Inside IBBI’s Discussion Paper: The Real-Estate Insolvency Panacea?

[By Kaustubh R Kulkarni & Harsh Pandey]

The authors are students of National Law University Odisha.



The Insolvency and Bankruptcy Code 2016 (Code) was enacted to bring about a framework which would bring down the complexity which was associated with the Insolvency framework for creditors. Be it, the multiplicity of applicable laws or the multiple fora which one had to deal with. With the introduction of the Code this was set to radically change. 

However, the real estate sector was not well received by the Code, there were multiple complexities associated with homebuyers and resolution of their problems under the Code. For instance, the conundrum around whether a homebuyer could be considered a Financial Creditor (FC), and issues surrounding whether there has to be a project-wise insolvency resolution process. The Code in this regard has been witness to continuous change by way of amendments or by way of making and amending regulations. The Insolvency and Bankruptcy Board of India (IBBI) to this extent notified a discussion paper on 6 November 2023 proposing several amendments to the existing Corporate Insolvency Resolution Process (CIRP) and Liquidation regulations in the light of real estate-related proposals. The authors argue that the discussion paper proposes a much-needed Project-Wise insolvency regime, but simultaneously dispenses with effectively resolving the convoluted Liquidation Estate tussle. 

Project-Wise CIRP: A Judicial Experiment 

Homebuyers or allottees have been granted the status of FC in relation to real-estate insolvency through the Insolvency and Bankruptcy (Second Amendment) Act 2018 by amending sub-Section (8) of Section 5, which defines “financial debt”. Further, the validity of the amendment was upheld by the Supreme Court (SC) in Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. Nonetheless, disputes continue to arise between the beneficiaries and other creditors (banks, etc.). It is significant to highlight that there are differences between the types of insolvencies that occur in real estate and other sectors. 

It is observed that allottees are usually more interested in obtaining their homes, apartments, or flats back during the insolvency processes than they are in recovering the money they invested in the project. Nonetheless, banks and other lending organizations are more likely to take a cut when they get their invested money back. Furthermore, if one of the Corporate Debtor’s (CD) projects defaulted, the CD’s other projects would also be roped in, leading to unnecessary hassles for the homebuyer. 

Introduced in Flat Buyers Associations v. Umang Realtech, project-wise CIRP was deemed to be a potential solution to maximize the value of the assets to balance the rights of different creditors. In this light the Ministry of Corporate Affairs also published a Consultation Paper on 18 January 2023 which specifically highlighted that the Adjudicating Authority shall have the authority to apply CIRP provisions project-wise to only such projects, which have defaulted. Buttressing the same, the SC in IndiaBulls Asset Reconstruction Company Limited v. Ram Kishore Arora and Ors upheld the validity of the NCLAT, New Delhi order allowing project-wise CIRP. Project-wise CIRP is a solution to the substantial problems of both the homebuyers and developers, in as much as it allows them an opportunity to settle their woes quickly and more so for the developers as it prevents stalling the construction of other real-estate projects. 

The Proposed Changes 

The discussion paper proposes several measures in order to ensure that Homebuyer does not face the brunt of the procedure of the Code. First of them being that the Interim Resolution Professional/Resolution Professional has to ensure that the real estate project be registered with Real Estate Regulatory Authority as a matter of mandate in terms of Section 17(2)(e) of the Code. This will ensure that there is transparency and accountability for a successful resolution. Establishing a separate bank account for each project during the CIRP ensures efficient repayment to homebuyers, thereby heralding project based insolvency as solution to real-estate insolvency disputes. 

Secondly, the paper puts forward the execution of registration/sublease deeds with approval of Committee of Creditors (CoC) during the CIRP. This allows the allottees to get their apartments in the case where they have fulfilled all their obligations as against the instrument of transfer. It empowers the homebuyer to obtain the units of the apartment in a “as is where is” basis alongside on the payment of balance amount, if the same is due. 

