When a real estate company enters insolvency, a common conflict arises between banks and homebuyers. Banks often claim that properties mortgaged to them should be sold to recover outstanding loans, while homebuyers argue that they have already paid for their flats and should not lose their rights.
This exact issue came before the National Company Law Appellate Tribunal (NCLAT) in Kotak Mahindra Bank Limited v. Resolution Professional of Universal Buildwell Private Limited (Company Appeal (AT) (Insolvency) No. 661 of 2021), decided on 11 April 2023.
The judgment is significant because it clarifies that units already allotted to homebuyers through Builder Buyer Agreements cannot be treated as free assets available for repayment of a bank’s debt, even if the sale deed has not yet been executed.
In this article, we explain the judgment in simple language and discuss its implications for homebuyers, banks, builders, and insolvency professionals.
Background of the Case
Universal Buildwell Private Limited, a real estate developer, underwent the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).
During the insolvency process, a Resolution Professional (RP) was appointed to manage the affairs of the company and prepare a Resolution Plan for revival.
One of the secured financial creditors was Kotak Mahindra Bank Limited, which had financed the developer and held a mortgage over one of its commercial projects known as Universal Business Park.
As required under the IBC, two registered valuers were appointed to determine the fair value and liquidation value of the company’s assets.
However, when the valuation reports were prepared, the liquidation value assigned to Kotak Mahindra Bank’s security interest in the Universal Business Park project was shown as NIL (Zero).
The Bank challenged this finding before the NCLAT.
Why Did Kotak Mahindra Bank Challenge the Resolution Plan?
Kotak Mahindra Bank argued that the valuation reports themselves identified unsold commercial space worth approximately ₹23.31 crore.
According to the Bank:
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- the project still contained valuable unsold units;
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- those units formed part of its mortgaged security;
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- therefore, the liquidation value should not have been shown as zero.
The Bank contended that it was entitled to receive a much larger amount under the Resolution Plan.
The Legal Issues Before the Tribunal
The NCLAT considered two important legal questions:
1. Can the liquidation value of a secured asset be treated as NIL even when valuation reports indicate that unsold units still exist?
2. Can the Committee of Creditors (CoC) ignore or modify the liquidation value determined by registered valuers?
These questions were crucial because they involved the competing rights of secured creditors and homebuyers during insolvency proceedings.
What Did the Tribunal Find?
After examining the valuation reports and the records of the Corporate Debtor, the Tribunal found that the issue was not merely about mathematics or valuation.
It was about legal ownership.
The registered valuers had indeed observed that some commercial space appeared to be unsold.
However, they had also clearly mentioned an important qualification.
The valuers had not independently verified whether those units had already been allotted through Builder Buyer Agreements or otherwise legally committed to purchasers.
This qualification became the turning point of the case.
Why Was the Liquidation Value Treated as Zero?
The Tribunal examined the project records and found that almost the entire commercial area had already been allotted to purchasers.
Builder Buyer Agreements had been executed with homebuyers much before the mortgage in favour of Kotak Mahindra Bank.
Although possession or registration had not been completed, the homebuyers had already acquired enforceable contractual rights over those units.
Therefore, the Corporate Debtor was no longer free to sell those properties again.
Since the units were already committed to homebuyers, they could not be treated as assets available for repayment of the Bank’s debt.
Accordingly, the Tribunal held that assigning NIL liquidation value to the Bank’s security interest in the Universal Business Park project was legally correct.
Builder Buyer Agreement: More Than Just a Contract
One of the most important observations made by the Tribunal relates to the legal effect of a Builder Buyer Agreement.
The judgment recognises that once a Builder Buyer Agreement is executed:
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- the homebuyer acquires enforceable legal rights;
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- the builder cannot treat the allotted unit as an unencumbered asset;
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- the property cannot be sold again for repayment of other creditors.
This principle protects thousands of homebuyers whose projects enter insolvency before possession or registration is completed.
