Evaluative Study On The Impact Of Real Estate Insolvencies On Homebuyers Rights And Creditors
Author: LawSphereX
Category: Corporate & Insolvency
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EVALUATIVE STUDY ON THE IMPACT OF REAL ESTATE
INSOLVENCIES ON HOMEBUYERS RIGHTS AND CREDITORS Sreelakshmi P R, LL.M., Amity Law School, Amity University, Bengaluru. Jyotirmoy Bannerjee, Assistant Professor, Amity Law School, Amity University, Bengaluru.
ABSTRACT
The real estate sector has witnessed a surge in insolvency proceedings, significantly impacting both homebuyers and creditors. This research paper presents an evaluative study on the effects of real estate insolvencies within the framework of the IBC, 2016, with a particular focus on the evolving rights of homebuyers and the balancing of creditors' interests. The inclusion of homebuyers as financial creditors through the 2018 amendment marked a pivotal shift in the IBC's application to real estate. This study critically examines key judgments by the NCLT and NCLAT, alongside legislative reforms, to assess their implications on the resolution process. It analyses whether the IBC has successfully protected homebuyers’ investments while maintaining the interests of secured creditors.
The research further explores challenges such as delays in project completion, misuse of insolvency proceedings, and the conflict between different classes of creditors. By assessing the legal and practical dimensions of these issues, the study offers insights into the effectiveness of the IBC in addressing real estate insolvencies and proposes recommendations to enhance its implementation for equitable stakeholder protection. The study further explores the challenges in implementing the IBC in real estate cases, including delays, lack of resolution plans, and developer insolvencies. By analysing legislative developments and landmark case laws, the paper provides a comprehensive understanding of the evolving dynamics between homebuyers and creditors, ultimately suggesting policy measures to ensure equitable protection and efficient resolution in real estate insolvencies.
Keywords: Real Estate Insolvency, Homebuyers’ Rights, Financial Creditors, RERA.
INTRODUCTION
Bankruptcy laws have long been a fundamental element of the capitalist system, playing a key role in enabling the restructuring or dissolution of failing businesses. Economically, such laws are crucial as they facilitate the efficient reallocation of capital from non-performing enterprises to more productive uses. When the British governed India, they introduced common law principles, embedding insolvency procedures into the legal system The first legislative initiative in this area was the Indian Insolvency Act of 1848. It allowed debtors to seek relief through the courts, but mandated that these proceedings be conducted under the supervision of Supreme Court judges. However, the Act proved ineffective and was soon considered obsolete. Consequently, it was replaced by the Presidency Towns Insolvency Act of 1909.
This new legislation attempted to address the shortcomings of the earlier act but still had significant limitations. It was observed that the 1909 Act disproportionately favored borrowers over lenders, providing little protection or recourse for creditors. Thus, although it marked progress in formalizing insolvency procedures, the Act did not strike a fair balance between the rights of debtors and creditors, highlighting the need for a more comprehensive and equitable insolvency framework in India’s evolving financial landscape. 1 The Indian real estate sector, currently valued at approximately USD 300 billion, is primarily categorized into residential and commercial segments, with a dominant 80:20 ratio in favor of residential projects2.
Over recent years, the sector has experienced increasing financial stress, resulting in a growing number of real estate companies entering insolvency proceedings. These insolvencies are largely attributed to the financial unviability of projects, leading to significant cost overruns and prolonged delays in execution. Such challenges have had a cascading effect on stakeholders, including homebuyers, financial institutions, and developers. According to data released by the IBBI, the real estate sector has become one of the most distressed industries under the IBC3. 1 Real Estate Insolvencies and the Status of Homebuyers, International Journal of Legal Science and Innovation, https://ijlsi. com/paper/real-estate-insolvencies-and-the-status-of-homebuyers/. 2 Real estate sector may touch market size of . 3 trillion by 2034: Report (Business Standard) available at: https://www.
business-standard. com/industry/news/real-estate-sector-may-touch-market-size-of-1-3-trillion-by- 2034-report-124031600627_1. html
3 OVERVIEW OF INDIA’S INSOLVENCY AND BANKRUPTCY CODE,
https://globalrestructuringreview. com/review/asia-pacific-restructuring-review/2023/article/overview-of-indiasinsolvency-and-bankruptcy-code (last visited May 8, 2025) As of June 2024, real estate and related business activities constituted approximately 22% of the total corporate insolvency resolution process (CIRP) applications filed before the National Company Law Tribunal (NCLT). This substantial share underscores the severity of the crisis facing the sector. The increased recourse to insolvency proceedings reflects both the mounting debt burdens on developers and the growing assertiveness of creditors and aggrieved homebuyers. While the IBC provides a legal framework to address insolvency in a time-bound manner, the complexities of real estate projects, involving multiple stakeholders and contractual entanglements, often complicate resolution.
