DISTRESSED REAL ESTATE ASSETS: HOW INSOLVENCY LAWS ARE BEING USED TO RESOLVE CRISES

– Kailash Ram, Associate

The Indian real estate sector has faced significant turbulence, marked by numerous stalled projects, developer defaults, and the plight of homebuyers left with uncertain investments. Prior to 2016, resolving such distress was fragmented and protracted. The enactment of the Insolvency and Bankruptcy Code, 2016, marked a watershed moment, providing a consolidated, time- bound framework aimed at resolving insolvency, maximizing asset value, and balancing the interests of all stakeholders, including the long-neglected homebuyers. The IBC operates alongside the Real Estate (Regulation and Development) Act, 2016, which primarily focuses on project regulation and buyer protection, while the IBC addresses the financial distress and insolvency of the developer entity itself.

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Unique Challenges Addressed by IBC in Indian Real Estate

The IBC framework had to grapple with sector-specific complexities:

1. Homebuyer Status: Initially, homebuyers lacked clear standing under insolvency laws. Their investments were often treated merely as advance payments, leaving them with limited recourse against defaulting developers.
2. Multi-Project Developers: A single developer entity often handles numerous projects, sometimes diverting funds between them. Insolvency triggered by default in one project could halt all others, affecting a vast number of stakeholders.
3. Conflicting Creditor Interests: Secured lenders (banks, financial institutions) prioritize debt recovery, while homebuyers primarily seek possession of their booked units or a refund. Operational creditors (suppliers, contractors) seek payment for services rendered. Balancing these is a key challenge.
4. Information Asymmetry: Assessing the true financial health and viability of multiple, often opaque, real estate projects under a single developer was difficult.

The IBC Framework and Real Estate Insolvency

The IBC introduced the Corporate Insolvency Resolution Process (CIRP), a structured mechanism applicable to distressed real estate companies:

1. Initiation: CIRP can be initiated by financial creditors, operational creditors, or the corporate debtor itself upon default. Crucially, amendments to the IBC recognized the unique position of homebuyers.
2. Moratorium (Section 14): Once CIRP is admitted by the National Company Law Tribunal (NCLT), an immediate moratorium comes into effect, prohibiting most legal actions, including recovery suits and asset transfers, against the developer. This provides stability for the resolution process.
3. Resolution Professional (RP): An Insolvency Professional is appointed (initially as an Interim RP, then confirmed as RP by the CoC) to take control of the company’s management, protect its assets, collate claims, and facilitate the resolution process.

4. Committee of Creditors (CoC): This committee, primarily comprising financial creditors, plays a pivotal role in approving resolution plans. Decisions typically require a 66% voting majority.
5. Adjudicating Authority: The NCLT is the primary adjudicating authority, with appeals lying before the National Company Law Appellate Tribunal (NCLAT), and ultimately the Supreme Court.

Empowerment of Homebuyers under IBC: A Landmark Shift

Perhaps the most significant impact of the IBC on real estate has been the empowerment of homebuyers:

• Financial Creditor Status (2018 Amendment): Recognizing that funds raised from homebuyers have the ‘commercial effect of a borrowing’ and are crucial for project finance, the IBC was amended in 2018 to classify homebuyers (allottees under a real estate project) as Financial Creditors under Section 5(8)(f).
• Constitutional Validity Upheld: The Supreme Court, in the landmark case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India 2019 INSC 889, upheld the constitutional validity of this amendment, solidifying homebuyers’ rights to participate in the CIRP, including representation on the CoC.
• Initiation Threshold (2020 Amendment): To prevent frivolous applications while retaining homebuyers’ rights, Section 7 of the IBC was amended in Now, an application to initiate CIRP against a developer must be filed jointly by at least 100 such allottees under the same real estate project or 10% of the total number of allottees under that project, whichever is lower.
• Representation: Given the large numbers, homebuyers are represented on the CoC by an Authorised Representative (AR), usually an Insolvency Professional, who votes based on their instructions.

Innovative Resolution Mechanisms Evolving under IBC

Recognizing that a ‘one-size-fits-all’ approach doesn’t work for real estate, the IBC framework has seen significant evolution through regulations and judicial interpretation:

1. Project-wise Resolution: Acknowledging that a developer might have multiple projects, some viable and others not, the concept of resolving specific projects is gaining traction. IBBI regulations now clarify that the RP, with CoC approval, can invite resolution plans for individual projects or groups of projects. The Supreme Court also implicitly supported this approach in the Indiabulls Asset Reconstruction Co. Ltd. vs Ram Kishore Arora & Ors. 2023 SCC Online SC 612, allowing CIRP to proceed for specific stressed projects while shielding others. Maintaining separate bank accounts per project (aligned with RERA) is also encouraged.
2. Reverse CIRP: Pioneered by the NCLAT in Flat Buyers Association Winter Hills v. Umang Realtech Pvt. Ltd. 2020 SCC Online NCLAT 1199, this judicial innovation allows the existing promoter (who might be barred under Section 29A from submitting a regular resolution plan) to infuse funds as an external lender to complete a stalled project under the RP’s supervision. This pragmatic approach aims to prioritize project completion and delivery to homebuyers over immediate liquidation or third-party takeover, balancing stakeholder interests.
3. Protecting Homebuyer Possession:
   • Exclusion from Liquidation Estate: IBBI regulations mandate that units where possession has already been handed over to homebuyers must be excluded from the assets available for liquidation if the company cannot be revived.
   • Handover During CIRP: Recent IBBI amendments (effective February 2025, Regulation 4E of CIRP Regulations) empower the RP, subject to 66% CoC approval and fulfilment of obligations by the homebuyer, to hand over possession of plots/apartments during the CIRP itself. This is a major relief for waiting homebuyers.
4. Homebuyer Associations as Resolution Applicants: Regulations now explicitly allow the CoC to relax certain eligibility conditions (like performance security, earnest money) for associations or groups of homebuyers wanting to submit a resolution plan themselves, empowering them to take control of their project’s completion.

Ongoing Challenges

Despite significant progress, challenges persist:

• Timelines: Delays in admission and resolution proceedings before NCLT/NCLAT remain a concern.
• Funding: Securing last-mile funding for completing stalled projects is difficult, although government initiatives like the SWAMIH fund aim to bridge this gap.
• Complexity: Managing CIRP for large developers with numerous projects and thousands of homebuyers is logistically complex.
• Monitoring: Ensuring effective implementation of resolution plans and appropriate use of funds in mechanisms like Reverse CIRP requires robust oversight.

Conclusion

The Insolvency and Bankruptcy Code, 2016, has fundamentally reshaped the landscape for resolving distress in India’s real estate sector. By granting homebuyers the status of financial creditors and fostering innovative, sector- specific solutions like project-wise resolution and Reverse CIRP, the IBC framework, guided by judicial interpretation and regulatory adaptation, strives to move beyond mere liquidation towards viable project completion and stakeholder value maximization. While challenges in implementation remain, the IBC provides a dynamic and evolving legal tool critical for addressing insolvency crises and restoring confidence in the Indian real estate market.