Can the Committee of Creditors Change the Liquidation Value?
The second issue concerned the powers of the Committee of Creditors (CoC).
The Tribunal clarified that under the IBC:
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- liquidation value is determined by independent registered valuers;
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- valuation is a specialised technical exercise;
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- the Committee of Creditors cannot simply substitute its own opinion for that of registered valuers.
However, the Tribunal also explained that where valuation reports contain legal qualifications or caveats, the Resolution Professional and Adjudicating Authority must consider the legal status of the assets while implementing the Resolution Plan.
In other words:
The CoC cannot rewrite valuation reports, but courts can examine the legal rights attached to the assets being valued.
The Importance of Registered Valuers
The Insolvency and Bankruptcy Code requires appointment of two independent registered valuers to determine:
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- Fair Value
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- Liquidation Value
These valuations form the foundation of the Resolution Plan.
The NCLAT emphasised that the commercial wisdom of the Committee of Creditors does not extend to modifying these statutory valuation reports without valid legal reasons.
This observation strengthens the credibility and independence of the valuation process during insolvency proceedings.
What Did the NCLAT Finally Decide?
The Tribunal dismissed the appeal filed by Kotak Mahindra Bank.
It held that
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- the Bank was not entitled to any liquidation value from the Universal Business Park project because the commercial units had already been allotted to homebuyers;
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- those units were no longer freely available assets of the corporate debtor.
However, the Tribunal modified one portion of the earlier order.
The lower authority had directed the Committee of Creditors to reconsider the valuation.
The NCLAT held that such a direction was legally incorrect because valuation is the responsibility of registered valuers, not the Committee of Creditors.
The approved Resolution Plan therefore continued without any change.
Under the Resolution Plan:
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- Kotak Mahindra Bank would receive ₹3 crore as provided under the approved plan;
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- the Bank would also take over another project, The Pavilion, for recovery of its remaining dues.
Why Is This Judgment Important for Homebuyers?
This judgment provides significant protection to homebuyers whose projects become subject to insolvency proceedings.
It confirms that merely because a developer has mortgaged a project to a bank, the bank does not automatically acquire rights over units that have already been allotted to purchasers.
Once a builder-buyer agreement is executed, the builder cannot freely use those units for repayment of financial creditors.
This principle prevents homebuyers from losing their homes because of disputes between builders and banks.
Impact on Banks and Financial Institutions
The judgment also serves as an important reminder for banks financing real estate projects.
Financial institutions should:
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- conduct thorough due diligence before accepting project assets as security;
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- verify existing Builder Buyer Agreements;
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- assess whether the proposed security is genuinely available.
Failure to verify prior allotments may substantially reduce the realizable value of the security during insolvency proceedings.
Key Legal Principles Established
The NCLAT judgment settles several important principles:
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- Builder-buyer agreements create enforceable legal rights in favor of homebuyers.
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- Units already allotted to purchasers cannot be treated as free assets for repayment of secured creditors.
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- Liquidation value determined by registered valuers cannot be arbitrarily modified by the Committee of Creditors.
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- Courts may examine the legal status of assets while interpreting valuation reports.
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- The rights of homebuyers continue to receive judicial protection even during insolvency proceedings.
Conclusion
The decision in Kotak Mahindra Bank Limited v. Resolution Professional of Universal Buildwell Private Limited is a landmark judgment balancing the interests of homebuyers and secured creditors under the Insolvency and Bankruptcy Code.
By holding that units already allotted through Builder Buyer Agreements cannot be used to satisfy bank debts, the NCLAT reaffirmed that homebuyers’ contractual rights deserve protection even during insolvency.
The judgment also reinforces the sanctity of the valuation process by clarifying that the Committee of Creditors cannot alter liquidation values determined by registered valuers.
For homebuyers, this decision is a reassuring reminder that their investment receives legal protection. For banks and lenders, it highlights the importance of careful due diligence before accepting real estate assets as security.