As the sector continues to grapple with these challenges, the need for policy reforms and efficient resolution mechanisms becomes even more critical to restore confidence and ensure timely project completion. 4 DEFINITION AND TYPES OF INSOLVENCY Bankruptcy is a fiscal condition in which a person or business can no longer meet their debt scores as they come due. It signifies further than just a temporary cash space — bankruptcy occurs when arrears surpass the total value of means. This condition can affect anyone, from individual entrepreneurs to global pots. A common misreading is to equate bankruptcy with ruin. still, while the two are related, they aren't the same. Insolvency describes the state of fiscal torture, whereas ruin is a formal legal process used to address that torture. Put simply, bankruptcy is the fiscal problem, and ruin is one implicit legal result for resolving it.
Understanding this distinction is essential because bankruptcy can have significant consequences. For businesses, it may lead to suspended operations, staff layoffs, and damage to character. For individualities, it could mean asset loss and dragged fiscal difficulties. Insolvency does not only affect debtors — it also impacts creditors, workers, investors, and the broader frugality. Timely identification and effective running of bankruptcy are pivotal in minimizing its fallout. Legal fabrics, similar as the Insolvency and Bankruptcy Code( IBC) in India, give structured, time- bound procedures to resolve bankruptcy, aiming to guard stakeholders' interests and maintain profitable stability. 5
4 INSOLVENCY 2024 - INDIA | GLOBAL PRACTICE GUIDES | CHAMBERS AND PARTNERS,
https://practiceguides. chambers. com/practice-guides/insolvency-2024/india/trends-and-developments 5 INSOLVENCY ONEMONEYWAY, https://onemoneyway. com/en/dictionary/insolvency/ (last visited May 5, 2025) INSOLVENCY IN REAL ESTATE SECTOR The Indian real estate industry has witnessed a significant number of companies undergoing insolvency in recent years. According to data from the Insolvency and Bankruptcy Board of India (IBBI), out of 2,298 Corporate Insolvency Resolution Process (CIRP) cases filed under the Insolvency and Bankruptcy Code, 2016 (the “Code”), 518 cases pertain to the real estate sector6. Notably, only 78 of the 611 approved resolution plans relate to real estate companies, highlighting the sector’s limited success in achieving timely resolutions under the Code.
In 2020, Section 7 was further amended to introduce a threshold requirement for allottees initiating CIRP, aimed at curbing frivolous petitions. Despite these reforms, the success rate of resolutions in the real estate sector remains low, resulting in continued delays and uncertainty for stakeholders. Persistent policy ambiguity has hindered effective resolution in the sector. Allottees often remain marginalized during insolvency proceedings, raising concerns over whether the Code is the most suitable framework for resolving real estate disputes. Many experts argue that the Real Estate (Regulation and Development) Act, 2016 (RERA) might offer a more focused and consumer-oriented remedy.
A balanced legislative framework is needed one that harmonizes the rights of allottees under RERA with the interests of creditors under the Code to ensure equitable and timely resolution of distressed real estate projects. 7 REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016 The Real Estate (Regulation and Development) Act, commonly known as the RERA Act, was enacted in 2016 to bring transparency, accountability, and efficiency to the real estate sector in India. Its primary objective is to protect the interests of homebuyers and boost investment by creating a more trustworthy and regulated environment. RERA is applicable across all states and Union Territories, with each having its own regulatory authority to oversee implementation.
