Homebuyers under BuyBack Scheme: Financial Creditors under IBC?

– Saloni Khant, Executive | corplaw@vinodkothari.com

Real estate developers often raise funds by offering flats under buy-back or assured return schemes, sometimes with a mandatory repurchase clause, or sometimes at the builder’s discretion. On the other hand, there may be people who genuinely want to acquire a home and live in it. In the former case, when the builder fails to repay the money or allot the flats, can such a lender don the garb of a homebuyer?

In the ruling of Mansi Brar Fernandes v. Shubha Sharma and Anr, the Supreme Court held that such investors lured by assured profits cannot be permitted to trigger CIRP as real estate allottees. Permitting such investors to invoke the insolvency process would undermine revival, destabilise projects, and prejudice genuine homebuyers. It was further held that investors seeking assured returns are essentially acting as speculative investors rather than genuine homebuyers; allowing them to initiate CIRP as allottees could enable recovery actions disguised as insolvency proceedings, thereby disrupting project completion and harming bona fide homebuyers.

But are such investors altogether debarred from seeking any remedy under the IBC against the builder? Will they not be considered as financial creditors in the capacity of depositors?

This article explores the positions of homebuyers with different commercial intentions under IBC and analyses whether real estate investors under buyback or assured return schemes may invoke CIRP against builders in the capacity of depositors.

Homebuyers or moneymakers?

A homebuyer, in the true essence, is one who purchases a house with an intention to reside in it. He squarely fits in the wording and spirit of the definition of a real estate allottee under the IBC.

There may also be persons who acquire residential units with the intention of renting them out or benefiting from appreciation in property values. While such persons may not be homebuyers in the strict sense, their underlying intention is often difficult to ascertain. Accordingly, they may still fall within the classification of real estate allottees under the IBC.

A third category comprises investors who enter into buyback or assured returns arrangements with the developers. The treatment of such investors under the insolvency framework has been the subject of several judicial pronouncements.

Buyback schemes – a gateway to CIRP?

In the ruling of Mansi Brar Fernandes v. Shubha Sharma and Anr, the Supreme Court examined transactions where investors had paid money to developers under arrangements linked to buyback of flats. Two situations were involved: first, where the scheme itself provided for a mandatory buyback, and second, where the buyback was optional at the discretion of the builder. The Supreme Court observed that the transactions were structured to yield an unusually high returns of over 25% in case of mandatory buyback scheme and 350% in case of the optional buyback scheme, respectively, within a short duration. The present facts indicated that the arrangements were essentially investment schemes rather than genuine purchases of residential units. Further, it was held that the investors whose participation is driven by the lure of assured profits, rather than the intention to acquire a residence, cannot be permitted to trigger CIRP. Since, if permitted, this would undermine revival, destabilise projects, and prejudice genuine homebuyers.

While the stance that such investors earning fixed rates of returns cannot be regarded as “homebuyers” under IBC is now settled, the case opens up a larger question as to whether these transactions can be considered as “deposits”. The question did not come up before the SC; however, the determination is extremely relevant because, if the transaction is considered to be a deposit being taken in the garb of repurchase agreements or alike, the same would attract an array of strict compliances under the Companies Act, 2013.

Scope and meaning of “deposits”

Pursuant to section 2(31) of the Companies Act, 2013:

“Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.”

Rule 2(1)(c) of the Deposit Rules, 2014  defines deposit as:

“(c) “deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

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(xii) any amount received in the course of, or for the purposes of, the business of the company,-

(b) as advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against such property in accordance with the terms of agreement or arrangement;

The provisions above imply that deposit is essentially a “money for money” scheme i.e., it involves the receipt of money with an obligation to repay in money. However, where the amount is received as advance towards the purchase of the immovable property and is intended to be adjusted against the consideration for such property in terms of the underlying agreement, it falls in the exemption provided in the Deposit Rules.^[1] 

Exemption for “advances”

1. As per clause (xii) of rule 2(1)(c), the definition of deposit excludes amount received in the course of or for the purpose of business as advance received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against such property in accordance with the terms of agreement or arrangement.
2. Therefore, the following pre-conditions are essential, for an advance to be exempted from the scope of “deposit”:
3. It should not be a money-to-money transaction – that is, the transaction should not involve acceptance of money with an obligation to return the same.

