Insolvency in Real Estate : A Difficult Balancing Act

In 2016, India enacted the Insolvency and Bankruptcy Code (IBC), a landmark legislation which reconceptualized the existing insolvency and bankruptcy regime in India. The IBC sought to overhaul an inefficient bankruptcy framework by introducing a creditor-in-control regime, a time-bound resolution process and reduced scope for judicial intervention. The IBC created two classes of creditor, financial and operational, with the former empowered to play a significantly greater role in the insolvency resolution process. One of the significant challenges faced under the new legal regime were insolvencies of real estate companies with a large number of pre-paying purchasers of residential apartments, who as a consequence of the IBC’s creditor classification, were excluded from the decision-making process in determining the outcome of these insolvencies. The legislative and judicial responses to address the concerns of such purchasers significantly evolved the IBC’s original framework. This evolution, particularly the legislative amendments to deem homebuyers as financial creditors, and judicial reluctance to allow liquidation of real estate companies, altered the resolution process and economic logic originally envisaged by the IBC. As a consequence, difficulties have arisen, and are further foreseen, in the resolution of real estate companies with a significant homebuyer presence