One of the key provisions of the Act is the mandatory registration of all residential and commercial real estate projects with a land area exceeding 6 Faizan Haidar, Real estate firms stuck in insolvency courts have a slower resolution rate, study shows, THE ECONOMIC TIMES, May 29, 2023, https://economictimes. indiatimes. com/industry/services/property-/- cstruction/real-estate-firms-stuck-in-insolvency-courts-have-a-slower-resolution-rate-studyshows/articleshow/100580982. cms? from=mdr
7 INSOLVENCY IN REAL ESTATE SECTOR
ISSUES AND CHALLENGES – BY ABHISHEK ARYA – IBC LAWS, https://ibclaw.in/insolvency-in-real-estate-sector-issues-and-challenges-by-abhishek-arya/
500 square meters or involving more than eight apartments. This ensures that only credible and
compliant projects are marketed and sold to the public. The Act also mandates developers to provide accurate project details, adhere to committed timelines, and safeguard the funds of allottees by depositing 70% of the collected amount into an escrow account. Additionally, developers must update project status regularly on the RERA portal. RERA has significantly strengthened consumer rights and provides a structured mechanism for dispute resolution through fast-track adjudication. By promoting transparency and fair practices, the Act aims to improve buyer confidence and encourage responsible development in the real estate sector8.
STRENGTHENING CONSUMER RIGHTS AND MARKET DISCIPLINE IN INDIAN REAL ESTATE The RERA Act, 2016 marked a transformative shift in India’s real estate governance by establishing a uniform regulatory framework aimed at protecting homebuyers while ensuring accountability from developers and agents. The Act was enacted in response to widespread grievances regarding project delays, unethical practices, and financial irregularities in the sector, which had eroded public trust. By institutionalizing transparency and mandating legal compliance, RERA seeks to foster a more organized, predictable, and consumer-friendly real estate market. A cornerstone of the Act is the establishment of the Real Estate Regulatory Authority (RERA) and Real Estate Appellate Tribunal (REAT) at the state level, providing specialized forums to handle disputes swiftly and efficiently.
These bodies are empowered to oversee the registration of projects, enforce contractual obligations, and penalize non-compliant developers. According to the Ministry of Housing and Urban Affairs, as of March 2024, over 110,000 projects and 80,000 agents have been registered under RERA across various states, reflecting growing institutional compliance. 9 Importantly, RERA mandates that all new real estate projects exceeding 500 square meters or involving more than eight units be compulsorily registered. This registration is not just a formality; it ensures detailed disclosures regarding project
8 RERA ACT - REAL ESTATE REGULATORY AUTHORITY & RERA RULES
9 Apoorva Dandinashivara Krishnamurthy & Gangadhar Mahesh, Stimulation of Construction Industry Output through Enhanced Efficiency of Indian Residential Real Estate Sector, 14 Built Environment Project and Asset Management 562 (2024). timelines, financial status, approvals, and title clarity—offering consumers access to verified data and minimizing information asymmetry. Moreover, the Act embeds progressive consumer protection provisions by requiring that promoters deposit 70% of project funds collected from buyers into an escrow account, solely earmarked for construction and land costs. This aims to prevent fund diversion to other projects, a common malpractice that had previously led to insolvencies and project abandonments.
10 Furthermore, RERA strengthens homebuyers' rights by stipulating that both buyers and promoters are liable to pay equal interest rates in case of delays or defaults, ensuring parity and discouraging exploitative clauses in builder-buyer agreements. The Act also grants buyers the right to full compensation in cases of defective title or misleading information, ensuring legal recourse beyond routine warranty periods. Significantly, RERA restricts civil courts from intervening in disputes falling under its purview or that of the Appellate Tribunal, ensuring that real estate cases are handled by specialized bodies with sectoral expertise, leading to faster adjudication—often within 60 days of filing, as prescribed under the Act.
11 In addition, to address instances of non-compliance or defiance of orders, RERA empowers authorities to impose fines, suspend registrations, or even pursue imprisonment of promoters up to three years, adding teeth to its enforcement capabilities. 12 These provisions have collectively contributed to a cultural shift within the sector, wherein buyers now operate from a position of legal strength, and developers are compelled to adopt ethical and transparent business models. HOMEBUYER PROTECTION AND INSOLVENCY The pre-insolvency phase in the real estate sector poses unique vulnerabilities for homebuyers, who often invest up to 70-90% of the total property cost during the construction phase itself, as per industry estimates by the Confederation of Real Estate Developers' Associations of India (CREDAI).
