By Shivanand Pandit
Homebuyers may soon have better protection if a real estate developer with a well-functioning project is pushed into bankruptcy court because of financial troubles in other projects. India’s bankruptcy regulator is taking steps to ensure that ongoing, viable real estate projects are shielded—or “ring-fenced”—from others that have failed.
The Insolvency and Bankruptcy Board of India (IBBI) has set up an internal committee to review the possibility of allowing insolvency proceedings at the individual project level instead of covering the entire company, according to two people familiar with the development. Under the current insolvency law, bankruptcy resolution is applied at the company level, which includes all of its projects, even those that are not under financial stress. This move is being considered as a special provision for the real estate sector due to its significant impact on the general public. Real estate companies account for over one-third of the nearly 8,500 insolvency cases admitted to courts under India’s bankruptcy framework so far.
Under the proposed system, developers would need to maintain separate financial records for each project, helping authorities isolate the financial issues of one project without jeopardising others. To support this approach, new IBBI regulations mandating project-specific accounting may be required. At present, when a real estate developer is admitted for insolvency, all its assets—including unfinished properties across all projects—are grouped as part of the resolution process. This often harms the interests of homebuyers in projects that are otherwise progressing smoothly, as they are forced to wait through lengthy legal proceedings linked to an entirely unrelated troubled project.
For example, in the case of Supertech Ltd, a loan default connected to its Eco Village II project in Greater Noida led to the company being dragged into insolvency court in March 2022. The bankruptcy process caused a payment freeze affecting all ongoing projects of the developer. To protect homebuyers in its other unaffected projects, the National Company Law Tribunal (NCLT) later ruled that the insolvency would apply only to the Eco Village II project—a ruling that was eventually upheld by the Supreme Court in May 2023. Similarly, Jaypee Infratech’s insolvency, which began with defaults in its Yamuna Expressway project, disrupted homebuyers across several housing projects. A resolution plan by Suraksha Group was approved in 2023, and construction is currently in progress to complete pending homes.
The idea of project-wise ring-fencing is logical and practical. However, it can only work effectively if developers maintain detailed and accurate financial records for each project and properly identify common expenses like overheads, employee salaries, or general loans that might apply across multiple projects. While many developers already track specific project costs—such as construction expenses, sold and unsold inventory, and scheduled milestones—and report these to Real Estate Regulatory Authority (RERA) bodies as required, other corporate costs may not be allocated at the project level. In some cases, the land and construction work for a project may even be held by separate entities within the same real estate group, adding another layer of complexity.
Powerless homebuyers, Powerful builders
When the Reserve Bank of India directed banks to initiate insolvency proceedings against major corporate defaulters, Jaypee Infratech Ltd (JIL) quickly became one of the most notable cases under the Insolvency and Bankruptcy Code (IBC), 2016. What set JIL apart was not only its financial scale but also the severe human impact. Thousands of home-buyers, who had invested their life savings into incomplete housing projects, were left without either a home or legal recognition in the resolution process. Their struggle triggered a major change in India’s insolvency framework: the formal recognition of real estate buyers as financial creditors under the IBC.
Under the original IBC structure, creditors were split into two categories: financial and operational. A financial creditor was one to whom a financial debt was owed, while an operational creditor was owed a debt related to the supply of goods or services or government dues. Until August 2017, however, home-buyers weren’t recognised in either category, meaning they had no standing to file claims during insolvency proceedings. This changed after intense protests by JIL home-buyers in 2017, who demanded representation in the committee of creditors (CoC) that makes key decisions during insolvency. In response, the IBBI created ‘Form F’ for “other creditors,” but these creditors still couldn’t initiate insolvency proceedings. Recognising this gap, the government amended the IBC in June 2018, classifying real estate allottees as “financial creditors” by revising the definition of “financial debt.” New procedural forms and mechanisms to appoint representatives of such home-buyers in the CoC were introduced soon after.
Home-buyers often unknowingly become financiers of real estate projects. In real estate, customer advances typically form the backbone of project funding. The funding model usually involves several players: the real estate developer, a project lender (such as a bank), the buyer (allottee), and the buyer’s lender (such as a home-loan provider). Where a buyer takes a home loan, a tripartite agreement is often signed between the buyer, developer, and lending bank to secure the bank’s claim on the property. The project lender’s no-objection certificate (NOC) effectively gives the buyer’s bank a charge on the property. Under Section 3(21) of the IBC, such an arrangement qualifies as a “security interest.” Thus, once an NOC is issued, the buyer is effectively a secured creditor concerning their property, holding rights equal to, or stronger than, the project lender—provided the buyer is not in default.
The decision to treat allottees as financial creditors was challenged in the Supreme Court. In the “Pioneer Urban Land and Infrastructure Ltd. v. Union of India” case, the Court upheld the amendment but observed (without ruling explicitly) that allottees should be seen as unsecured creditors. This view overlooked contractually created security arrangements between buyers, developers, and banks. Meanwhile, the growing misuse of the IBC by “speculative investors” came to light in the “Mansi Brar Fernandes v. Shubha Sharma” case, where the Supreme Court clarified that such investors cannot trigger insolvency proceedings but may still file claims during insolvency. However, IBC’s Section 50, meant to combat extortionate credit practices, is largely ineffective in addressing predatory interest rates charged by regulated entities like NBFCs or funds. The Court also emphasised that the “Right to Shelter” is part of the fundamental right to life under Article 21 of the Constitution. Yet, thousands of home-buyers continue to suffer, paying both EMIs and rent while waiting for homes that never materialise. Another example is the “Himanshu Singh v. Union of India” case, where the Supreme Court called for a CBI probe into a builder-bank nexus that forced buyers to pay EMIs without receiving possession, thereby damaging their credit scores.
The IBC mandates that a resolution professional keep the company running as a going concern. But in real estate, many resolution plans force buyers to pay extra to receive already agreed-upon units—essentially punishing them for no fault of their own. In February 2025, IBBI amended CIRP Regulations to let resolution professionals transfer possession of units upon CoC approval. But this only adds another barrier, allowing project lenders (who often dominate CoC) to delay or block handover. Despite their critical financial role, home-buyers remain disadvantaged in the IBC framework. They get no liquidation value as they are still treated as unsecured creditors, even though their payments often exceed the contributions of secured lenders.
Furthermore, IBC has become a vehicle to evade accountability, allowing real estate promoters to siphon funds and leave projects unfinished with little oversight or criminal consequences. Resolution professionals often lack critical records due to non-cooperation by promoters, while regulators remain passive. Another major issue is the exclusion of home-buyers who fail to file claims, even though their sold units are accounted for in valuations. Such discrimination among creditors is against the spirit of fairness and needs urgent correction. Even the prescribed 8% interest rate granted to home-buyers under IBC is arbitrary and unfair, especially when builders charge far higher rates for payment delays. The Supreme Court, in “Rajnesh Sharma v. Business Park Town Planners Ltd.”, has urged parity in such interest rates.
Home-buyers, whose funds ensure project viability, deserve greater protection than traditional financial creditors. While the judiciary has progressively acknowledged its rights, proper implementation requires stronger involvement from bodies like IBBI and RERA. Key reforms must include ensuring handover of completed units without CoC barriers, penalising lenders and developers who fail in due diligence or siphon funds, preventing exclusion of known allottees, even if no claim is filed, enforcing disclosure obligations on promoters and resolution professionals, and revising interest terms to ensure parity with market rates. The IBC, especially as it applies to real estate, needs a thorough overhaul to prevent misuse and ensure that innocent home-buyers are not sacrificed to protect negligent or complicit creditors.
