Recalibrating Real Estate Insolvency Under The Ibc:A Resolution - First, Homebuyer - Centric Blueprint

INTRODUCTION: THE STRUCTURAL COMPLEXITY OF REAL ESTATE INSOLVENCY:

From the time insolvency framework came in force vide the Insolvency and Bankruptcy Code, 2016 (“IBC”), National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT) and the Hon’ble Supreme Court of India (collectively referred as Adjudicating Authorities)faced multiple issues while dealing with the Corporate Insolvency Resolution Process (CIRP) of real estate projects across the country. Time and again, the Adjudicating Authorities have, through several judicial interventions have made attempts to deal with the challenges which were fundamentally distinct from other sectors.

However, the evolution of IBC vis-à-vis real estate through these judicial precedents has further created uncertainty which has affected the resolution of real estate projects. Unlike the preamble of IBC, which deals with: “reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues” whereas, the matters dealing with insolvency of real estate projects directly implicates a large and dispersed class of retail stakeholders, homebuyers, whose primary expectation is not monetary recovery but the timely completion and delivery of their homes. The sector is characterized by project-based financing, fragmented ownership structures, layered regulatory oversight, and long gestation periods, all of which render it particularly vulnerable to disruption once insolvency is triggered.

The Hon’ble Supreme Court, in Mansi Brar Fernandes v. Shubha Sharma & Anr., 2025 SCC OnLine SC 1972, recognized these structural peculiarities and emphasized the need for a sector-specific, completion-oriented approach. Pursuant to these directions, the Committee on Framing Guidelines for Insolvency Proceedings in the Real Estate Sector (hereinafter referred as Committee)undertook a comprehensive examination of the systemic bottlenecks affecting real estate insolvency and proposed a recalibrated framework that aligns legal processes with commercial realities and public interest considerations.

While legislative and judicial developments, particularly the recognition of homebuyers as financial creditors, have strengthened stakeholder participation, persistent inefficiencies remain. These include fragmentation of projects across entities, regulatory misalignment between the IBC and the Real Estate (Regulation and Development) Act, 2016 (“RERA”), lack of reliable project data, low participation by Resolution Applicants (“RAs”), and recurring failures in post-approval implementation.

The Committee’s recommendations seek to address issues by shifting the insolvency paradigm from entity-level to project-level resolution, and from procedural compliance to outcome-based stakeholder protection. The Committee has also focused on the specific role of RERA in real estate projects which are under CIRP.

I.RECOMMENDATIONS:

A.Structural Mismatch: Entity-Based Insolvency vs. Project-Based Reality:

Till now, IBC has been an entity focused CIRP, which has been the major challenge in real estate projects. However, the Committee has recommended that a project centric CIRP instead of the entity based CIRP. It has been time and again noted by the Adjudicating Authorities that insolvency proceedings initiated against a Corporate Debtor (CD) often engulf multiple projects, including those that are viable or near completion, resulting in avoidable delays and erosion of value.

The Committee recommends that insolvency proceedings should ordinarily be confined to the defaulting project only, treating each project as an independent economic unit. Completed or substantially completed projects, particularly those already occupied, should be excluded from the ambit of insolvency. This approach is further strengthened by mandatory ring-fencing of project assets and cash flows through separate escrow accounts and project-specific accounting systems.

The Committee also recommended appointment of separate Resolution Professionals for separate projects who is a sector specialist. In entity level proceedings, the appointment of Resolution Professional (RP) should appoint project level teams to manage site specific issues.

However, the complexity of real estate structures extends beyond individual projects. Projects are frequently developed through multiple Special Purpose Vehicles (“SPVs”), with land ownership, development rights, and financing distributed across different entities within the same group. In such cases, strict adherence to entity-based insolvency results in fragmented resolution and renders viable projects commercially unworkable. The absence of a group insolvency framework exacerbates this issue. The Committee therefore, recognizes the need for procedural consolidation in appropriate cases, allowing interdependent entities to be treated as a single economic unit for the limited purpose of resolution.