These advance payments are typically used by developers to meet working capital requirements, fund land acquisitions, or service existing debts, rather than being escrowed for
10 Dr Parineeta Goswami & Gurmanpreet Kaur, REAL ESTATE DISPUTE RESOLUTION
A STUDY OF REMEDIES AVAILABLE UNDER REAL ESTATE REGULATION ACT AND CONSUMER PROTECTION ACT (Jan. 7, 2025), https://papers.ssrn.com/abstract=5085787. 11 Neelam Chawla & Basanta Kumar, Does Indian Real Estate Regulation Protect Urban Homebuyers? Policy Implications, 9 Cogent Business & Management 2117164 (2022).
12 Ibid.
the completion of the specific project concerned. This structural flaw creates significant exposure for homebuyers, as they essentially finance the project without any ownership or security rights akin to those held by banks or secured creditors. Unlike institutional lenders who operate within risk-managed frameworks and collateral-backed loans, homebuyers are left exposed without legal leverage in the event of insolvency, making their stake both financially unsecured and emotionally irreplaceable, given that it relates to their future homes and life savings.13 The legal and regulatory interplay between the Real Estate (Regulation and Development) Act,
2016 (RERA), and the Insolvency and Bankruptcy Code, 2016 (IBC), adds further complexity.
RERA was designed as a consumer protection statute to bring accountability and transparency into the real estate sector by mandating project registration, escrow accounts, and timelines. However, when developers face insolvency, the IBC takes precedence as a specialized code dealing with collective debt resolution. While the 2018 amendment to IBC, which recognized homebuyers as financial creditors under Section 5(8)(f), empowered them to participate in the Committee of Creditors (CoC), their interests often conflict with those of institutional lenders focused on maximizing recovery rather than ensuring home completion. Moreover, empirical data from insolvency cases reveal that only around 30-35% of homebuyer claims get fully addressed, whereas secured creditors typically recover over 40-50%, as per IBBI reports.
This divergence underscores the lack of harmonization between RERA's consumer-centric model and IBC's creditor-centric insolvency resolution. 14 To bridge this systemic gap and foster fairness in insolvency resolution, a stronger and clearer coordination mechanism between RERA and IBC is indispensable. This includes establishing statutory mandates for CoCs to prioritize ongoing projects' completion where homebuyers constitute the majority of creditors and ensuring that insolvency resolution plans specifically ring-fence homebuyers' advances for construction purposes. 15 Additionally, introducing transparent reporting requirements under IBC proceedings regarding project status, timelines, and fund utilization can enhance trust and accountability.
A standardized framework that integrates RERA's regulatory oversight within insolvency proceedings—such as appointing 13 Saroj Choudhary, Regulation of Realty Sector for Consumer Welfare: Indian Perspective (Aug. 1, 2014), https://papers. ssrn. com/abstract=2474967. 14 Kushal Vilas Datrange, Rohit R. Salgude & U. S. Agrawal, Challenges and Opportunities in the Real Estate Act, 2016, India: A Focus on Judicial Appellate and Redevelopment Projects, 24 International Journal of Construction Management 1751 (2024).
15 Ibid.
RERA representatives as observers in CoC meetings—could also help balance stakeholder interests. As India’s real estate insolvency cases grow, with over 500 cases involving distressed housing projects by mid-2024 (as per NCLT data), it becomes critical to adopt such hybrid, stakeholder-inclusive models to restore homebuyer confidence, ensure project completion, and avoid protracted litigations that erode sectoral stability and economic trust. 16 • Home Buyers as Secured Creditor Under Section 3(30) of the IBC17, a secured creditor is one who holds a “security interest” as defined under Section 3(31), which includes mortgages, charges, hypothecation, and similar arrangements. In insolvency cases, stakeholders often have conflicting priorities—homebuyers seek timely possession, while banks focus on loan recovery. The Supreme Court, in Swiss Ribbons v.
Union of India18, upheld the inclusive nature of the IBC, ensuring fair treatment for all stakeholders. Homebuyers are now recognized as financial creditors, enabling them to participate in the Committee of Creditors (CoC). However, their influence remains limited due to the dominance of large financial institutions. According to Section 53 of the IBC19 allows secured creditors to either enforce their security separately or participate in liquidation. While banks aim for financial recovery, homebuyers primarily want possession, which often leads to conflicting interests during resolution. GLOBAL APPROACHES TO HOMEBUYER PROTECTION IN REAL ESTATE INSOLVENCY The challenges faced by India in balancing homebuyers’ rights within the insolvency regime are not unique.
