The Codification of Project-Wise Insolvency in the Real Estate Sector: A Paradigm Shift under the IBC

Introduction

For a long time, the Indian real estate market has been tormented by unfinished housing projects, delays, and financial difficulties, which have left thousands of homebuyers frustrated. The Insolvency and Bankruptcy Code, 2016 (IBC) established a comprehensive and time-bound framework for resolving corporate insolvency while balancing stakeholder interests and optimizing asset value. However, its application to the real estate business has shown serious flaws, especially because real estate entities have a special structure where several projects are managed by a single corporate body.

As a result, the principle of “project-wise insolvency” was established through judicial innovation in order to address these sector-specific issues. Its emergence and impending codification mark a critical paradigm shift from a rigid "one-size-fits-all" statutory approach to a nuanced and sector-specific mechanism. This blog critically examines this shift through judicial developments to impending legislative codification.

What is Project wise Insolvency ?

The traditional Corporate Insolvency Resolution Process (CIRP) has a structural flaw that must be understood in order to comprehend the need for project-wise insolvency. Earlier, when a corporate debtor defaults on a threshold debt, the entire company is declared insolvent under IBC. All corporate assets are placed under a legislative moratorium under Section 14 of the IBC, the board of directors is suspended and a Resolution Professional (RP) takes over.

In the past, the corporate debtor as a whole was the target of insolvency proceedings under the IBC. But in the real estate sector, where developers frequently work on several separate projects, this strategy proved troublesome. The failure of one project regularly caused the derailment of others, affecting stakeholders who had no link to the default.

The Indian tribunals introduced the concept of project-wise Corporate Insolvency Resolution Process (CIRP), which has progressively gained acceptance and is now moving towards formal codification to address this issue. It describes the commencement and management of insolvency procedures limited to a particular real estate project as opposed to the corporate entity as a whole. This method acknowledges that every project usually has a distinctive set of assets, liabilities, creditors, and homebuyers; thus, it renders reasonable to regard them as distinct economic entities.

This conceptual change is largely influenced by the regulatory approach of the Real Estate (Regulation and Development) Act, 2016 (RERA). The Act requires that each real estate project be registered separately and have a designated project-specific bank account to avoid systematic withdrawals of financial assets. With the integration of IBC's resolution procedure with RERA's project-centric structure, project-wise insolvency ensures that the financial negative impact of a single failed project does not spread to the developer's entire business.

Judicial Evolution : Genesis of Project Wise Insolvency

There was no project-wise CIRP provision in the original IBC statute language. The Adjudicating Authorities i.e., the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), intervened with extraordinary judicial creativity in the face of legislative inaction and an increasing crisis of halted projects.

The genesis of this jurisprudential shift can be traced to the case of Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd. (2020),where the NCLAT developed the concept of “Reverse CIRP,” and discarded the principles of standard CIRP. The tribunal also permitted the promoter to continue carrying out the project with the primary objective of completing construction and delivering possession to homebuyers. This principle has been validated in the further landmark judgement of the Supertech case(2022), where the NCLAT specifically mandated that the CIRP be limited to one specific project (Eco Village II).

The appellate tribunal also acknowledged that Supertech had multiple projects at different stages of completion and that dragging the entire corporate entity into CIRP would cause irreparable harm to thousands of beneficiaries designated in other projects. It effectively created project-specific bankruptcy by isolating the troubled project and serving as a judicial shield against the harsh instrument of the unamended Act. The Supreme Court in Indiabulls Asset Reconstruction Co. Ltd. v. Ram Kishore Arora & Ors. (2023),upheld the NCLAT's directives for project-specific resolution in the Supertech dispute. The Court also recognised that allowing the Interim Resolution Professional (IRP) to supervise progress with the aid of former management presented a reduced risk of injustice whereas the constitution of company-wide CoC would cause greater harm and inconvenience to homebuyers.

However, in N. Kumar, RP of M/s. Sheltrex Developers Pvt. Ltd. v. M/s. Tata Capital Housing Finance Ltd., the NCLT Chennai ruled decisively that Project-Wise CIRP cannot be administered equally and that the IBC does not explicitly mandate it. This judicial conflict is the most persuasive justification for legislative codification where certain benches support project-wise resolution while others oppose it.

