Answer By law4u team
The Insolvency and Bankruptcy Code (IBC), enacted in 2016, offers a unified framework for resolving insolvency in a time-bound manner. With rising defaults in the real estate sector, the IBC has become an essential legal tool to protect the interests of homebuyers, financial institutions, and other stakeholders. Real estate insolvency poses unique challenges due to multiple ongoing projects, diverse stakeholder groups, and high-value investments. Amendments to the IBC, especially post-2018, have specifically focused on providing remedies for homebuyers and ensuring project-level resolution rather than blanket liquidation.
How IBC Addresses Real Estate Insolvency
1. Homebuyers as Financial Creditors
As per the 2018 amendment to IBC, allottees (homebuyers) are recognized as financial creditors.
This allows them to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC if a builder defaults.
Homebuyers also get voting rights in the Committee of Creditors (CoC), giving them a say in major decisions.
2. Initiation of CIRP by Homebuyers
A minimum of 100 homebuyers or 10% of total allottees (whichever is lower) in a project can collectively file a case before the National Company Law Tribunal (NCLT).
This ensures that minor grievances do not trigger full-scale insolvency proceedings, avoiding misuse.
3. Project-Wise Resolution
Courts and tribunals have started interpreting IBC to allow project-wise insolvency rather than dragging the entire company into CIRP.
This helps isolate the issue to the delayed or defaulting project, protecting other functioning projects.
4. Appointment of Interim Resolution Professional (IRP)
The IRP takes control of the builder’s finances and operations during the CIRP.
They assess the assets and liabilities of the project and invite resolution plans from potential investors or developers.
5. Resolution Plan and Role of CoC
The CoC (which now includes homebuyers) votes on proposed resolution plans.
Plans may include taking over the project by another builder, raising funds for completion, or compensating homebuyers.
6. Safeguards Against Liquidation
Courts generally avoid liquidation in real estate cases unless there is no viable resolution plan.
The focus remains on completing the project and delivering homes, not just recovering money.
Common Challenges in Real Estate Insolvency
Multiple Projects Across Jurisdictions
One developer may have several ongoing projects, making resolution complex.
Discrepancy Between IBC and RERA
Conflicts may arise between the IBC process and state-level Real Estate Regulatory Authority (RERA) mandates.
Delay in Resolution
Despite the 330-day deadline under IBC, real estate resolutions often face extensions.
Lack of Financial Viability
If a project is too financially stressed, few investors come forward with a resolution plan.
Legal Protections and Remedies
IBC Section 7 Amendment (2018)
Gave legal status to homebuyers as financial creditors.
Supreme Court Judgments
Upheld the rights of homebuyers and emphasized project-wise resolution.
Interplay with RERA
Homebuyers can seek remedies under both RERA and IBC. However, once CIRP begins, the moratorium under IBC takes precedence.
Refunds and Compensation
In some cases, if the homebuyer does not want possession, refunds are considered as part of the resolution plan.
Consumer Safety Tips
Verify Builder’s Track Record before investing.
Check RERA Registration of the project.
Follow Project Progress Updates regularly.
Consult Legal Help if the project shows signs of delay or default.
Be Active in Group Actions for collective legal strength.
Example
Suppose a real estate developer launches a luxury apartment project and takes advances from hundreds of homebuyers. Two years later, construction halts due to financial mismanagement. No possession or refund is offered.
Steps homebuyers should take:
Form a group of affected allottees.
File a Section 7 application at NCLT for initiating CIRP.
Demand the appointment of an Interim Resolution Professional to manage funds and assets.
Participate in CoC meetings to evaluate and vote on resolution plans.
If feasible, allow another builder or developer to complete the project.
In parallel, register complaint under RERA for consumer protection.
