Insolvency and Bankruptcy Code and Real Estate Laws

Real estate brings major changes in the economy of a nation in terms of investment. Investments were being discouraged, because of a lack of regulatory mechanism. The Insolvency and Bankruptcy Code came into force in 2016[1]. The amendment in the Code, in 2018 brought ‘real estate allottees’ under the realm of financial creditors. The constitutionality of this Second amendment was challenged by real estate companies, since the changes made the real estate projects unaffordable.

Homebuyers as Financial Creditors

Real Estate Allottees, the homebuyers, were included under the term financial creditors in the case of Pioneer Urban Land and Infrastructure Limited and Anr. v. Union of India[2]. This case made the Second amendment in the Insolvency and Bankruptcy Code, which was held as constitutionally valid by the Apex Court.

SC added further that RERA is not an exclusive act but an additional one, as per section 88 of the Act. The intent was not such that it will be given preference over the IBC. The two legislations are considered to co-exist together, as per harmonious construction. If there is a clash between the two, then IBC will be preferred.

Once the Code is triggered the proceeding becomes public (in rem), it goes beyond the control of the person who filed the case first, and all the stakeholders then get involved. There is more risk for a house allottee if he files under the Code, than the RERA Act. If the company after the Corporate Insolvency Resolution Process is initiated, becomes insolvent, it would be impossible for the allottee to get his amount back.

Under the code, insolvency proceedings can be initiated by both the Financial Creditors or the Operational Creditors. But only the Financial Creditors can vote on the resolution plan made for the insolvency or liquidation of a company. If every homebuyer starts filing insolvency applications, only due to delay caused to them, the real estate company then will have to go through the process of insolvency, once those applications get accepted. It was held by the courts that any delay made in conveying the estate project will be considered ‘default’ under the Code. This led to numerous cases being filed because of such delay.

The Amendment created distress to both the real estate companies and also the homebuyers. The companies, if didn’t work within the time-limit, would have insolvency resolution processes initiated against them. If any of the homebuyers sued for the delay, then the rest of the homebuyers who did not want the proceeding being initiated, were getting affected.

Once the resolution process is initiated, moratorium gets imposed. Moratorium brings stay on all other suits filed against the company i.e., the Corporate Debtor. The other homebuyers, or creditors not involved in the first application will remain remediless till the time moratorium gets lifted. To solve these problems, another Amendment Bill was brought in the Code in the year 2019. The Bill put the requirement that the resolution process can only be initiated when 10% of all the homebuyers or 100 homebuyers, whichever is less, are initiating the process. This reduced the number of frivolous applications.

Impact of IBC

IBC brought relief to homebuyers and paved a new way for the Real estate sector. Real Estate (Regulation and Development) Act, 2016 deals with delays in the matters of real estate. Compulsory registrations are mandatory for the real estate companies. This legislation also prescribes penalties in case there is delay in the completion of the project. Since homebuyers can also initiate proceedings under IBC, it will create confusion in choosing which of the two legislation to be used. It may increase the burden if people start filing for proceeding under both the legislations.

The main purpose of the Insolvency Code is to initiate proceedings of insolvency. However, homebuyers filing cases for delay in the delivery of the estate, will cause the project to lag more. Is there really the need of IBC, when we already have RERA? IBC (Second Amendment) Bill, 2019[3], will help reduce the burden of courts as well as the parties themselves, if passed.

RERA: Real Estate (Regulation and Development) Act, 2016

Real Estate (Regulation and Development) Act, 2016[4] came into force in 2017. It was enacted to establish an authority to promote and regulate the real estate sector in India. The continuous demand has brought a dominant position to the real estate developers in India. Generally, the developers build one-sided contracts and abuse their dominant position in ways like delaying the delivery, or altering the allotted estate without consent of the allottee. To prevent this misuse RERA was enacted. RERA was established to run real estate projects in a smooth, transparent and efficient manner, by protecting its consumers.

Section 3 of the RERA makes prior registration of a real estate project mandatory, with the Real Estate Regulation Authority. This bars the developers from progressing any further without registering with the authority. Subsection (2) of Section 3 makes the exception when registration is not required. The conditions of such exemption are-

          When the project is less than or equal to 500 metre square.

          Total number of apartments to be made is less than or equal to 8.

          Where a completion certificate has been received by the promoter, before the Act has been brought in force.

          Where no new allotment is being made, only repair work is being done.

The registration made under the Act can be revoked either suo-moto or when any complaint is received. The registration also gets revoked, if the promoter fails to fulfil any requirement under the act, or violates the conditions given by the Authority. The Authorities can also revoke registration if it is found out that the Promoter has been involved in unfair practices. This Act makes registration of the Real Estate Agent mandatory, under Section 9. An agent cannot facilitate sale or purchase of any project if he is not duly registered as per the section.

A promoter can only make minor architectural changes, in case of need. No changes can be made in the decided plan of the project if consent has not been taken from the allottees. The minor changes that have been done due to urgency, later need to be rectified by the promoter.

If the project is being transferred to a different developer, then the consent from at least two-third allottees has to be obtained first. If the transfer is finalised, then the pending obligations still need to be fulfilled by the promoter. In case of delay in the delivery of the estate by the promoter, the liability to refund the amount with interest also falls on him, if the allottees want to withdraw.  

The homebuyer has rights to be informed of all the plans, specifications or layouts of the project. The time schedule has to be mentioned to him stage-wise. If the promoter fails to deliver the estate, then the allottee has the right to get a refund along with the interest. The homebuyer is entitled to claim the possession of the allotment.

RERA creates a transparent grievance redressal mechanism protecting interests of the promoters as well as allottees. It brings assurance of timely completion of the projects, and also facilitates land records digitization. It brings a boost in investment in the real estate sector, since there is amicable conciliation of disputes and penalties are imposed in case of defaults.

Real Estate Regulation Authority is the deciding authority under the Act, appeals may be filed to the Real Estate Appellate Tribunal in case of any grievance. The appeal has to be filed within 60 days from which the decision has been made by the Real Estate Regulation Authority. If the person is not satisfied with the decision of the Appellate Tribunal, then from the date such order was passed, another appeal to the High Court can be made within 60 days.

The penalty has been provided in case where the promoter fails to register the project, he will be liable to pay upto 10% of the estimated project cost. If the promoter furnishes false information when registering the project, there will be a penalty.

Other Relevant laws

There are other laws that govern the aspects such as sale, licensing, mortgage or lease, etc. of real-estate in India.

          The Transfer of Property Act, 1882

          The Registration Act, 1908

          The Specific Relief Act, 1963

          Land Acquisition Act, 2013

Foreign Exchange Management Act, 1999 applies in case of Non-Resident Indians and foreign investments. A clearance is also needed as per Environment Laws before constructing any immovable property.


There has been extensive growth in the real estate sector, investments have increased. But one-sided contracts are still dominating the market, worsening the condition for the consumers. These acts and amendments brought light on the prevalent market practices under judicial scrutiny. It has brought relief to the allottees and the homebuyers by providing them the option to recover their value.


[1] Insolvency and Bankruptcy Code 2016.

[2] WP (C) No. 43/2019.

[3] IBC (Second Amendment) Bill, 2019.

[4] Real Estate (Regulation and Development) Act, 2016.


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