Identifying the exact scope of the proposed new regulatory regime for rescuing distressed assets in the housing sector is a key area of consultation launched by the Ministry of Corporate Affairs (MCA) and IBBI after the Supreme Court in September ordered coordinated action by all stakeholders to protect the interests of home buyers and restore confidence in the real estate sector.
Narrowing down the bankruptcy solution to a single project — or even a single tower within a project — raises new policy questions for authorities, including how to deal with a developer who defaults on payments.
“A creditor takeover of a defaulting company under the IBC is a deterrent to financial indiscipline and insolvency and penalizes erring management. If one tower facing difficulties is earmarked for resolution without affecting the rest of the company’s assets in default, that deterrent is weakened,” said the first of the two people cited above, both of whom spoke on condition of anonymity.
Email queries to MCA and IBBI remained unanswered.
At the moment, insolvency is being resolved only at the level of a legal entity. Once a bankruptcy petition is accepted in court, creditors appoint an administrator – known as an insolvency practitioner – to run the company, who also invites bids from new investors. All its assets are part of the resources available for restructuring.
While narrowing down the financial distress to a few housing units and finding a new investor to complete those units could leave the rest of the units built by the same real estate developer undisturbed, such an approach may not be consistent with one basic event envisaged under the Insolvency and Bankruptcy Code (IBC) – creditors taking over a company’s affairs in case of default.
Choosing one approach over the other creates a real dilemma. Homebuyers in distressed towers may want all of the developer’s assets pooled to revive the company and complete their homes, but customers in well-managed towers or projects may not want their units dragged into bankruptcy for fear of delays.
Regulatory framework
The ministry and IBBI are consulting experts to develop a new regime as directed by the Supreme Court. These proposals are likely to form part of future amendments to the IBC. The Bankruptcy (Amendment) Bill, 2025, now before a Lok Sabha select committee after extensive government deliberations, is likely to be passed before the current discussions on real estate-specific reforms are completed.
Niranjan Hiranandani, chairman of real estate industry association NAREDCO said the move to create a specialized insolvency framework for real estate is a welcome step.
“Our industry runs on cash flow at the project level, so resolving insolvency at the project or even tower level can protect home buyers and keep construction on track,” Hiranandani said.
“The tower approach can help ensure that work on other parts of the project continues without affecting the entire development or society. It is important that the system remains fair to all stakeholders and prevents abuse. We need a balanced structure that protects buyers and lenders while allowing genuine developers to complete houses without long delays,” Hiranandani added.
Insolvency resolution at the corporate level should remain a last resort, reserved for cases where financial stress is pervasive across a developer’s portfolio, said Manmeet Kaur, partner at law firm Karanjawala & Co.
“A project-by-project solution framework offers the most balanced and practical approach as it limits the cash flows and liabilities of each project, protects the purchasers of that particular project, and prevents the insolvency of one project from bringing the entire company/entity to a standstill. That being said, in certain large municipalities or multi-tower developments where each tower is functionally and financially different, higher resolution at the tower level could offer even higher resolution.”
However, such an approach can only be used where financial cash flows, approvals and construction phases are clearly defined, Kaur added.
Home Buyer Protection
A tailored real estate insolvency framework is critically needed to address industry-specific complexities, said Amit Maheshwari, tax partner at AKM Global, a tax and advisory firm.
Solving insolvency at the project level strikes a practical balance by protecting affected homebuyers and lenders without needlessly crippling a developer’s entire operations, Maheshwari said.
“Where feasible, a tower solution within large, independently funded projects could offer even more granular relief by isolating the risks of failure to specific segments, protecting the interests of unaffected stakeholders. However, a project solution remains the most feasible and manageable approach overall given the current regulatory and operational realities,” said Maheshwari.
Any new framework must also include clear, objective criteria to prevent abuse while promoting the timely revival and completion of stalled projects, he said.
The Supreme Court in its judgment in Mansi Brar Fernandes vs Shubha Sharma and others dated September 12 said that resolution of real estate insolvency should generally be on a project-specific basis and not on the basis of the entire corporate debtor, unless the circumstances warrant otherwise.
The property and construction sectors together account for just over a third of the more than 8,600 companies that have gone through insolvency proceedings since the Insolvency and Insolvency Act came into force in 2016.