What Statutory Framework Must Provide ?

The rationale for codifying project-specific bankruptcy under the IBC is more than just theoretical. It is a practical need that would end various operational nightmares that presently torment Resolution Professionals, creditors and adjudicating authorities.

First, most real estate developers use consolidated financial statements instead of project-specific accounting. When a CIRP initiates, the RP is faced with the almost impossible task of disaggregating assets, liabilities, revenues and costs across several projects from a single set of records. So the codification must be accompanied by an obligatory requirement for project-specific accounting, not just as a regulatory objective but as a legal responsibility.

Next, we need to clarify who makes up the Committee of Creditors. When there are 2 or more different projects (A and B) all being developed by the same developer but at different points in time during development, it raises the issue of what constitutes the Committee of Creditors. If the Committee of Creditors were to consist of all creditors from all projects, then there would be a dilution of the voting power of the homebuyers as it pertains to the defaulting project. The Supertech judgment gave some guidance as to how to create a Committee of Creditors on a project basis, but it still does not have the force of law since it is merely judicial direction as opposed to statutory legislation. The key to solving this problem lies in creating a statutory definition of the scope and composition of committees of creditors for project-type proceedings with absolute clarity.

The third action is to resolve the Section 29A conflict under the IBC. In a Reverse CIRP case, promoters are allowed to invest capital as external financiers to finish the construction of unfinished projects. However, Section 29A of the IBC prohibits promoters of bankrupt corporations from serving as resolution applicants. Traditionally, the courts have addressed this issue by categorising the promoters as financing sources instead of resolution applicants, but it is becoming increasingly hard to maintain this characterisation of promoters because they are not true financiers.

Fourth, Section 14 of the IBC places a moratorium on the transfer or encumbrance of assets while an entity is going through the CIRP process. In real estate, this greatly impacts the ability to deliver possession of completed units to the homebuyer who has made full payment for the unit. The February 2020 IBBI revisions to the IBC were a step forward in allowing the delivery to occur with the approval of the Committee of Creditors (CoC), but it is still a regulatory compromise and not a statutory right of the debtor. The Parliament needs to specifically exclude the transfer of possession of completed units from the moratorium.

Lastly, there is a jurisdictional overlap between the RERA authorities and the framework provided under the IBC with respect to a real estate project. However, RERA's project-specific regulatory model lends itself to a natural fit for project-specific insolvency. Similarly, a codified framework for Project-Wise Insolvency Resolution Processes (PWIRP) should be created for coordination between RERA authorities, the RP and the adjudicating authority, including provisions for the continued registration of RERA projects during CIRP as well as using escrow funds mandated by RERA to complete the projects.

Apart from the arguments based on the law and the applicability of the PWIRP to various situations, the codification of project-wise insolvency carries a broader significance. A clear codified PWIRP framework will encourage specialised resolution applicants, who would otherwise hesitate to pursue project-specific proceedings because of uncertainty regarding the outcome of such proceedings due to the current reliance on judicial discretion.

The Regulatory Responses of IBBI

The Insolvency and Bankruptcy Board of India (IBBI) has made gradual progress in implementing a series of incremental changes to provide a formalised resolution process for real estate projects through regulatory frameworks after realising that courts could not bear this responsibility alone indefinitely.

Two important new provisions were added to the IBBI (CIRP) Regulations as part of the amendment dated February 2024. First, the introduction of Regulation (4D) requires that resolution professionals must maintain separate bank accounts for each real estate project under a corporate debtor, which has made a significant contribution to achieving financial segregation in real estate project accounts that was absent previously. Second, Regulation 36A(1A) provides the ability of resolution professionals to invite resolution plan submissions related to specific assets of a corporate debtor with the approval of CoC instead of having a single solution offered for all the corporate debtors projects.

