Is Your Builder Facing Bankruptcy? Govt, IBBI Plan Reforms To Safeguard Homebuyers

(MENAFN- Live Mint)

New Delhi: For thousands of Indian families, a builder's bankruptcy means losing the home they paid for, while still juggling EMIs and rent. Now, spurred by a 12 September Supreme Court ruling that declared the right to shelter a fundamental right under Article 21, the government and bankruptcy regulator Insolvency and Bankruptcy Board of India (IBBI) are weighing reforms to protect genuine homebuyers and restore credibility to the real estate sector.

Two people familiar with the matter, who spoke on the condition of anonymity, said discussions are at an early stage and aim to address the sector's credibility gap and protect those who invest their life savings in homes.

The Supreme Court, ruling in the case of Mansi Brar Fernandes vs Shubha Sharma (clubbed with cross-appeals and another case), said that the 'right to shelter' is a fundamental right, and home purchases are much more than a commercial transaction.

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Early reforms on the table

According to one of the persons cited above, the proposals include early registration of property in a buyer's name after 20% payment, project-specific insolvency resolution so only troubled projects-not entire developer groups-go into bankruptcy, stronger coordination between IBBI and state real estate regulatory authorities, and institutional reforms to ensure stalled projects are revived.

Queries emailed to IBBI, ministry of corporate affairs and the ministry of housing and urban affairs seeking comments for the story remained unanswered at the time of publishing.

“The state carries a constitutional obligation to create and strictly enforce a framework wherein no developer is permitted to defraud or exploit homebuyers. Ensuring timely project completion must be a cornerstone of India's urban policy," the top court said, while also asking the authorities to check the menace of a parallel cash economy and speculation in the real estate market, which artificially inflate housing costs.

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Distinguishing genuine buyers from speculative investors, the court ruled that only genuine buyers can trigger insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) . The Supreme Court said registration of houses with local revenue authorities in the name of the home buyers should be done upon 20% of the payment, rather than full payment.

It also urged the creation of a retired high court judge-led committee to propose systemic reforms, a council of IBBI and RERA authorities to frame sector-specific insolvency guidelines, and greater use of government bodies or PSUs to rescue stalled projects through bridge financing.

Real estate insolvency: A fresh approach

The top court strongly recommended that project-specific bankruptcy resolution be implemented in the real estate sector and that specific guidelines be framed.

This will ensure that housing projects which have run into financial problems will individually be taken up for debt resolution under the IBC, rather than the developer as a corporate entity facing bankruptcy proceedings . This will ring-fence projects that are going well from the bankruptcy resolution of projects that are stuck, enabling delivery of homes to customers in the better managed projects without legal complications.

Interestingly, the government had considered this option earlier but opted not to propose it in the IBC (Amendments) Bill 2025 , currently before a select committee of the Parliament. With the Supreme Court recommending it, this is expected to become part of India's the bankruptcy resolution framework.“Work is going on in that direction," said the first person quoted above.

Abhay Upadhyay, president of Forum For People's Collective Efforts (FPCE), a homebuyers' association, said that the Supreme Court judgement and further development based on the court's order is a welcome move.

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“Also, apart from further change in regulations, there is a need for strict measures against developers defaulting on the delivery of homes and, in specific cases, show-cause notices can be sent to RERAs which failed to address homebuyers' concerns. In the absence of strict steps, not much movement is expected as issues of delayed delivery, stalled projects have stretched through several years now," said Upadhyay.

“Corporations will have to bring in self-regulation and the highest level of governance so that the ultimate customer is encouraged and motivated to buy home without fear of being cheated," said Surendra Raj Gang, partner, Deals – Debt & Special Situations at Grant Thornton Bharat LLP.

While the Supreme Court in this case primarily dealt with whether a party was a 'speculative investor' or a 'genuine home buyer' and the applicability of the IBC Ordinance/Amendment Act, 2019 to pending matters, it also reiterated several key aspects concerning homebuyers and the real estate sector at large, explained Raj Gang.

In the order, the apex court discussed the urgency for providing infrastructure for National Company Law Tribunal (NCLT) benches, filling in vacancies of judges at NCLTs and NCLAT, ensuring timely adjudication, constitution of a committee to propose commercially viable systemic reforms for cleansing and infusing credibility into the real estate sector and the need for close coordination among NCLT, IBBI and state RERA authorities to treat home purchases not merely as commercial transactions but also as a fundamental human need, said Raj Gang.

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