Torbit Legal Guide - The IBC Moratorium Paradox: Where Does This Leave Real Estate Consumers?

Justice M.M. Nerlikar's recent judgment from the Nagpur Bench of the Bombay High Court in Srei Equipment Finance Limited v. Rajesh Bajirao Khandewar (Criminal Writ Petition No. 41 of 2025) has crystallized what many of us in property law practice have been grappling with for years: when a real estate developer enters insolvency, consumer protection takes a back seat. Not temporarily, not partially, but completely.

The Court's observation that "the rigour of the IBC leaves no room for exceptions; once the moratorium is declared, the curtain falls on all parallel proceedings" is legally unimpeachable. Section 14 of the Insolvency and Bankruptcy Code, 2016, doesn't equivocate. But standing in a courtroom, watching a middle-aged couple realize their consumer complaint against a builder has been rendered non-maintainable because of an insolvency admission, you begin to question whether this is the balance the legislature intended.

What makes the current legal position particularly vexing is the tension between two recent approaches. In March 2025, the Supreme Court held in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth that regulatory penalties imposed under the Consumer Protection Act survive the IBC moratorium. The Court rightly distinguished punitive measures from debt recovery proceedings.

Yet the Bombay High Court now says that consumer proceedings—where homebuyers seek possession, refunds, or compensation—cannot continue during the moratorium. So penalties may be enforced, but the relief that matters to consumers remains elusive. This is rather like being told you can punish the thief but cannot recover your stolen property.

The doctrinal reasoning is sound. Penalties are excluded from debts under Section 79(15) of the IBC. Consumer proceedings seeking property or monetary relief affect the corporate debtor's assets and fall within the moratorium's sweep. But I suspect this neat legal distinction offers cold comfort to a homebuyer who has paid ₹80 lakhs for a flat and holds only an incomplete builder-buyer agreement.

The Property Definition Problem

The Nagpur Bench's interpretation of "property" under Section 3(27) of the IBC warrants closer examination. The Court held that directing the return of even a JCB machine constitutes interference with the corporate debtor's property. Extended to real estate, this means any consumer forum order directing a builder to hand over possession—even of a fully paid, substantially completed unit—would violate the moratorium.

Think about this for a moment. A homebuyer pays the builder, often taking a 20-year home loan. The builder uses that money—not for construction, but to fund other projects, pay earlier buyers, or service debt. When insolvency strikes, the flat the buyer paid for becomes part of the corporate debtor's assets, frozen for the resolution process. The buyer's claim is reduced to being just another unsecured financial creditor, competing with banks and operational creditors.

This inversion—where the buyer's money finances the builder's operations, yet the buyer ends up as a creditor in the builder's insolvency—reflects a fundamental flaw in how our legal system treats advance payments in real estate transactions.

RERA's Uncertain Status

Notably, the judgment doesn't address whether proceedings under the Real Estate (Regulation and Development) Act, 2016, would also be barred. I have watched RERA transform real estate dispute resolution over the past eight years. Its regulatory authorities have been far more effective than consumer forums in many jurisdictions.

But if consumer complaints are barred during the IBC moratorium, can RERA proceedings continue? Section 88 of RERA contains a non-obstante clause stating its provisions override other laws. Section 238 of the IBC contains an identical provision favoring the IBC. When two laws each claim supremacy, litigation is inevitable. We are likely to see this precise question before the Supreme Court within the next year or two.

My sense is that RERA proceedings, being regulatory in nature, may fare better than consumer complaints. But that remains untested, and uncertainty is the last thing distressed home buyers need.

The Jaypee and Amrapali Legacy

These aren't abstract legal questions. The Jaypee Infratech and Amrapali Group insolvencies affected over 40,000 homebuyers. Many waited six to eight years for resolution. During that period, they paid rent, serviced home loans for properties they couldn't occupy, and watched their savings erode.

The IBC promised a time-bound resolution: 180 days, extendable to 330 days. Reality has been different. Real estate insolvencies typically take 3 to 5 years. The complexity of land titles, multiple regulatory approvals, incomplete construction, and competing claims make these cases particularly challenging.

Meanwhile, homebuyers exist in limbo. Their consumer complaints have stayed. Their RERA remedies are uncertain. Their participation in the Committee of Creditors is often nominal because they lack the sophistication of institutional creditors. The resolution plan, when it finally comes, typically involves further payments or significant haircuts.

A Question of Priorities

Parliament amended the IBC in 2018 to classify homebuyers as financial creditors. This was meant to give them a voice in insolvency proceedings. In practice, that voice is often drowned out by secured creditors who hold priority in the waterfall distribution.

Consider the typical structure: secured creditors (banks and financial institutions) get first claim on assets after insolvency costs. Then come workmen's dues and employee salaries. Homebuyers, despite being classified as financial creditors, effectively compete with unsecured creditors for whatever remains.

This seems inequitable when you consider that homebuyer advances often exceed 80-90% of the property value. In commercial terms, they are the project's primary financiers. Yet they rank behind institutional lenders who may have advanced funds against property mortgages—mortgages secured by land purchased with homebuyer funds.

The circularity is obvious, but breaking it requires legislative intervention, not judicial interpretation.

