NCLT Developer Insolvency and Bangalore Home Loans

What Happens to a Bangalore Home Loan When the Developer Enters NCLT Insolvency Proceedings and What Are the Allottee’s Options?

By the Property Law Team | Legal Brigade | Bar Council of Karnataka

When a Bangalore under-construction flat allottee has an active home loan from a bank — with construction-linked disbursements tied to the developer’s project milestones — and the developer enters insolvency proceedings before the National Company Law Tribunal under the Insolvency and Bankruptcy Code 2016, the allottee faces a complex situation where the developer’s obligation to complete the project is suspended by the NCLT’s moratorium, the bank’s disbursements may be halted as the construction milestone triggers are not met, the allottee’s EMI obligation continues despite not receiving possession and the allottee must decide between continuing with the loan pending the NCLT resolution or seeking relief through the NCLT as a financial creditor.

What Happens to the Home Loan When the Developer Enters NCLT?

When the developer enters NCLT insolvency, the NCLT imposes a moratorium under IBC Section 14 — suspending all proceedings against the developer’s assets and prohibiting any enforcement or transfer of the developer’s assets during the moratorium period. This moratorium affects: the RERA escrow (which is part of the developer’s assets and comes under NCLT jurisdiction); the construction of the project (which requires the developer’s continued operation); and the allottee’s possession timeline (which cannot proceed until the resolution plan determines the project’s future).

The home loan bank is not directly affected by the NCLT moratorium — the moratorium restricts proceedings against the developer, not against the allottee. The allottee’s obligation to pay EMI to the bank continues regardless of the NCLT proceedings. An allottee who stops paying EMI because the project is in NCLT becomes a home loan defaulter — risking SARFAESI enforcement by the bank against the allotment rights. This creates the central dilemma for allottees of NCLT-project developers.

What Is the Allottee’s Position as a Financial Creditor in NCLT?

The Supreme Court of India’s ruling in Pioneer Urban Land and Infrastructure v. Union of India (2019) confirmed that home buyers (allottees) are financial creditors under the IBC — entitled to participate in the Committee of Creditors that approves the resolution plan for the insolvent developer. As financial creditors, allottees have voting rights in the CoC and can vote on whether the resolution plan is acceptable — specifically whether the plan provides for project completion or for a refund with interest.

An allottee who votes against a resolution plan that provides for completion (preferring instead a refund) can receive the refund amount specified in the plan if the majority of the CoC approves the plan. An allottee who votes for a completion plan but the developer subsequently fails to complete faces a second round of NCLT proceedings. The resolution professional (RP) appointed by the NCLT manages the project during the CIRP period — the allottee’s interaction with the project shifts from the developer to the RP.

What Steps Should the Allottee Take When the Developer Enters NCLT?

Step 1: File a proof of claim with the NCLT’s resolution professional within the prescribed period — typically 30 days from the public announcement of the CIRP. The claim should include the total amount paid to the developer with interest.

Step 2: Continue paying home loan EMIs to the bank — stopping EMIs creates a SARFAESI risk from the bank that is entirely separate from the NCLT proceedings.

Step 3: Monitor the NCLT proceedings through the resolution professional’s public announcements — the RP publishes information about the CIRP progress, the resolution plan applications and the CoC meetings.

Step 4: Participate in the CoC meetings when invited — as a financial creditor, exercise the voting right on the resolution plan. Assess whether a completion plan or a refund plan is more beneficial for the specific situation.

Step 5: Have a property lawyer advise on the NCLT claim filing, the CoC voting strategy and the interaction between the NCLT proceedings and the home loan bank’s position.

Q1. What is the NCLT moratorium and does it protect the allottee from the bank’s home loan enforcement?

The NCLT moratorium under IBC Section 14 restricts proceedings against the developer’s assets during the CIRP period. It protects the developer’s assets from creditor enforcement — not the allottee. If the allottee defaults on their home loan EMIs, the bank can proceed with SARFAESI enforcement against the allottee’s allotment rights — the moratorium does not protect the allottee from this action.

Q2. What is a resolution professional and what do they do with the developer’s project?