B. Resolution-First Principle and Completion-Centric Approach:

At the core of the Committee’s recommendations is the adoption of a “resolution-first” principle, under which liquidation is treated strictly as a last resort. In the context of real estate, liquidation is often value-destructive, leading to abandoned projects and severe prejudice to homebuyers. The Committee emphasizes that value in real estate is realized through completion rather than asset liquidation.

Accordingly, insolvency proceedings must prioritize project completion through RAs, homebuyer-led plans, and public sector participation. This approach aligns with judicial recognition that housing implicates the Right to Shelter under Article 21 of the Constitution of India and cannot be reduced to a purely commercial transaction. The emphasis is therefore on revival, continuation, and delivery rather than recovery and exit.

C. Information Asymmetry and the Absence of Reliable Project Data:

One of the most significant operational deficiencies in real estate insolvency is the absence of reliable technical and financial data at the stage of inviting resolution plans. Information Memorandum (IM)frequently lack critical details relating to construction progress, cost-to-complete estimates, regulatory approvals, and pending liabilities. This information asymmetry prevents RAs from accurately assessing project viability, leading to conservative bidding, reduced competition, and sub-optimal outcomes.

To address this, the Committee recommends creating protocols to share RERA-registered project data, allottee lists and escrow details with the RP during the CIRP. The said recommendation will provide critical information which is essential for RAs before submitting a resolution plan and improve market participation and ensuring realistic and implementable resolution plans.

D. Escrow Dysfunction and Fund Flow Disruptions:

While the principle of ring-fencing project funds is well recognized, its practical implementation remains inconsistent. In several cases, escrow accounts become inoperative upon commencement of CIRP, even where sufficient funds are available for construction. This results in a paradox where projects remain stalled despite the availability of dedicated funds.

The Committee highlights the need for mandatory continued operation of project-specific escrow accounts during insolvency, with strict oversight by the RP. Funds must be utilized exclusively for the concerned project, and any diversion must attract strict consequences. Ensuring continuity of fund flows is critical to maintaining construction momentum and preserving value.

E. Regulatory Fragmentation and Development Authority Risks:

A major structural challenge arises from the lack of standardized conduct among development authorities. Authorities often exercise unilateral powers, including lease termination and imposition of additional dues, even during or after CIRP, thereby undermining resolution plans and deterring potential bidders.

The Committee recommends the formulation of uniform Standard Operating Procedures (“SOPs”) to govern the conduct of development authorities during insolvency. These SOPs should address restructuring of dues, continuity of development rights, and recognition of the binding nature of approved resolution plans. Once a plan is approved, all past liabilities owed to such authorities must stand conclusively settled, and authorities must be restrained from reopening claims or initiating fresh enforcement actions.

F. Expiry of Approvals and Implementation Bottlenecks:

A critical but often overlooked issue is the expiry of regulatory approvals during the pendency of CIRP. Given the time-bound validity of approvals under RERA and local laws, delays in insolvency proceedings frequently result in lapse of permissions, rendering otherwise viable projects incapable of implementation.

The Committee recommends automatic extension of approvals for the duration of the CIRP and the establishment of fast-track revalidation mechanisms post-approval. Without such measures, the benefits of resolution plans are undermined at the implementation stage, leading to further delays and uncertainty.

G. Homebuyer Protection: From Formal Status to Substantive Outcomes:

While homebuyers are recognized as Financial Creditors, their effective protection requires a shift from formal status to substantive outcomes. The Committee adopts an outcome-based approach by recognizing that homebuyers may seek different forms of relief, including possession, conveyance, or refund.

Resolution plans must therefore provide clear and structured options, enabling homebuyers to make informed choices. The Committee also emphasizes the need to address misuse without rigid classifications by allowing the Adjudicating Authority to examine the nature of transactions at the admission stage. At the same time, procedural challenges such as belated claims and lack of awareness must be addressed through simplified claim processes and improved access to information. Importantly, the scale and impact of belated claims require careful management, as they can destabilize creditor composition, inflate liabilities, and delay implementation.

