose default must be shown to be at least one crore rupees. The Blue Heights allottees are not counted and may pursue RERA or consumer remedies, or join if a further 70 allottees of that project apply with them.

3. Does the Allottee Threshold Apply to Pending Applications?

Facts

In 2019, before the 2020 amendment, five allottees filed a section 7 application against U Builders. When the amendment came into force, they did not add other allottees. Six months later they argue that the threshold cannot apply to an application filed before it existed, as that would take away a vested right. Decide.

  • Issue. Whether the allottee threshold applies to applications pending on the date of the amendment.
  • Law. The 2020 amendment applied the threshold to pending applications not yet admitted, requiring compliance within thirty days, failing which they were deemed withdrawn. In Manish Kumar v Union of India (2021), the Supreme Court upheld this as a reasonable measure to prevent a handful of allottees from pushing an entire project into insolvency, noting that filing an application does not create a vested right to a CIRP.
  • Application. The five allottees did not reach the threshold within thirty days.
  • Conclusion. The application stands withdrawn. The allottees may file afresh with the required number, subject to limitation, or use other remedies.

Key rules for allottees

Figure 2: Key rules for allottees

4. Can a Speculative Investor Trigger CIRP as a Homebuyer?

Facts

V Investments Pvt Ltd booked twenty-five flats in one project of W Realty under an agreement giving it the right to demand a refund with 18 per cent return after three years. When property prices fell, it led a group of 110 allottees in a section 7 application. W Realty shows that the project is nearly complete and that V Investments' real aim is to exit. Advise the NCLT.

  • Issue. Whether the NCLT may decline to initiate a CIRP on an application led by an allottee who is a speculative investor.
  • Law. In Pioneer Urban Land (2019), the Supreme Court upheld the deeming of allottees as financial creditors but recognised safeguards: the developer may show that the allottee is itself in default, that there is no default by the developer, or that the allottee is a speculative investor not genuinely interested in possession and seeking to exit because of a fall in the market. The NCLT must form a prima facie view on this at the stage of initiation. Section 65 penalises initiation for a malicious or fraudulent purpose.
  • Application. V Investments booked many units with a guaranteed return and exit right, which points to an investment rather than a purchase of homes, and the project is nearly complete. However, the other allottees appear to be genuine homebuyers whose possession is delayed.
  • Conclusion. The NCLT should examine whether the application, counting only genuine allottees, still meets the threshold and shows a default. If V Investments is the driving force and the application is an attempt to exit, it may be rejected, and costs or a penalty under section 65 may follow. The finding on speculation concerns initiation only and does not decide whether V Investments' claim is admitted in any CIRP.

5. Does a RERA Refund Order Give Priority in CIRP?

Facts

X Homes Ltd is in a CIRP initiated by a bank. Earlier, the RERA authority had ordered it to refund one allottee with interest. That allottee now argues that its RERA order gives it a priority over other allottees. In the committee, the allottees' class holds 30 per cent of the voting share. Of 1,000 allottees, 300 vote on a resolution plan: 160 in favour and 140 against. How does the authorised representative vote, and is the RERA order a priority? Advise.

  • Issue. Whether a RERA refund order gives priority in a CIRP, and how an authorised representative casts the class vote.
  • Law. The Code and RERA operate concurrently, but section 238 gives the Code primacy in conflict (Pioneer Urban Land, 2019); during the CIRP, all claims are dealt with under the Code and the RERA order cannot be executed because of the moratorium. Under section 25A(3A), the authorised representative votes the whole class's share according to the decision of more than 50 per cent of the voting share of class members who voted.
  • Application. The refund order only quantifies the allottee's claim, which it files with the resolution professional like other allottees. In the vote, 160 of the 300 who voted, more than half, supported the plan.
  • Conclusion. The RERA order gives no priority over the class. The authorised representative must cast the entire 30 per cent share in favour of the plan, not split it, and non-voting allottees are bound by the result.

⚠ Exam trap

The threshold is the lower of 100 and 10 per cent, computed project by project. Pending applications had thirty days to comply (Manish Kumar, 2021). A speculative investor may be shut out at initiation (Pioneer Urban Land, 2019), but that finding does not decide admission of claims. RERA remedies are concurrent, but the Code prevails during a CIRP. The class votes as one block under section 25A(3A), decided by a majority of those who voted.

6. Frequently Asked Questions

Can a single allottee file a section 7 application?

Not ordinarily. Since 2020, allottees must apply jointly in the required number, so a single allottee must use RERA or consumer remedies, or file a claim in a CIRP started by another creditor.

Who chooses the authorised representative?

The interim resolution professional offers three insolvency professionals, and the class members choose one, who is then appointed by the NCLT.

7. Related Topics

  • Topic 8: Homebuyers as Financial Creditors. Allottees under the IBC.
  • Topic 98: Section 7 IBC Application. Debt, default and admission.
  • Topic 100: Section 9 IBC. Demand notice and dispute.