Globally, various jurisdictions have struggled to find the right equilibrium between the interests of secured creditors, operational creditors, and retail consumers like homebuyers, particularly in large-scale real estate failures. A comparative analysis of jurisdictions such as the United States, the United Kingdom, and China offers critical insights into how these issues have been addressed through regulatory, legislative, and judicial interventions.
16 Ibid.
17 IBC 2016, S 3(30).
18 [2019] 3 S.C.R. 535.
19 UNRAVELLING SECTION 53 OF IBC
JUDICIAL INSIGHTS AND IMPLICATIONS TAXGURU.
In the United States, real estate insolvency is predominantly handled under Chapter 11 of the United States Bankruptcy Code, which allows for debtor-in-possession proceedings. Importantly, the treatment of advance purchasers or homebuyers is often subordinate to that of secured creditors. However, the system provides for class-based negotiations where consumer interests can be aggregated and represented collectively, particularly in large residential projects. The U. S. model ensures that while homebuyers may not automatically be treated as financial creditors, their claims for specific performance or refund are recognized as unsecured debt, allowing them to participate in reorganization plans.
Moreover, consumer protection is strengthened through robust escrow regulations under the Real Estate Settlement Procedures Act (RESPA), mandating that advance payments be safeguarded, thus reducing the risks associated with project insolvencies. In contrast, the United Kingdom adopts a creditor-centric approach under the Insolvency Act 1986, where homebuyers are treated largely as unsecured creditors. However, the UK strengthens consumer protection through the National House Building Council (NHBC) warranty schemes and statutory protections under the Consumer Rights Act 2015, which allows homebuyers to claim compensation or specific performance outside of insolvency forums. China, facing an urban housing crisis and widespread developer defaults, has recently reformed its Bankruptcy Law and introduced the Real Estate Registration System to protect homebuyers.
Notably, in China’s legal framework, local governments often intervene directly in real estate insolvencies, prioritizing social stability and homebuyer protection over strict creditor hierarchy. As per data from the China Banking and Insurance Regulatory Commission, over 60% of stalled projects were revived through government-mediated asset takeovers or restructuring plans that ensured possession delivery before resolving creditor claims. This ‘homebuyer-first’ approach, although criticized for undermining commercial creditor rights, reflects the political priority placed on maintaining social harmony. JAYPEE INFRATECH LTD. INSOLVENCY CASE The insolvency case of Jaypee Infratech Ltd. 20 (JIL) has been one of India’s most prominent and complex cases under the Insolvency and Bankruptcy Code (IBC), exposing significant gaps in stakeholder protection, particularly for homebuyers.
JIL, a subsidiary of Jaiprakash
20 (2019) ibclaw.in 47 NCLT.
Associates, defaulted on loans amounting to over ₹9,635 crore, leading IDBI Bank to initiate insolvency proceedings under Section 7 of the IBC in August 2017. The default affected not only financial institutions but also over 20,000 homebuyers, who had collectively invested nearly ₹13,000 crore in JIL’s ambitious Wish Town project across Noida and Greater Noida. Despite the staggering number of affected consumers, homebuyers were initially not recognized as financial creditors under the IBC framework, leaving them without any voting rights in the Committee of Creditors (CoC). This legal vacuum triggered widespread protests, legal battles, and public outcry, culminating in a landmark intervention by the Supreme Court in 2018. Through its ruling in Chitra Sharma v.
Union of India21, the apex court declared homebuyers as financial creditors, granting them representation in the CoC with voting rights proportional to their admitted claims. This judicial recognition added ₹13,000 crore worth of homebuyer claims, representing over 57% of the total admitted debt in the JIL case, significantly altering the creditor composition and voting dynamics within the CoC. The inclusion of homebuyers led to multiple bidding rounds under the resolution process, with over 4 major bidders, including Suraksha Group and NBCC (India) Ltd. , submitting competing plans. After prolonged litigation and delays spanning over 6 years, the Supreme Court finally approved NBCC’s resolution plan in March 2021.