H. Governance Failures: Role of Authorized Representatives:

A significant governance gap lies in the functioning of Authorized Representatives (“ARs”), who often act as passive intermediaries rather than active fiduciaries. Resolution plans are frequently placed for voting without adequate consultation or explanation, resulting in uninformed decision-making by homebuyers.

The Committee recommends strengthening the accountability of ARs through mandatory disclosures, structured consultations, and clear communication obligations. ARs must facilitate informed participation by explaining the implications of resolution plans and ensuring meaningful engagement with homebuyers.

I. Post-Approval Failures and Weak Monitoring Mechanisms:

A recurring issue in real estate insolvency is the failure of resolution plans at the implementation stage. There is often a significant gap between plan approval and actual construction, with successful RAs delaying execution or imposing additional conditions not transparently disclosed.

The Committee recommends the establishment of Project Monitoring Committees comprising representatives of creditors, homebuyers, regulators, and technical experts. Resolution plans must include milestone-based implementation frameworks, linking financial obligations to construction progress. Effective monitoring is essential to ensure that resolution translates into actual completion.

J.Market Constraints: Low Participation by RAs:

Real estate insolvency continues to witness limited participation by credible RAs. This is attributable to multiple factors, including incomplete information, regulatory uncertainty, unclear treatment of liabilities, and risks associated with land titles and approvals. Low participation reduces competition and results in sub-optimal resolution outcomes.

The Committee therefore emphasizes the need to improve transparency, standardize processes, and encourage alternative models such as homebuyer-led resolution and public sector participation. Enhancing market confidence is critical to achieving effective resolution.

K. Reverse CIRP and Doctrinal Clarity:

The practice of Reverse CIRP, which allows promoters to retain control during resolution, lacks statutory recognition and raises concerns regarding compliance with Section 29A of the IBC. The Committee does not support its continuation and instead advocates for Code-compliant models that ensure independent resolution and accountability.

L. Clean Slate Principle and Legal Certainty:

While the “clean slate” principle is recognized under the IBC, its inconsistent enforcement creates significant uncertainty. Authorities have, in several cases, sought to revive past liabilities even after approval of resolution plans, undermining finality and increasing risk for RAs.

The Committee emphasizes the need for strict and unequivocal enforcement of this principle, ensuring that all pre-CIRP liabilities stand extinguished unless specifically provided in the resolution plan. Legal certainty in this regard is essential to attract investment and ensure viability of resolution outcomes.

M. Institutional Gaps: NCLT Delays and Lack of Specialization:

Delays in approval of resolution plans by the National Company Law Tribunal (“NCLT”) continue to impede effective resolution. The absence of specialized benches further exacerbates the problem, as real estate cases require sector-specific expertise.

The Committee recommends the establishment of specialized benches and streamlined procedures to ensure timely adjudication. Reducing delays is essential to preserving value and maintaining stakeholder confidence.

N. Transition between IBC and RERA: The Regulatory Vacuum:

A significant systemic gap exists in the transition from insolvency resolution under the IBC to project monitoring under RERA. The absence of a structured handover mechanism creates a regulatory vacuum during the implementation phase, leaving homebuyers without effective oversight.

The Committee recommends formalizing this transition by assigning post-resolution monitoring responsibilities to RERA, thereby ensuring continuity of supervision and enforcement of timelines.

O. Social Dimension and Public Interest Considerations

Real estate insolvency extends beyond commercial considerations and directly impacts housing security for a large segment of the population. Delays in resolution translate into prolonged financial and emotional distress for homebuyers, many of whom continue to service loans without receiving possession.

The Committee therefore frames real estate insolvency as a matter of public interest, requiring a calibrated approach that balances commercial objectives with social welfare. Protecting homebuyers’ interests is not merely a regulatory goal but a broader societal imperative.

