Revolutionising real estate insolvency in India

The real estate insolvency landscape in India is evolving rapidly, with the focus shifting to protection of rights and interests of homebuyers. The judiciary and the legislature have been proactively taking steps and laying paths for real estate insolvency framework to grow.

From inclusion of homebuyers in the category of financial creditors to consolidation of corporate insolvency resolution processes (CIRP) of inter-connected real estate companies to handing over possession of units to homebuyers during the CIRP, real estate insolvency infrastructure in India has come a long way.

The Insolvency and Bankruptcy Code, 2016 (IBC) originally did not contemplate the inclusion of homebuyers in any category of creditors for defaults or breach of contracts by real estate companies. Through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 homebuyers were classified as financial creditors and their debts as financial debts. Further, the amendment in 2020 imposed a threshold for the initiation of CIRP by the homebuyers. The amendment provided that an application may be filed by the homebuyers under section 7 of IBC either jointly by not less than one hundred of such creditors in the same class or not less than ten percent of the total number of such creditors in the same class, whichever is less. However, if the CIRP is in relation to a specific project, the said threshold will be restricted to the creditors/ allottees under the said project.

The issues and difficulties in running the insolvency process of real estate projects have been addressed by various benches of the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court from time to time, followed by legislative amendments.

Courts and tribunals have come up with various solutions basis the facts and circumstances of each case. These solutions include consolidation of CIRPs, reverse CIRP and project-wise CIRP. In this article, we discuss the developments made in the real estate insolvency sector, despite the absence of specific legislation governing the same.

Real estate projects often involve several connected companies whose operations are intertwined or where finance structures are interlinked.

While India lacks specific laws for combining insolvency processes, the courts have proactively addressed this issue. They've recognised "synergy" and "value addition" as key drivers, combining processes when companies share common elements like control, directors, assets, or finances.

In the case of real estate companies, the principle of consolidation was followed by the Supreme Court in a non-insolvency case in Bikram Chatterji v. Union of India, wherein it ordered the attachment of assets and freezing of accounts for all 40 Amrapali Group companies involved in residential projects. In a landmark real estate insolvency case, the NCLAT allowed consolidation of CIRPs of five companies, which were corporate guarantors and co-borrowers for the loan obtained by the corporate debtor, and the lands owned by the five companies, were consolidated for constructing a residential plotted colony. Similarly, the NCLAT allowed initiation of CIRP jointly against the developer and the landowner, on the ground that they collaborated and established an individual corporate entity for the purpose of developing the land and allocating premises to allottees.

In the case of Lavasa Corporation Limited v. Warasgaon Assets Maintenance Limited, separate CIRPs were initially initiated against a holding company and its subsidiaries, which were primarily involved in developing and maintaining townships. The NCLT applying the yardstick of substantial interdependence, ordered the consolidation of the CIRPs for these entities. The resolution applicant resolved the debt of all the group companies vide a common resolution plan.

The NCLAT introduced the concept of reverse CIRP for the first time in the case of Flat Buyers Association Winter Hills v. Umang Realtech Private Limited. In this decision, the NCLAT emphasised that homebuyers, as unsecured creditors, have specific rights to properties and shouldn't face the same losses as other creditors in a typical insolvency process. Reverse CIRP allows a promoter to act as a lender, ensuring project completion and homebuyers' possession without external interference. The NCLAT also clarified in this case that insolvency proceedings for a specific project shouldn't affect other projects of the company. It also held that secured creditors like banks shouldn't be prioritised over homebuyers' claims.

The concept of reverse CIRP was affirmed by the Supreme Court in the cases of Anand Murti v. Soni Infratech Private Limited and Another and Amit Katyal v. Meera Ahuja.  However, it has differentiated the allotees who seek monetary refund and are merely speculative investors from the bona fide allotees and has refused to grant them any remedy under law.

That said, the practice of reverse CIRP has not gained as much traction or recognition as the consolidation of CIRPs, due to multiple factors as discussed below.

Reverse CIRP hasn't always aligned with the existing regulatory frameworks. For instance, under Section 4(2)(1)(D) of the Real Estate (Regulation and Development) Act, 2016, seventy per cent of the amounts realised from the allottees must be deposited in a separate account to cover construction and land costs. However, this requirement has largely been overlooked in insolvency proceedings. Despite this, courts have made efforts to uphold the mandate where feasible. In the case of Ram Kishor Arora, Suspended Director of Supertech Limited v. Union Bank of India and Another, the NCLAT ordered the resolution professional to deposit all money and receivables in a separate account.