What Practitioners Are Seeing

In my practice, I have noticed a pattern. Sophisticated developers now use the threat of IBC admission as a negotiating tactic. When faced with adverse consumer forum or RERA orders, they hint at financial stress and potential insolvency proceedings. Homebuyers, aware that insolvency will indefinitely freeze their remedies, often settle for less favourable terms.This isn't to suggest developers routinely abuse the IBC—many genuinely face financial distress. But the power imbalance is real, and the current legal framework amplifies it.

I have also seen homebuyers' associations struggle to participate effectively in insolvency proceedings. Unlike financial institutions with in-house legal teams and insolvency specialists, homebuyers must pool resources to engage professionals. Coordinating hundreds or thousands of individual buyers, each with slightly different interests, is monumentally difficult.

Due Diligence Beyond the Brochure

The lesson for prospective homebuyers is stark: due diligence can no longer be limited to visiting the site and reviewing the builder's earlier projects. You need to understand the builder's financial health, existing liabilities, and litigation profile.

Some practical measures:

Examine the builder's audited financial statements, available through the Registrar of Companies portal. Look at the debt-equity ratio, liquidity position, and profitability trends. A builder consistently operating on thin margins with high debt is a red flag.

Check pending litigation not just against the company, but also against its promoters and directors. The MCA21 portal, district court websites, and high court websites are all accessible. Time-consuming, yes, but so is fighting an insolvency proceeding.

Verify RERA registration meticulously. Check the sanctioned plan, approved timeline, and quarterly progress reports the builder must file. Delays in one project often indicate larger financial troubles affecting all projects.

Insist on project-specific escrow accounts. Though RERA mandates 70% of buyer advances be kept in separate accounts for project expenses, enforcement is patchy. A builder willing to provide quarterly escrow statements and bank certifications offers greater security.

Title verification remains paramount. Engage a good property lawyer—not the builder's panel lawyer—to examine the chain of title, encumbrances, and regulatory approvals. Title defects become increasingly difficult to resolve once insolvency proceedings begin.

The Resolution Process Reality

If you are a homebuyer in an IBC proceeding, I want you to know that your participation matters. The Resolution Professional is required to form a Committee of Creditors. While homebuyers below a threshold are represented collectively, staying informed about committee decisions is crucial.

Resolution plans often require homebuyers to make additional payments or accept delayed possession. Read these plans carefully. The NCLT will consider objections from homebuyers, though approval doesn't require unanimous consent. If the plan is patently unfair or unimplementable, voice your concerns through proper legal channels.

Remember that the approved resolution plan is binding and extinguishes all claims not included in it. This is your last opportunity to protect your interests. Once approved, you cannot later file consumer complaints or RERA applications for matters covered by the plan.

A Legislative Solution?

Courts must interpret the law as written, not as we wish it were written. Justice Nerlikar applied Section 14 faithfully. The problem isn't judicial interpretation; it's the statutory framework.

What's needed is legislative clarity on three points:

First, homebuyer priority in the distribution waterfall should reflect economic reality. When a buyer has paid 80% of the property value, their claim should rank alongside or ahead of secured creditors, at least for that specific unit.

Second, substantially completed units—say, those over 90% complete and for which the buyer has paid the full amount—should be transferable to buyers even during the moratorium. The builder's creditors have no real interest in an almost-finished flat when the buyer has already paid. Keeping such units in the moratorium serves no insolvency objective.

Third, RERA's interaction with IBC needs explicit clarification. If RERA proceedings are to be stayed during the moratorium, homebuyers should have clearly defined alternative remedies within the insolvency framework itself.

These aren't radical suggestions. They align with the IBC's objective of value maximization—a homebuyer who takes possession is more likely to complete payment than one who is fighting an insolvency proceeding for years.

Closing Reflections

In writing "Property Law Unveiled," I devoted considerable time to the evolution of property rights in independent India. We have moved from a system that privileged land-owning elites to one that, at least nominally, recognizes the property rights of ordinary citizens. RERA was a milestone in this journey.

But insolvency law has created a new hierarchy, one where institutional creditors and resolution mechanisms take precedence over individual property rights. This isn't inherently wrong—efficient insolvency resolution serves important economic objectives. But when applied to real estate, where the "creditors" are actually home buyers who have advanced money in exchange for property, the system feels misaligned with its underlying purpose.

The Nagpur Bench's judgment is a reminder that real estate consumers operate in a precarious legal space. Consumer protection laws offer remedies, but those remedies can vanish overnight if the builder enters insolvency. Regulatory mechanisms like RERA provide accountability, but their interaction with IBC remains uncertain. And the insolvency process itself, while offering homebuyers a seat at the table, often leaves them with fewer rights than they held before.

Until the legislature addresses these gaps, homebuyers must approach real estate transactions with the caution typically reserved for complex commercial dealings. The romantic notion of buying one's dream home must be tempered by a hard-headed assessment of financial risks and legal protections.

Because in the current legal framework, when insolvency strikes, the dream often becomes a protracted legal nightmare.

The author practices extensively in property and insolvency matters before the Supreme Court and various High Courts. The views expressed are based on analysis of current legal provisions and judicial precedents and do not constitute legal advice for specific situations.

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