SC Urges IBC Overhaul and Revival Fund for Stressed Real Estate Projects

The Supreme Court (SC) has suggested significant reforms in the Insolvency and Bankruptcy Code (IBC) to restore confidence in the regulatory and insolvency framework. The court also urged the government to set up a revival fund to provide financing for distressed real estate projects undergoing insolvency proceedings.

The apex court stated that the Right to Housing is not just a contractual right but a fundamental aspect of the Right to Life under Article 21 of the Indian Constitution. The government has a constitutional duty to protect the interests of homebuyers and the broader economy. A bench of Justice J.B. Pardiwala and Justice R. Mahadevan emphasized that insolvency reforms are essential to prevent speculative misuse and ensure that the dream home of Indian citizens does not become a lifelong nightmare.

The Union Government is advised to establish a revival fund under the National Asset Reconstruction Company (NARCL) or expand the Special Window for Affordable and Mid-Income Housing Fund to provide bridge financing for stressed projects undergoing Corporate Insolvency Resolution Process (CIRP). This would prevent the liquidation of viable projects and safeguard homebuyer interests. The court directed that a comprehensive periodic performance audit by the Comptroller and Auditor General (CAG) be conducted, with reports made public in a comprehensible format.

According to the judgment, every residential real estate transaction for new housing projects must be registered with local revenue authorities upon the payment of at least 20% of the property cost by the buyer or allottee. To protect senior citizens and genuine homebuyers, contracts that significantly deviate from the Model RERA Agreement or incorporate returns/buyback clauses for allottees over the age of 50 must be supported by an affidavit sworn before the competent Revenue Authority, certifying that the allottee understands the risks.

In projects at nascent stages, such as where land acquisition is pending or construction has not started, proceeds from allottees must be placed in an escrow account and disbursed in phases aligned with project progress, as per a RERA-sanctioned Standard Operating Procedure (SOP). Every RERA must devise such SOPs within six months from the date of the judgment.

The court stressed that this issue is not just about houses or apartments but also involves the banking sector, allied industries, and employment for a large population. Genuine homebuyers represent the backbone of India's urban future, and their protection lies at the intersection of constitutional obligation and economic policy. The top court also directed the government to fill vacancies in the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) on a war footing.

The Centre must file a compliance report within three months on measures taken to upgrade the infrastructure of tribunals and appellate tribunals nationwide. The recent closure of the Chandigarh tribunal and parts of the Delhi tribunal due to water seepage in courtrooms and chambers underscores the need for robust infrastructural support.

Within three months, a committee chaired by a retired High Court judge, with representatives from the Ministry of Law, Ministry of Housing, and domain experts in real estate, finance, and insolvency, as well as two eminent industry representatives, will be constituted to suggest commercially viable systemic reforms for the real estate sector. NITI Aayog and the National Institute of Urban Affairs will provide research and secretarial support, and the committee will submit its report within six months of its constitution.

Since real estate is the second-largest sector in insolvency proceedings, the Insolvency and Bankruptcy Board of India (IBBI), in consultation with real estate authorities, will constitute a council to frame specific guidelines for insolvency proceedings in real estate, including timelines for project-wise insolvency and safeguards for allottees. Resolution of real estate insolvency should, as a rule, proceed on a project-specific basis rather than for the entire corporate debtor, unless circumstances justify otherwise. This will protect solvent projects and genuine homebuyers from collateral prejudice. The insolvency board will also devise a mechanism to enable the handover of possession to willing allottees where substantial units in a project are completed.

For future reforms, the top court suggested that IBBI consider introducing “Basel-like” early warning frameworks, drawing from comparative practices such as pre-bankruptcy mediation and preventive restructuring, requiring directors to initiate restructuring before defaults spiral out of control. The Union Government should undertake a consultative exercise to bring uniformity in RERA Rules across states, to remove ambiguity and fill lacunae in what is otherwise a watershed legislation. Housing boards, state-level Urban Development Authorities like DDA, and CPSUs should establish dedicated wings to revive and complete stalled projects under IBC mechanisms.

Collaboration with Indian think tanks and academic institutions should be strengthened to build indigenous capacity for sectoral restructuring, which has the potential to improve India’s ease of doing business and accelerate economic growth. Additionally, the Centre may consider establishing a body corporate, on the lines of NARCL or otherwise, promoted by real estate or construction-focused public sector units or through public-private partnerships, to identify, take over, and complete stalled projects under the insolvency framework. Unsold inventory from such projects could be utilized towards affordable housing schemes like Pradhan Mantri Awas Yojana or for government quarters, thereby addressing both the housing shortage and revival of sick projects.