Additionally, in cases of reverse CIRP, considerations such as conflict with Section 29A of the IBC, 2016 and the role of the committee of creditors, take a back seat. However, the courts have navigated such conflicts by recognising that the reverse CIRP promotes value maximisation for all stakeholders including homebuyers. Therefore, the process in a way gives another chance to willing promoters/directors of the corporate debtor to complete the stalled projects.

Reverse CIRP may be regarded as an alternative to CIRP only in specific cases, based on the assessment of the overall financial health of the developer. Legislative amendments may be introduced to fully integrate reverse CIRP into the IBC, based on a comprehensive evaluation of the developer's financial condition and the willingness of stakeholders to complete specific projects.

Project-wise CIRP refers to the initiation of CIRP in respect of an individual real estate project, rather than against the entire real estate company. It is aimed at avoiding a blanket moratorium over and preventing disruption of viable projects of the company. It is pertinent to note that the NCLAT had already touched upon the concept of project-wise CIRP in the matter of Umang Realtech, to protect the healthy projects of the company undergoing insolvency/ The Supreme Court also recognised the practicality of adopting a project-wise approach for real estate insolvency.

In November 2023, the Insolvency & Bankruptcy Board of India (IBBI) published a discussion paper, calling for strengthening the legal framework governing insolvency processes of real estate projects under the IBC.

Based on the discussion paper, on February 15, 2024, the IBBI notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2024. This amendment brought an imperative shift in the approach for conducting project-wise CIRPs of real estate projects, such as a separate bank account for each real estate project under a corporate debtor and separate resolution plans for each project, etc.

In November 2024, the IBBI released a discussion paper addressing crucial issues such as inclusion of land authorities in CoC meetings, streamlining handover of possession during CIRP etc. Recently, the recommendations in the discussion paper have been adopted by the IBBI via amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 in February 2025, aimed at addressing certain key concerns, as follows:

a. Transfer of completed units to homebuyers

Resolution professionals have been allowed to hand over completed units to homebuyers during the resolution process, subject to CoC’s approval with a 66% majority vote. It reinforces some earlier decisions that the sale of constructed apartments is part of the regular business operations of the corporate debtor, with the sale proceeds being recorded as revenue from operations, and therefore, such sale/ transfer is necessary for maintaining the going concern status of the corporate debtor.

b. Participation of land authorities in CIRP

Statutory bodies, such as those holding rights over leased land, are often seen to delay the resolution. A recent instance is the Supreme Court’s decision to halt the implementation of NBCC’s approved resolution plan for Supertech, following petitions from the company’s promoters and the Yamuna Expressway Industrial Development Authority.

Pursuant to the amendment, the CoC can invite relevant land authorities to their meetings for inputs and perspectives on regulatory and land development-related matters. Thus, the need to include these statutory authorities in CoC meetings though without voting rights, allows the successful resolution applicants to navigate these complexities quite early in the process, reducing the potential of any conflicts.

Additionally, the resolution professionals are now required to submit a detailed report on development rights, approvals and permissions within 60 days of CIRP initiation.

c. Easing restrictions for homebuyers

CoCs are now been empowered to relax certain conditions for associations or groups of homebuyers to participate as resolution applicants in the insolvency resolution process. These include relaxations in eligibility criteria, performance security and deposits for submitting resolution plans. This would promote completion of projects in alignment with consumer interest, less likelihood of challenge to resolution plans and reduced litigation.

Housing and construction activities are important and significant components of India’s gross domestic product as these have strong forward linkages with other sectors including employment and job creation. The Indian Banks’ Association has estimated that 4.12 lakh stressed dwelling units involving ₹4.08 lakh crore are impacted i stalled real estate projects. The resolution of these stressed units will provide a major impetus to economic activity and growth.

Although the Central government is thinking of dropping its plan of bringing up a sector-specific insolvency regime for real estate insolvencies, the above amendments are an important step forward in giving some relief to homebuyers by addressing the practical concerns of real estate insolvency challenges.

However, the effectiveness of the above-discussed amendments may remain limited. It is because the homebuyers face significant disadvantages compared to institutional financial creditors. They usually have most of their savings tied up with a single real estate project and often lack the financial means to pursue long legal battles. Therefore, the legislature may consider making some modifications to the above amendments, in tandem with the interests of homebuyers. It may consider reducing the percentage of CoC’s approval requirement, and conditioning homebuyers’ obligations on the corporate debtor’s performance. This would ensure that homebuyers' right to possession is enforceable without purely being subject to financial creditors' discretion, and foster greater accountability and fairness within the insolvency framework.

Jeta Shree is a Senior Associate at Trilegal.

Sachika Vij is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.

The views expressed above are entirely personal to the authors and do not reflect the views of the firm.