Third and most prominent change, the RP now shall have the power to propose to the CoC to examine and invite separate plans for each project. An amendment hence has been suggested of the CIRP Regulations to insert a clarification right under Regulation 36A(4). This is set to give succor to homebuyers who are usually concerned with a specific project and on the other hand would benefit the developer by ensuring that his other projects are not stalled due to the moratorium if an Insolvency petition is admitted for a single project.  

Lastly, the paper proposes exclusion of property in possession of homebuyers from the Liquidation Estate (Estate). This ensures and affords an opportunity to the homebuyer to occupy the units “as is where is” in order for it to not form part of the Estate, which would otherwise entitle the creditors to make a claim and sell the same in order to realize the liquidation value. 

Implications and Challenges 

The implementation of the discussion paper’s proposals would have far-reaching ramifications and implications for homebuyers and developers. It will affect not only those homebuyers who have their units pending in a particular project (P1) which itself has defaulted but also those homebuyers whose units are pending in other projects, who will be affected by the cascading effects caused by default in P1. By making a provision of taking the possession of the units from the developer in “as is where is”, it gives discretion to either receive a payment with a haircut or to obtain the units even if the construction is incomplete.  

The proposed amendment under Section 36 of the Code provides to exclude those properties, from Estate, that are in the possession of the allottee. The rationale behind such a proposal is primarily derived from Bikram Chatterjee & Ors. V. Union of India & Ors., where the SC held that a CD cannot enforce or sell the properties of the allottee so as to discharge his/her liabilities. This would safeguard the homebuyers from double jeopardy i.e., diversion of their invested funds and depriving them of their properties. 

However, it fails to address some of the conflicts that will arise if the proposed changes are brought into force. One of the conflicts is with regards to Section 54 of the Transfer of Property Act 1882 (TOPA). Section 54 of the TOPA provides for the essentials of the sale of an immovable property, registration of the property being one of them. Mere possession of the property does not mean that ownership is transferred to the allottee. As per this provision, there needs to be a registered sale deed for the transfer of ownership. Moreover, in the case of Maru Ram v. Union of India, the SC distinguished between a special law and a specific provision and held that if there is any particular situation which is not being dealt with the special law then the specific provision dealing with the particular situation would prevail. A special law essentially entails a law made for a specific purpose and hence takes precedence over other prevailing laws. Here, special law (the Code) does not specifically deal with the transfer of title so the specific provision (Section 54 of TOPA) will prevail. 

It is pertinent to note that a registered sale deed is not just a procedural requirement, it is one of the essential elements for the transfer of ownership as per the Section 54 of the TOPA. In order to exclude property from Estate, one should have ownership of the same. Excluding a property without any ownership rights goes blatantly against the tenets of Section 54 of the TOPA. Furthermore, Section 17 of the Real Estate Regulatory Authority Act 2016 (RERA) mandates the execution of registered conveyance deed alongside the possession and not possession alone for complete transfer of title.  

In addition, as per Section 52 of the Code, only an asset which is charged to a secured creditor can be left outside the Estate. However, the properties of allottees having mere technical possession and no registered sale deed lack any sort of charge on the property and therefore would not be considered under Section 52 of the Code. The current IBC regime is silent on the status of the homebuyers i.e., whether they are secured or unsecured creditors. In this context, the proposals should have essentially cleared the air around the same and recognized homebuyers as secured FC’s.  


The discussion paper is a commendable move by IBBI to recognize the distinct nature of the real-estate sector and bring in the much-needed reforms so as to reduce the plight of homebuyers. Project-Wise Insolvency as proposed will go a long way in benefiting the homebuyers and will uphold the spirit of the Code. Nevertheless, there is a need to subside the conflicts that may arise post enforcement of the proposal with regards to the Estate. It may be achieved by a proviso clause under Section 54 of TOPA and Section 17 of RERA granting the registered sale deed, a status of ‘procedural requirement’ in case of insolvency so as to absolve registered sale deed from the essentiality status. 


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