In March 2023, the Ministry of Housing and Urban Affairs (MoHUA) set up an investigative committee under Amitabh Kant to resolve the problem associated with abandoned real estate projects. The committee's formal report outlined a sobering picture which based on data and analysis compiled through the use of related data from the Indian Banks' Association about these types of abandoned residential properties: 4.12 lakh units of distressed stalled residential units worth 4.08 trillion rupees throughout the country, with 2.4 lakh units contained within the National Capital Region alone. The following observations were made and confirmed by the committee:

1. All real estate projects are registered with the Real Estate (Regulation and Development) Act, 2016 (RERA) and should be treated as separate units for the purposes of section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC);

2. The alignment between RERA's project-centric architecture and the IBC's resolution framework supports the conclusion that both regulatory schemes are not only administratively challenging to align, but they also provide the same legal recognition to real estate projects;

3. Parliament can undoubtedly create a resolution process that handles projects equally for the purpose of insolvency if it can establish a regulatory body that regards them as distinct units for the purpose of safeguarding consumers. The inability to do so indicates a lack of legislative intent rather than a lack of legal resources.

Opinions and Legal Critique

From a legal professional's perspective, the move towards a project-wise approach is an essential step rather than just a choice. When the Insolvency and Bankruptcy Code initially emerged, it was focused on creditors, primarily banks and other financial lenders. In contrast, real estate insolvency is fundamentally centred on consumers directly as the homebuyers are not lenders and will not have the financial capacity to absorb the losses incurred when receiving significantly reduced value for property they purchase.

The IBC, in its original form, was drafted as a heavily creditor-centric law focused on financial lenders. However, real estate insolvency is inherently consumer-centric. Homebuyers are not institutional banks; they do not possess the financial risk appetite to accept heavy haircuts on their investments. They simply want the keys to the homes they paid for.

The success of project-wise insolvency law is dependent on RERA being complied with in an ex-ante manner. If developers are allowed to pool their funds before there is a risk of being insolvent there will be a project-wise CIRP to do nothing more than to evaluate an already dead and cash-deficient project. Thus, I believe that the real paradigm shift will not be achieved by simply modifying the IBC in isolation, but through establishing a mutual statutory relationship between RERA's preventive project registration framework and the IBC's curative resolution framework.

Conclusion

The story of how the judiciary in India has creatively filled a void in the law regarding insolvency for projects within the real estate industry is a remarkable tale of judicial creativity. The evolution of the judiciary's approach to insolvency law in India, especially in relation to real estate, represents a major paradigm shift from a traditional entity-based method to a more modern project-focused approach. The judiciary has recognised the challenges which exist within the current framework of IBC by implementing significant improvements in home buyer protection, value maximisation and increased flexibility within the resolution process.

Despite these positive developments, the absence of a defined legislative framework associated with this new form of insolvency will create additional challenges that require legislative changes. Given the evolving nature of India's insolvency laws, the codification of a project-wise CIRP is critical to ensure that the IBC continues to meet the demands of an ever-changing and increasingly complex economy. The creation of a project-based insolvency process represents not only a major legal reform but also a paradigm shift in terms of how insolvencies are approached and treated in an equitable and efficient manner.

Author: Vivek Kushwaha, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes

1. Insolvency and Bankruptcy Code, 2016, No. 31 of 2016, §§ 7, 14, 29A & 238 (India).

2. Real Estate (Regulation and Development) Act, 2016, No. 16 of 2016, §§ 3, 4 & 4(2)(l)(D) (India).

3. Flat Buyers Association Winter Hills–77, Gurgaon v. Umang Realtech Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 926 of 2019, National Company Law Appellate Tribunal (4 February 2020).

4. Indiabulls Asset Reconstruction Co. Ltd. v. Ram Kishore Arora & Ors., Civil Appeal Nos. 6640–6641 of 2021, Supreme Court of India (2023).

5. Insolvency and Bankruptcy Board of India, Insolvency Resolution Process for Corporate Persons (Fourth Amendment) Regulations, 2024, introducing Regulations 4D and 36A(1A), Gazette of India, 15 February 2024.

6. Ministry of Housing and Urban Affairs, Government of India, Report of the Committee on Treatment of Stressed Real Estate Projects (Chair: Amitabh Kant, 2023).