Homebuyers with RERA orders can't be paid less in insolvency: SC

A builder went bankrupt. Some homebuyers had RERA refund orders. The resolution plan paid them half of what others got. The Supreme Court just tore up that plan.

The plan had already passed two courts. The National Company Law Tribunal (NCLT) approved it. The National Company Law Appellate Tribunal (NCLAT) upheld it on 28 February 2023. Then the Supreme Court asked a question that undid everything: could a resolution plan punish homebuyers for exercising their legal rights?

The courtroom fell silent as the bench—Justice S. Ravindra Bhat and Justice Aravind Kumar—listened to the argument. On the table lay the resolution plan document, its pages marked with the 50% figure that separated one group of homebuyers from another. A stack of UPRERA orders sat beside it, each one a legal decree the affected homebuyers had obtained before the builder entered insolvency.

When the builder stopped building

Bulland Buildtech Pvt. Ltd. launched a real estate project. Homebuyers booked flats. They paid their money. Then the project stalled.

Some homebuyers did what any reasonable person would do: they complained to UPRERA—the Uttar Pradesh Real Estate Regulatory Authority, set up under the Real Estate (Regulation and Development) Act, 2016 (RERA). UPRERA ordered the builder to refund their money with interest under Section 18 of RERA. These homebuyers now held a legal decree from a statutory authority.

But before they could recover, the builder entered insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). The company went into a Corporate Insolvency Resolution Process (CIRP—the formal process where a resolution professional takes over a bankrupt company to find a buyer or revive the business).

The resolution plan that drew a line

The resolution professional—the person managing the company during insolvency—prepared a plan to revive the company or sell its assets. That plan split homebuyers into two groups.

One group: homebuyers who had obtained refund orders from RERA. The other: homebuyers who had not approached RERA. The first group was offered 50% less than the second.

The logic: homebuyers with RERA orders had already secured a legal remedy and could pursue that separately. The plan treated them as a separate sub-class of financial creditors (creditors who lent money to the company and are entitled to repayment under the IBC).

The affected homebuyers challenged this. They argued the IBC treats all homebuyers as financial creditors, regardless of RERA orders. The NCLT disagreed. The NCLAT disagreed too, dismissing the appeal on 28 February 2023.

What the IBC actually says

The homebuyers appealed to the Supreme Court. Their argument rested on a single provision: Section 5(8)(f) of the IBC, which defines "financial debt" to include amounts raised from allottees in a real estate project. The Explanation to this provision makes it clear: any amount received from an allottee is a financial debt, regardless of whether the allottee has a court order or RERA decree.

In plain terms: every homebuyer who paid money is a financial creditor. The law does not create a hierarchy based on who filed complaints with RERA.

The resolution plan created exactly that hierarchy. It classified RERA decree-holder homebuyers as a separate sub-class and paid them less. The homebuyers argued this was not just unfair—it was unconstitutional.

Why the court said no

The Supreme Court bench allowed the appeal on 6 October 2023. The court held that Section 5(8)(f) of the IBC makes no distinction between different classes of financial creditors. Homebuyers who have obtained orders from RERA cannot be treated differently from those who have not, because both are financial creditors by virtue of being allottees.

The court observed: "The underlying claim of an allottee is crystallized in the form of a court order or decree under RERA, but that does not alter or disturb the status of the allottee as a financial creditor under IBC." Only homebuyers can approach RERA. Treating those who exercised RERA remedies differently under the IBC, the court said, "would be highly inequitable."

The court also invoked Section 238 of the IBC, which contains a non obstante clause (a provision giving the IBC overriding effect over other laws). RERA-based distinctions cannot override the equal treatment mandated by the IBC's classification of allottees as financial creditors.

The constitutional problem

The court went further. It held that the distinction drawn by the resolution professional was artificial. The court called it "hyper classification"—a classification so fine and arbitrary that it violates Article 14 of the Constitution (the right to equality before the law).

Article 14 does not forbid classification. But it requires that any classification be reasonable and based on an intelligible differentia—a genuine difference that justifies different treatment. Here, the court found no such difference. Both categories had paid money. Both had a claim for refund. The only difference was that one group had approached RERA and obtained an order. That, the court said, was not a valid basis for discrimination.

The court cited the precedent of Mr. Natwar Agrawal (HUF) v. Ms. Ssakash Developers & Builders Pvt. Ltd., decided by the NCLT Mumbai Bench on 2 August 2023, to reinforce the principle that allottees are financial creditors under the IBC.

What this means for homebuyers

The judgment is a significant victory for homebuyers caught between two legal regimes—RERA and IBC. Exercising your rights under RERA does not weaken your position under IBC. All homebuyers stand on equal footing as financial creditors, regardless of whether they have pursued RERA remedies.

For resolution professionals, the message is equally clear: you cannot create sub-classes of financial creditors based on orders from other statutory authorities. The IBC's classification of allottees is uniform and cannot be fragmented.

THE PLAY: If you are a homebuyer with a RERA refund order in a builder's insolvency, you are entitled to the same treatment as every other homebuyer—and you can challenge any resolution plan that offers you less.

The court set aside the impugned orders and declared the appellants as financial creditors entitled to equal treatment with other homebuyers. The appeal was allowed. The resolution plan—already approved by the NCLT and NCLAT—now goes back to the adjudicating authority for reconsideration. This time, with one understanding: all homebuyers are equal under the IBC.