If Your Builder Goes Insolvent: What the IBC Means for Bengaluru Homebuyers

The word arrives in a WhatsApp group before it reaches any formal letter: insolvency. A buyer in a stalled tower on the outskirts of Bengaluru reads that a lender has taken the developer to the tribunal, and a dozen questions follow at once. Is my money gone? Can I still go to RERA? Do I have any say in what happens to the project?

The Insolvency and Bankruptcy Code, 2016 gives homebuyers a defined place in that process. It treats money raised from flat buyers as a financial debt, sets out how buyers can start a case together, and pauses most other proceedings once a case is admitted. This guide reads the relevant provisions from the official texts published by the Insolvency and Bankruptcy Board of India and explains what they mean for a Bengaluru buyer.

The short answer. Under the explanation to Section 5(8)(f) of the IBC, any amount raised from an allottee under a real estate project is deemed to have the commercial effect of a borrowing, which makes it a financial debt. Under the second proviso to Section 7(1), homebuyers in the same project can start an insolvency case only jointly, with at least one hundred allottees or ten percent of the allottees in that project, whichever is less. Once a case is admitted, a moratorium under Section 14 stops new suits and proceedings against the developer. The trade-off: the IBC gives buyers a collective voice in a resolution, but it moves individual claims into a shared process, so timing and coordination with other buyers matter.

Are flat buyers financial creditors under the IBC?

The consolidated text of the Insolvency and Bankruptcy Code, 2016 published by IBBI defines financial debt in Section 5(8). Clause (f) covers any amount raised under any other transaction, including a forward sale or purchase agreement, having the commercial effect of a borrowing.

The explanation to that clause settles the position for homebuyers. It says that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing. It also says that "allottee" and "real estate project" carry the meanings given in Section 2(d) and Section 2(zn) of the Real Estate (Regulation and Development) Act, 2016.

So the instalments you paid towards an apartment in a real estate project are treated as a financial debt owed to you by the developer. That puts homebuyers among the creditors to whom a financial debt is owed, rather than leaving them as ordinary trade creditors.

How can homebuyers start an insolvency case against a builder?

Section 7(1) allows a financial creditor, alone or jointly with others, to apply to the Adjudicating Authority to start a corporate insolvency resolution process when a default has occurred. For homebuyers, a specific threshold applies.

The second proviso to Section 7(1) says that for financial creditors who are allottees under a real estate project, an application shall be filed jointly by not less than one hundred allottees under the same real estate project, or not less than ten percent of the total number of allottees under the same project, whichever is less.

That threshold is designed around a single project. A buyer in a large Bengaluru development cannot file alone, and buyers spread across several of the same developer's projects count separately for each project. In practice, it means an organised association or buyers' group is usually the vehicle for any homebuyer application.

IBBI's legal framework page also lists the Insolvency and Bankruptcy Code (Amendment) Act, 2026, which received assent on 6 April 2026. Its Section 1(2) says it comes into force on dates the Central Government notifies, and its Section 4 substitutes Section 7(5) of the Code so that the tribunal must admit or reject an application within fourteen days, after a seven day window to rectify defects. Check which provisions have been notified before relying on that timeline.

What changes once a builder's insolvency case is admitted?

Admission brings the moratorium. The table below sets out the key provisions a buyer will feel first.

The moratorium is the provision buyers notice most. Section 14(1)(a) prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree or order in any court, tribunal, arbitration panel or other authority. A buyer who had a complaint or an order against the developer elsewhere should expect that route to pause while the moratorium lasts.

Two other limbs of Section 14(1) shape what happens to the project itself. Clause (c) prohibits any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property, including action under the SARFAESI Act, 2002. Clause (d) prohibits the recovery of any property by an owner or lessor where that property is occupied by or in the possession of the corporate debtor. Together with clause (b), these keep the land, the structure and the project assets together while a resolution is attempted, rather than letting individual lenders pull pieces away.

The explanation to Section 14(1) adds a protection that matters for a real estate project. It clarifies that, notwithstanding any other law, a licence, permit, registration, quota, concession, clearance or similar grant given by a government, local authority, sectoral regulator or other authority shall not be suspended or terminated on the grounds of insolvency, as long as there is no default in paying current dues for its use or continuation during the moratorium. For buyers, that means approvals the project needs are not meant to fall away merely because insolvency has started, which keeps completion by a resolution applicant possible.

How long does a resolution process take under the Code?

Section 12(1) says the corporate insolvency resolution process shall be completed within one hundred and eighty days from admission. Section 12(2) and (3) allow one extension of up to ninety days, on an application backed by sixty-six percent of the voting shares in the committee of creditors, if the tribunal is satisfied the process cannot be completed in time.

The second proviso to Section 12(3) adds an outer limit: the process shall mandatorily be completed within three hundred and thirty days from the insolvency commencement date, including any extension and the time taken in legal proceedings. Those are the Code's targets; individual cases can involve further litigation, so use them as a guide rather than a promise.

Because homebuyers in a large project can be numerous, Section 21(6A)(b) of the Code provides for an authorised representative to act for a class of financial creditors that exceeds a specified number. For buyers, that means your voice in the committee is usually exercised through a representative, which is another reason to stay in touch with your association.

How does RERA fit alongside an insolvency case?

Your RERA rights do not disappear, but the moratorium shapes how they can be used against the developer while it lasts. The protections built into RERA before insolvency still matter, especially the separate project account. Our guide to the RERA 70 percent project account rule explains why money held there is meant for construction and land cost.

A RERA registration can also be revoked for defaults, and buyers then have specific rights to a refund or to completion through the association. We set out those routes in our guide to what happens when a RERA registration is extended, lapses or is revoked. Which route is open in a given case, and in what order, is a question for advice once an insolvency application is filed or admitted.

What should a Bengaluru buyer do if insolvency is mentioned?

Move early and together. Use this checklist:

1. Confirm whether an insolvency application has been filed, admitted, or only discussed.
2. Collect your agreement for sale, allotment letter and every payment receipt.
3. Join or form a buyers' association for your specific project.
4. Count how many allottees your project has, since the filing threshold is project based.
5. Watch for a public announcement inviting claims once a case is admitted.
6. File your claim with proof of payments within the period the announcement sets.
7. Take advice on how your pending RERA or other cases are affected by the moratorium.

Insolvency is unsettling, but the Code gives homebuyers a defined status and a seat at the table. Buyers who organise and document their claims early are best placed to use it.

What do Bengaluru homebuyers ask about builder insolvency?

Are homebuyers financial creditors under the IBC?

Yes. The explanation to Section 5(8)(f) of the Insolvency and Bankruptcy Code says any amount raised from an allottee under a real estate project is deemed to have the commercial effect of a borrowing, which makes it a financial debt. Allottee and real estate project carry their RERA Act meanings.

How many homebuyers are needed to start an insolvency case?

Under the second proviso to Section 7(1), allottees must file jointly: at least one hundred allottees under the same real estate project, or ten percent of the total allottees in that project, whichever is less. A single buyer cannot file alone under this proviso.

What happens to my RERA case if the builder enters insolvency?

Once a case is admitted, Section 14(1)(a) of the Code imposes a moratorium prohibiting the institution or continuation of suits and proceedings against the developer, including execution of orders. Your pending case is therefore likely to pause, so take advice on its status.

How long does the insolvency process take?

Section 12 sets 180 days from admission, with one extension of up to 90 days, and an outer limit of 330 days from the insolvency commencement date including extensions and litigation. These are the Code's targets, and individual cases can take longer where litigation intervenes.

Last updated 2026-10-17. PropNewz Team.