This holds good irrespective of whether there is an interest component or not. Money may be deposited with or without interest but payable whether on demand or otherwise shall be a deposit.

1. it has to be received in the course of or for the purpose of business of the company,
2. it has to be against consideration for an immovable property.

The transactions in the case of buyback or assured returns schemes do not fulfill the requirements of an advance as provided in clause (xii) of rule 2(1)(c) of the Deposit Rules so as to be exempted from the definition of deposits on account of the following reasons:

1. The transactions are clearly money-for-money transactions where the investor deposits money with the builder who repays the same with huge returns.
2. While these transactions appear to be advances against consideration for an immovable property, the investor has no intent of purchasing the property. From the very beginning, the purpose is to lend money to the builder.

It is well settled in law that such buyback agreements are in the nature of loans and not advances against the immovable property. In practice, however, such structures often emerge from an attempt to seek shelter from the stringent compliances governing deposits, by presenting what are essentially deposit-like transactions in the guise of advances against immovable property. 

Deposit – an inherent financial debt

Where companies accept deposits explicitly or under such guise of advance against immovable property, the question arises as to whether  the depositors are entitled to be treated as financial creditors under IBC?

Deposits fulfill the conditions set out in the definition of ‘financial debt’ as provided under section 5(8) of IBC, 2016:

‘A debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes-

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing .’

Further, section 21(6A)(a) recognises deposits as financial debts. Needless to say, a depositor is a financial creditor. Even otherwise, a mandatory or optional buyback agreement anyways partakes the nature of a financial transaction since there is a clear effect of commercial borrowing.

In fact, uptil now, there have been diverse rulings on whether investments made under buyback schemes are financial debts. In the case of Kussum Chadha Ahuja[1]  and Anr. v. M/s C&C Towers Limited, NCLT admitted a CIRP application from investors under a buyback scheme with assured returns for purchasing  a commercial property. See also Mr. Paritosh Jain & Anr. v. Anand Divine Developers Pvt. Limited. In the case of Mr. Narender Kumar v. Aadinath Probuild (India) Private Limited and Ors., the NCLAT had also allowed investors under a buyback scheme to initiate CIRP against the defaulting builder.

In the case of Mr. Mohanlal Dhakad v. BNG Global India Limited, while NCLT acknowledged that the amount paid by investors under the buy back scheme amounts to ‘deposit’, however, directed to  explore alternative remedies under the deposit-related provisions under the Companies Act, which was later considered as financial debt by the NCLAT. [2] 

That is to say, the angle of deposits in such buyback schemes has not been entirely overlooked. The Indian Courts have time and again acknowledged the possibility that investments under buyback schemes may amount to deposits. However, In the humble submission of the author, the present ruling of Hon’ble Supreme Court seems to have overlooked the ‘deposit’ angle in the buyback scheme and has excluded the investors under buyback scheme from the ambit of homebuyers, the judgement does not appear to have conclusively determined whether such investors stand entirely outside the purview of financial creditors.  

Conclusion

The present ruling of the Supreme Court in Mansi Brar clarifies that investors entering into buyback or assured return schemes in case of real estate investment cannot invoke CIRP in the capacity of homebuyers, since their objective is investment returns rather than acquisition of a real estate unit. However, the judgement also brings forward a related question. If such arrangements are in substance money-for-money transactions with an assured return, they may also merit examination from the perspective of deposit provisions.

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^[1] See detailed article: “On the meaning of “Deposit” for Deposit Regulations”, at: https://vinodkothari.com/wpcontent/uploads/2017/03/On_the_meaning_of_Deposit_for_Deposit_Regulations.pdf

 [1]Para 4 – details of the scheme

 [2]Para 2 – Extract of NCLT ruling

Refer to our articles:

1. IBC (Amendment) Bill, 2025: Key Recommendations of the Select Committee
2. Redeemable preference shares not debt under IBC
3. A voice without a vote: IBBI proposes OCs as observers amongst unrelated FCs in CoC