No Sailing In Two Boats: Electing Remedy For Refund Strips A Home Buyer Of The Financial Creditor Tag

The National Company Law Appellate Tribunal (“NCLAT”), Principal Bench, New Delhi, vide its judgment dated August 19, 2026, in Mr. Sumit Bansal v. Mr. Rajeev Lochan, Resolution Professional, Messrs RG Residency Private Limited, Company Appeal (AT) (Ins) Nos. 858 of 2025, held that flat purchasers who have executed agreements for sale with assured appreciation returns and have subsequently elected to seek a full refund of their investment by invoking arbitration clause and initiating proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), renounce their status as “allottees”. Consequently, such claimants cannot be accorded the status of a “Financial Creditor” in the class of allottees under Section 5(7) read with the Explanation to Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 (“Code”).

Brief Facts:

Messrs RG Residency Private Limited (“Corporate Debtor”), floated a residential real estate project wherein the Appellants agreed to purchase multiple flats for a cumulative consideration of INR 1,35,00,000 (Indian Rupees One Crore Thirty-Five Lakh only). Upon full payment of the said consideration, Agreements for Sale (“Agreements”) were executed between the parties on November 24, 2015, which were unregistered. Under the terms of the Agreements, symbolic possession was handed over along with post-dated “value appreciation cheques” pursuant to Clause 7(d), assuring complete construction and handover of physical possession by September 30, 2018. Further, Clause 10 of the Agreements provided for dispute resolution through arbitration.

Upon the failure of the Corporate Debtor to deliver the possession on schedule, the appreciation and refund cheques were presented by the Appellants which were returned as dishonoured by the bank. Accordingly, actions were initiated under Section 138 of the NI Act followed by invocation of arbitration by the Appellants praying for a full refund of the consideration paid together with interest at 12% (twelve percent) per annum from October 1, 2018. Subsequently, during the Corporate Debtor’s insolvency proceedings, the Appellants filed interlocutory applications under Section 60(5) of the Code before the National Company Law Tribunal (“NCLT”) seeking admission of their entire claim and praying to be recognized as financial creditors in the class of allottees.

Vide order dated May 13, 2025, the NCLT upheld the validity of the Agreements and directed the admission of the entire claim of the Appellants, however, the NCLT declined to accord the Appellants the status of ‘financial creditors’ under Section 5(8)(f) of the Code. Aggrieved by the latter, the Appellants approached the NCLAT.

Issue:

Whether flat purchasers holding unregistered agreements for sale with assured appreciation returns, who have actively sought refund of their investment by invoking arbitration and initiating proceedings under Section 138 of the NI Act, can claim the status of “Financial Creditors” in the class of allottees under Section 5(8)(f) of the Code?

Contentions of the Appellant:

It was contended by the Appellants that having remitted the full and final sale consideration under the executed Agreements, they squarely fall within the definition of allottees under a real estate project, and hence a financial creditor belonging to a class in terms of Section 5(8)(f) of the Code. Relying heavily on the judgment of the Supreme Court in Vishal Chelani. v. Debashis Nanda, Civil Appeal No. 3806 of 2023., it was argued that the law strictly prohibits classification or a sub-classification, as amongst the class of allottees, and that they must be treated commonly for the purposes of allotment.

Contentions of the Respondent:

It was the case of the Respondent that the Appellants’ claim for declaration as financial creditors was untenable in light of their own admitted conduct and the covenants of the underlying transaction. Referring specifically to Paragraphs 4 and 5 of the Appellants’ statement of claim before the Arbitral Tribunal, the Respondent highlighted that only symbolic possession had been handed over alongside appreciation and principal security cheques, with physical handover of fully constructed units being contingent upon future completion. On this basis, the Respondent submitted that the Agreements could not be treated as a complete transfer or actual delivery of the property in question, and consequently, did not possess the essential features of an “allottee”.

Decision:

The NCLAT observed that to acquire the status of a “Financial Creditor” under Section 5(7) read with Section 5(8) of the Code, there must exist a subsisting “financial debt owed” by the Corporate Debtor, which, in terms of Section 3(11) of the Code, signifies a continuous liability or obligation. The NCLAT noted that by accepting post-dated refund/appreciation cheques, presenting them for encashment, initiating criminal proceedings under Section 138 of the NI Act upon dishonour, invoking arbitration to seek a full refund, and filing of application before the NCLT seeking refund, the Appellants, by their own conduct, waived and renounced their status as allottees. As the debt stood remitted and discharged when the Appellant filed the interlocutory application seeking the refund, consequently, the obligation of the Corporate Debtor qua the Appellants ceased to be continuous, disentitling the Appellants from being termed as a “Financial Creditor” in terms of Section 5(8) of the Code.

Distinguishing the Supreme Court’s ruling in Vishal Chelani (supra), the NCLAT observed that Vishal Chelani (supra) prohibited sub-classification among allottees whose refund claims were crystallized in a decree passed by Real Estate Regulatory Authority (“RERA”). In the present case, the Appellants could not claim parity as they did not retain the status of allottees in the first place upon invocation of arbitration seeking refund. The NCLAT emphasized that a claimant cannot “sail on two boats simultaneously” by pursuing pure monetary recovery remedies under the NI Act and arbitration on one hand, while continuing to assert the protective status of an allottee under the Code on the other.

The NCLAT further held that the mere execution of an agreement for sale does not confer legal sanctity to the agreement for sale and the conditions of the agreement, and that the Appellants cannot be placed on same pedestal as that of a continuous allottee. Finding no perversity in the order of the NCLT declining to recognize the Appellants as financial creditors, the NCLAT dismissed all the company appeals.

Argus Comment:

The NCLAT’s ruling in Sumit Bansal sets a vital boundary for the statutory legal fiction under the Explanation to Section 5(8)(f) of the Code. While the Supreme Court in Vishal Chelani (supra) protected genuine allottees seeking statutory refunds, the NCLAT has rightly distinguished such agreements in question in the present dispute. Where a transaction is underpinned by guaranteed “value appreciation” returns and the purchaser elects to pursue purely monetary recovery through contractual arbitration and cheque-dishonour proceedings, the claimant voluntarily renounces their status as an “allottee”. This is because a ‘financial creditor’ status for homebuyers exists solely by virtue of the legal fiction tied to an active allotment, renouncing that relationship causes the statutory fiction under Section 5(8)(f) to collapse.

Crucially, this principle does not impact conventional lenders who initiate arbitration or recovery suits as they derive their status directly from core provisions (like based on the time value of money), which operates independently of any allotment relationship and remains intact during recovery or arbitral proceedings.

Practically, while such claimants do not lose their admitted monetary claim, they are stripped of the privileges accorded to “Financial Creditors” and are relegated to the class of “Other Creditors,” forfeiting representation and voting rights in the Committee of Creditors. The ruling strikes a necessary balance by shielding resolution processes under the Code from speculative investors seeking undue leverage, without extinguishing their underlying claims.

Please find attached a copy of the Judgment, here.