Intra-Class Distinctions Among Homebuyers in Real Estate Insolvency cases
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Homebuyers were granted the status of financial creditors under the Insolvency and Bankruptcy Code, 2016 (IBC) following the Supreme Court’s judgement in the Pioneer Urban case, enabling them to initiate corporate insolvency resolution processes (CIRPs), participate in the Committee of Creditors (CoC), and vote on resolution plans. The issue of intra-class distinctions has become significant in real estate insolvency cases because homebuyers are not a homogenous group as they have differences in payment timing, possession status, etc, which challenge the principle of equitable treatment under the IBC, raising questions about whether all homebuyers should be treated uniformly despite varying circumstances. Representing a diverse homebuyer group within the CoC poses challenges due to the structural power imbalance, lack of negotiation power in standard agreements, and the risk of speculative or non- bona fide buyers undermining the resolution process. This necessitated pre-admission scrutiny to ensure genuine intent and protect the integrity of the CIRP.
Understanding Homebuyers as a Single Class
Due to the financial debt created when homebuyers pay amounts for allotment in Real Estate Insolvency cases projects, as clarified by an amendment to section 5(8)(f) of the IBC. The rationale for treating them as a single class is the need for unified decision-making to ensure project revival, prevent fragmentation within the CoC, and maintain a time-bound resolution process, as the legislative intent emphasises coherence and efficiency. To manage this, homebuyers elect an Authorised Representative (AR) who acts on their behalf in CoC meetings, casting votes according to instructions received from the class, and is appointed by the Adjudicating Authority prior to the first CoC meeting. The AR ensures collective representation, binding all homebuyers to decisions made by majority vote, thereby upholding the principle of unified action and preventing individual dissent from disrupting the resolution process.
Why Intra-Class Differences Arise
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- Variations in Project Status: Buyers of completed units prioritise quick possession or the immediate finalisation of amenities, potentially favoring resolutions that differ significantly from those desired by buyers of early stage bookings. For those invested in semi-complete or early-stage projects, recovery expectations are often lower and they may be more amenable to rescue financing or stalled project completion plans, while buyers of finished units might push for immediate legal remedies or winding up proceedings if possession is delayed.
- Differences in Contractual Terms: Agreements or contracts often include different price variations, possession timelines, etc., resulting in a disparity of legal rights and potential compensation claims among a group of buyers. These differential rights mean some buyers might have stronger legal standing to demand specific performance or higher penalties than others, influencing their willingness to negotiate or compromise during resolution processes.
- Investment Intent: Genuine-end users are primarily focused on obtaining their physical home and are often more patient with completion plans and less concerned with maximising immediate financial returns, fostering a preference for project rescue over liquidation. Conversely, speculative or investment-oriented buyers view the property purely as a financial asset and may advocate for faster exit strategies or liquidation to recover capital, a stance that has led to judicial scrutiny regarding their influence on decisions affecting end-users.
- Extent of Payment Made: Fully-paid home buyers have the largest financial exposure and are often strongly aligned with the project’s completion to realise their full investment, making them highly invested in seeing the project through the end. Partially-paid and defaulting homebuyers have different levels of leverage and risk exposure, which shapes their preferences, thereby, those who have paid less might be more willing to abandon the project or pursue immediate, partial refunds rather than committing more funds to a potentially uncertain completion. Read more : Financial creditor can initiate CIRP against both Principal Borrower and Corporate Guarantor
Judicial View on Intra-Class Distinctions
Supreme Court has held that:
- Courts generally discourage splitting homebuyers into sub-classes.
- Collective voting ensures administrative feasibility.
- Need to balance individual grievances with overall class interests.
Challenges Created by a Single-Class Approach
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- Conflicting Interests Within the Group: A single-class approach forces end-users who prioritize early possession to be grouped with investors whose primary goal is maximum financial recovery. This structure also creates conflicts between buyers of premium units and buyers of affordable units regarding shared costs and potential recoveries.
- Voting Complications: Within a single-class, an AR faces the challenge of reconciling diverse viewpoints and priorities among the group members. This structure can make it difficult to ensure that the concerns of all members are adequately considered in the final decision-making process.
- Valuation and Distribution Issues: It becomes difficult to provide fair and uniform treatment within a resolution plan when a single class comprises creditors with fundamentally different claims and expectations. This approach inevitably leads to significant disputes over the priority of allotments in a project or the equitable distribution of limited funds for refunds.
Possible Approaches for Better Resolution
- Enhanced Role for Authorized Representatives: To improve resolutions, it is required to include more frequent consultation with ARs, and a systematic process ofr segment-wise feedback collection. Additionally, ensuring clearer communication regarding plan implications can better inform homebuyers about their options.
- Transparent Plan Structuring: This allows for differential treatment criteria based on objective measures, such as current construction status, payment percentage completed, or specific contractual entitlements, thus, ensuring fairness by providing distinct, justifiable categories for treatment within a single resolution plan.
- Strengthening Information Flow: This is achievable through the use of dedicated digital portals for real-time updates and document access. These portals can also interactive tools for plan comparisons and guided voting processes.
- Policy-Level Clarity: Possible future reforms include the formal recognition of sub-class distinctions where justified. Such reforms would need robust safeguards to ensure fairness and prevent misuse of these distinctions.
Conclusion
Intra-class distinctions among homebuyers are inevitable due to varying interests and contractual rights, such as differences in payment timing, possession status, and the existence of recovery certificates. While the IBC currently mandates treating them as a single class of financial creditors, practical challenges persist, including unequal voting power through an AR and difficulties in coordinating collective action. A combination of judicial refinement, improved representation, and transparent plan structures can ensure fair outcomes in real estate insolvency cases.
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