Unravelling Homebuyers’ Journey Through Insolvencies In Indian Real Estate Sector

The Indian real estate sector, a cornerstone of traditional investment and aspirational societal mobility for the Indian masses, has faced a myriad of challenges over the past decade such as project delays, non-deliveries, and financial mismanagement by developers. This article explores the homebuyer’s journey through insolvencies in the Indian real estate market, highlighting the role and impact of the IBC.

During the initial phases of its implementation, the IBC did not specifically recognize the treatment of homebuyers in the case of an insolvent real estate company. The lack of protective provisions for homebuyers in the IBC hit the judicial conscience, which led to some innovative amendments to the IBC. 

Chitra Sharma Judgment and the game-changing 2018 Amendments to IBC

When the insolvency of Jaypee Infratech Limited reached the Supreme Court amidst popular outbursts from anguished homebuyers in 2017, the Hon’ble Supreme Court rendered a landmark verdict in Chitra Sharma v. Union of India providing interim directions for the appointment of authorized representatives to protect and preserve the rights of the homebuyers in the committee of creditors of the corporate debtor.

The 2018 amendments to the IBC, while placing Chitra Sharma judgment into the blackletter of the law, went one step beyond by inserting an explanation to Section 5(8)(f) to clarify that amounts raised from allottees under a real estate project were amounts having the commercial effect of borrowing, thereby bringing the homebuyers under the category of ‘financial creditors’ under the IBC. 

These 2018 Amendments were assailed in a constitutional challenge before the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure v. Union of India, albeit unsuccessfully. As an obiter, the Hon’ble Supreme Court also observed that protection of the homebuyers’ rights was of paramount importance in a real estate insolvency.

2020 Amendments to IBC

To ensure that the insolvency is triggered on a significant default, the legislature introduced the 2020 amendments to the IBC mandating a a threhold of 100 in number or 10% of the total allottees in a real estate project, whichever is less, to initiate insolvency against a corporate debtor. 

Innovative approaches to real estate insolvencies

The protection of homebuyers has not been limited to instances of legislative wisdom, but judicial innovation has gone far and beyond for the cause of the homebuyers. For instance, in the case of Umang Realtech Private Limited, the NCLAT introduced the concept of ‘reverse CIRP’ to safeguard the rights and interests of homebuyers, whereby the promoters agreed to remain outside the CIRP to ensure the CIRP is successful, and the homebuyers take possession of their flats during the CIRP without any third-party intervention. Similarly, in the case of Indiabulls Assets Reconstruction Company Limited v. Ram Kishore Arora, the SC recognized that a ‘project-wise CIRP’ approach may be more suitable when dealing with real estate developers.

Recently, the IBBI has amended Regulation 36A of the CIRP Regulations to state that the resolution professional may separately invite a resolution plan for each real estate project or group of projects of the corporate debtor with the approval of the committee of creditors. 

Pitfalls of insolvency resolution for homebuyers

In July 2023, the ‘Committee to examine the issues related to Legacy Stalled Real Estate Projects’ chaired by Mr. Amitabh Kant submitted its report, inter alia examining the efficacy of IBC as a solution for resolving the legacy stalled real estate projects. The report noted that while IBC had effectively resolved more than 30 cases, however, due to the IBC being a legal process prone to severe delays, it must only be employed as a matter of last resort for revival of the real estate projects. 

The IBC, especially after its 2018 amendment, has shifted the power dynamics in favour of homebuyers, enabling them to take legal action and participate in decision-making processes. However, challenges such as limitation of understanding, under-developed role of authorised representative, prolonged legal proceedings, project delays, and complex claims structures still exist. The journey through insolvency is not an easy one for homebuyers, but with the protections offered by the IBC, they are no longer silent spectators in the resolution process.