II. KEY HIGHLIGHTS

a) Codified resolution‑first standard: An explicit statutory and regulatory articulation that real estate insolvency is completion‑oriented, with liquidation confined to clearly unviable projects.

b) Project‑wise insolvency and ring‑fencing: Admission normally confined to the defaulting project; exclusion of completed/occupied projects; mandatory project‑wise escrow and accounts aligned with RERA.

c) Granular, outcome‑based homebuyer protection: Classification by relief sought (possession / conveyance / refund), mandatory options in plans, liberalised handover of pre‑CIRP completed units, simplified claim processes and strengthened AR independence and communication duties.

d) Change of Threshold of IBC for Real Estate Projects: In 2016, the threshold for initiation of CIRP was ₹ 1,00,000/- (Rupees One Lakh only). The same was changed in March 2020 to ₹ 1,00,00,000/- (Rupees One Crore only). The threshold for initiation of CIRP was never sector specific. However, the Committee has recommended to increase the threshold of initiation of CIRP from ₹ 1,00,00,000/- (Rupees One Crore only) to ₹ 5,00,00,000/- (Rupees Five Crores only) for real estate insolvencies.

e) Deep RERA–IBC integration: Formal IBBI–RERA consultation mechanisms, information‑sharing protocols, RERA’s structured participation in Committee of Creditors (COC) and PMCs, and post‑resolution monitoring and timeline reset anchored in approved plans.

f) Process stability with targeted refinements: Retention of creditor‑neutral initiation, existing thresholds (subject to a specific proposal to raise the real estate default threshold to ₹5 crore), voting rules, claims framework and sector‑agnostic timelines, but with enhanced transparency and best‑practice guidance.

g) Robust implementation architecture: Mandatory technical and cost audits, institutionalized PMCs, milestone‑based definitions of implementation and strict protection of the clean‑slate principle and Section 32A of the IBC immunity for Successful Resolution Applicants.

h) Strategic use of public and priority finance: Project‑wise interim finance encouraged and potentially treated as priority‑sector lending; integration of SWAMIH and similar Government‑backed bridge funding mechanisms within the CIRP framework.

i) Targeted responses to special contexts: Primacy of RERA processes for legacy stalled projects, PSU participation in public‑interest resolutions, and mandatory provision for slum rehabilitation obligations within plans.

j) Mandatory Slum Rehabilitation: The Committee recommends mandatory obligations in the resolution plan for the rehabilitation of slums as a non-negotiable. The same has to be identified and disclosed during the IM.

III. CONCLUSION

The evolution of a separate stream of real estate insolvency under the regime of IBC reflects a broader shift in insolvency jurisprudence, from a narrow focus on entity based resolution to the project based resolutions. The abovementioned recommendations show the intent that the prioritizing the completion of projects, preserves value, and safeguards the interests of homebuyers whose stakes are fundamentally non-commercial in nature

The recommendations given by the Committee shows that the much needed overhaul of the process has been taken in consideration while protecting the interest of the stakeholders. By making sure the representation of AR of RERA a mandatory and directing a standard operating procedure for RERA related compliance in relation to the real estate projects in CIRP, the Committee has made an attempt to solve the ongoing issues faced by the stakeholders and avoid delays in the CIRP. The much needed recognition of RERA as a necessary stakeholder in the CIRP will smoothen the process and further improve the efficiency and accountability of RPs.

Further, the Committee’s approach, therefore, is both pragmatic and systemic. By emphasizing project-wise insolvency, strengthening institutional coordination with RERA and development authorities, ensuring continuity of funding mechanisms, and reinforcing the finality of resolution through strict enforcement of the clean slate principle, it seeks to create a framework that is not only legally sound but commercially workable. Equally significant is the recognition that insolvency in the real estate sector carries a distinct public interest dimension, implicating housing security and public confidence in regulatory institutions.

Ultimately, the success of these recommendations will depend on their consistent and coordinated implementation across regulatory, adjudicatory, and administrative bodies. If effectively operationalized, they have the potential to transform real estate insolvency from a process marked by delay, uncertainty, and value erosion into one that delivers timely completion, equitable outcomes, and renewed confidence in the insolvency framework.