The resolution professional is an NCLT-appointed insolvency professional who manages the insolvent developer’s operations during the CIRP period. The RP takes over from the developer’s management, manages the project’s assets (including the RERA escrow), invites resolution plan applications from potential acquirers and presents the resolution plan to the CoC for approval. For RERA projects, the RP must also interact with K-RERA about the project’s RERA registration and completion obligations.

Q3. Can the allottee get a refund through the NCLT resolution plan?

A resolution plan can provide for a refund of allottees’ amounts — typically at a discount to the full amount paid plus interest, reflecting the developer’s insolvency position. The refund quantum in the resolution plan is negotiated between the resolution applicant and the CoC. Allottees who prefer a refund should vote against completion plans and advocate for refund provisions in the resolution plan.

Q4. What happens to the RERA K-RERA registration during NCLT proceedings?

The interaction between K-RERA and the NCLT for RERA-registered projects is governed by the Supreme Court’s ruling in Flat Buyers Association v. Union of India. K-RERA’s RERA registration and the RP’s NCLT management co-exist — the RP must obtain K-RERA’s cooperation for the project’s completion if the resolution plan provides for completion. K-RERA cannot unilaterally cancel the RERA registration during the NCLT moratorium.

Q5. Can the allottee file a RERA complaint against the developer who is in NCLT?

RERA complaints against an insolvent developer are technically possible but may be stayed by the NCLT moratorium — the moratorium restricts “the institution of suits or continuation of pending suits or proceedings” against the developer. K-RERA complaints may be treated as “proceedings against the corporate debtor” and stayed during the moratorium. The allottee’s primary recourse during NCLT is through the CIRP process, not through K-RERA.

Q6. What if the NCLT liquidates the developer instead of approving a resolution plan?

If no resolution plan is approved within the CIRP timeline, the NCLT orders liquidation of the developer. In liquidation, the developer’s assets (including the project’s land and construction) are sold to pay creditors. Allottees as financial creditors have a priority claim on the project’s assets in liquidation. However, liquidation typically results in a lower recovery than a resolution plan — the allottees may receive significantly less than the full amount paid.

Q7. Can the bank foreclose on the allotment rights during the NCLT proceedings?

The NCLT moratorium protects the developer’s assets from foreclosure — but the allottee’s allotment rights are not the developer’s assets. They are the allottee’s contractual rights. A bank that has a charge on the allotment rights (from the home loan) can potentially enforce against those rights even during the NCLT moratorium — because the enforcement is against the allottee’s rights, not the developer’s assets. This is a legal grey area — a property lawyer should advise on the specific bank’s enforcement rights.

Q8. What if the allottee’s home loan bank is also a creditor in the NCLT proceedings?

The allottee’s home loan bank may simultaneously be a secured creditor of the developer (if the bank lent to the developer for construction financing) and the allottee’s home loan lender. In this case, the bank has two separate claims in the NCLT (as a developer creditor) and a separate relationship with the allottee (as the home loan lender). The two claims are independent — the bank’s NCLT recovery does not reduce the allottee’s EMI obligation.

Q9. What documentation should the allottee file as proof of claim in NCLT?

The proof of claim for a financial creditor allottee in NCLT should include: the registered sale agreement with the developer, all payment receipts with total amount paid and dates, the home loan disbursement records (if the bank paid the developer directly), the RERA allotment letter, the K-RERA project registration number and any delayed possession compensation orders from K-RERA. The RP specifies the exact format required.

Q10. How does Legal Brigade assist allottees when their developer enters NCLT?

Legal Brigade files the proof of claim with the NCLT’s resolution professional within the prescribed period, advises on continuing EMI payments to avoid SARFAESI risk, monitors the NCLT proceedings, advises on the CoC voting strategy for the resolution plan and interacts with K-RERA for the project’s RERA status. Legal Brigade also advises on the interaction between the NCLT refund claim and the home loan bank’s outstanding balance.

Your Bangalore under-construction flat developer entered NCLT insolvency and you have an active home loan — uncertain whether to keep paying EMIs and how to file your claim? Legal Brigade files your NCLT proof of claim and advises on the EMI continuation strategy.

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