Under this plan, NBCC committed to complete over 20,000 housing units across 28 projects, alongside paying ₹750 crore upfront to lenders, thus ensuring partial recovery for financial creditors and securing the long-pending rights of homebuyers. Despite the resolution plan’s approval, the case highlights systemic inefficiencies. The insolvency process, which is statutorily required to conclude within 330 days, stretched to nearly 1,400 days in this instance, reflecting a delay of over 324% beyond the mandated timeline. Moreover, financial creditors suffered haircuts exceeding 60%, while homebuyers endured not only financial losses but also emotional distress and rental burdens due to delayed possession.
The JIL case also exposed regulatory gaps concerning project-specific insolvency proceedings, the absence of escrow mechanisms to ring-fence homebuyer advances, and the need for faster judicial resolution of creditor disputes.
21 [2018] 12 S.C.R. 1044.
Statistical evaluations post-JIL reveal the broader impact of the case on India's insolvency jurisprudence. According to data from the Insolvency and Bankruptcy Board of India (IBBI), by FY 2023-24, homebuyer claims constituted over 35% of all claims admitted under CIRP, a sharp rise from less than 5% before the JIL verdict, reflecting the systemic recognition of consumer rights in real estate insolvencies. The case further influenced amendments to the IBC in 2018, through which homebuyers were formally included as financial creditors under Section 5(8)(f), empowering them to initiate CIRP under Section 7. Further, the Jaypee Infratech Ltd.
insolvency has not only served as a cautionary tale of regulatory lapses in protecting retail investors but also as a catalyst for significant jurisprudential and legislative reforms that have reshaped India’s insolvency landscape, making it more inclusive and responsive to consumer interests.
CONCLUSION
The Indian real estate sector, contributing nearly 7% to the national GDP and expected to reach a market size of USD 1 trillion by 2030, continues to grapple with deep-seated structural and regulatory inefficiencies. Despite the enactment of the IBC and the Real Estate (Regulation and Development) Act (RERA), over 500 real estate insolvency cases have been admitted under IBC since 2017, as per data from the Insolvency and Bankruptcy Board of India (IBBI). Simultaneously, more than 19% of the total admitted insolvency cases involve real estate projects, reflecting the chronic distress plaguing the sector. The inclusion of homebuyers as financial creditors under the IBC through the 2018 amendment was a landmark reform, granting over 35,000 homebuyers representation rights in various insolvency proceedings by FY 2023-24.
However, this has also triggered over 200 litigation challenges in NCLT and higher forums, as per industry reports, highlighting tensions between institutional creditors and retail consumers. The categorization of creditors and the prioritization of claims continue to face constitutional scrutiny, resulting in delays averaging 700-1,000 days in the resolution of complex real estate insolvency cases, well above the IBC's 330-day limit, as per IBBI reports. These ongoing legal ambiguities, coupled with persistent project delays affecting over 4. 12 lakh stalled housing units worth ₹4. 84 lakh crore in top-7 cities alone, as per Anarock Property Consultants, underscore the limitations of insolvency law alone in ensuring sectoral stability and consumer confidence.
The weak enforcement of RERA provisions is evident in the below 45% execution rate of orders passed by state RERA authorities, indicating systemic enforcement bottlenecks. Therefore, a multi-pronged, data-backed approach is imperative to create a resilient ecosystem. This includes enhancing RERA enforcement through stricter compliance audits, ensuring 100% escrow account adherence for all ongoing and future projects, and reforming financing norms to reduce dependence on high-cost debt structures that trigger insolvency risks. Additionally, reforms in contract law to ensure watertight builder-buyer agreements and mandatory project insurance can significantly lower consumer vulnerability. Monitoring the real-world impacts of these legal reforms remains critical.
This can be achieved by establishing a centralized digital dashboard tracking project completion rates, resolution timelines, and stakeholder satisfaction indices post-insolvency resolution. The outcomes will not only determine the future trajectory of India’s real estate market but also provide a replicable model for other emerging economies grappling with similar sectoral imbalances. The overarching policy goal must align toward creating a transparent, time-bound, and consumer-centric real estate framework, where the rights of over 75 million urban homebuyers, who drive India’s residential demand, are protected with legal and financial certainty.