Government Explores Revolutionary Insolvency Framework for Real Estate
The Indian government and the Insolvency and Bankruptcy Board of India (IBBI) are actively considering a groundbreaking approach to address financial distress in the real estate sector. According to sources familiar with the discussions, authorities are examining whether insolvency resolution should occur at the level of individual projects or even specific towers within developments.
This initiative represents a significant departure from the current system where insolvency proceedings take place only at the corporate entity level. The move comes as a response to the Supreme Court's September directive calling for coordinated action to protect homebuyers and restore confidence in India's troubled real estate market.
The Policy Dilemma: Precision vs. Deterrence
The proposed framework creates a genuine policy challenge for regulators. While narrowing bankruptcy resolution to specific towers could protect unaffected homebuyers, it might dilute the deterrent effect of the Insolvency and Bankruptcy Code (IBC).
An anonymous official involved in the discussions explained the concern: "Creditor taking over the management of a defaulting company under IBC serves as a deterrence against financial indiscipline. If only distressed towers are ring-fenced for resolution without affecting the developer's other assets, that deterrence gets significantly weakened."
Currently, when a bankruptcy plea is admitted, creditors appoint an insolvency professional to manage the entire company and invite bids from new investors. All corporate assets become available for restructuring under the existing framework.
Industry Experts Welcome Sector-Specific Approach
Real estate industry leaders have expressed strong support for developing a dedicated bankruptcy framework tailored to their sector's unique needs. Niranjan Hiranandani, chairman of NAREDCO, emphasized the practical benefits of project-level resolution.
"Our industry runs on project-level cash flows, so resolving insolvency at the project or even tower level can protect homebuyers and keep construction on track," Hiranandani stated. He stressed the importance of creating a balanced system that protects both buyers and lenders while allowing genuine developers to complete projects without unnecessary delays.
Legal experts echo this sentiment. Manmeet Kaur, Partner at law firm Karanjawala & Co., suggested that insolvency resolution at the corporate level should remain the last resort, reserved for cases where financial stress affects the developer's entire portfolio.
"A project-wise resolution framework offers the most balanced and practical approach as it fences each project's cash flows and liabilities," Kaur explained. She noted that in large townships with functionally distinct towers, tower-level resolution could provide even greater precision, though this requires clear delineation of financial flows and construction stages.
Supreme Court Mandate Drives Reform Efforts
The push for real estate-specific insolvency reforms gained momentum following the Supreme Court's September 12 judgment in the Mansi Brar Fernandes vs Shubha Sharma case. The court explicitly stated that resolution of real estate insolvency should typically proceed on a project-specific basis rather than targeting the entire corporate debtor.
The timing of these discussions coincides with the ongoing parliamentary review of the Bankruptcy (Amendment) Bill 2025, which is currently before a Lok Sabha select committee. The real estate-specific reforms being discussed are likely to form part of future amendments to the IBC.
The scale of the problem is substantial - real estate and construction sectors account for more than a third of the over 8,600 companies undergoing bankruptcy proceedings since the IBC's implementation in 2016.
Amit Maheshwari, tax partner at AKM Global, emphasized the critical need for a tailored framework. "Resolving insolvency at the project level strikes a practical balance by protecting affected homebuyers and creditors without unnecessarily crippling the developer's entire operations," he said.
Maheshwari added that where feasible, tower-wise resolution within large, independently-funded projects could offer granular relief by isolating default risks to specific segments. However, he cautioned that any new framework must incorporate clear, objective criteria to prevent misuse while promoting timely revival of stalled projects.
The government's exploration of tower-level insolvency represents a potentially transformative approach to addressing one of India's most persistent consumer protection challenges in the real estate sector.
