New Delhi: The government and the Insolvency and Bankruptcy Board of India (IBBI) are examining if the proposed framework tailored for real estate sector should attempt to resolve financial distress at the level of individual projects or at the level of individual towers within a project, according to two persons familiar with the discussions.

Identifying the exact scope of a proposed new regulatory regime for rescuing distressed assets in the housing sector is a key area of the consultations that the ministry of corporate affairs (MCA) and IBBI have started after the Supreme Court in September ordered coordinated action by all stakeholders to protect the interests of homebuyers and restore confidence in the real estate sector.

Narrowing bankruptcy resolution to a single project-or even a single tower within a project-raises fresh policy questions for the authorities, including how to treat a developer that has defaulted on repayments.

“Creditor taking over the management of a defaulting company under IBC is a deterrence against financial indiscipline and payment defaults, and it penalises the erring management. If one tower that is facing distress is ring-fenced for resolution without affecting the rest of the assets of the defaulting company, that deterrence gets diluted," said the first of the two persons cited earlier, both of whom spoke on the condition of anonymity.

Queries emailed to MCA and to IBBI remained unanswered.

At present, insolvency resolution takes place only at the level of the corporate entity. Once a bankruptcy plea is admitted in a tribunal, creditors appoint an administrator - known as insolvency professional - to run the company who also invites bids from new investors. All its assets are part of the resources available for a restructure.

While narrowing down the financial distress to a few housing units and finding a new investor for completing those units could leave the rest of the units being built by the same real estate developer undisturbed, such an approach may not be aligned with one basic event envisaged under the Insolvency and Bankruptcy Code (IBC) -creditors taking over the affairs of the company in the event of a payment default.

Choosing one approach over the other creates a genuine dilemma. Homebuyers in distressed towers may want all of the developer's assets pooled together to revive the company and finish their homes, but customers in well-run towers or projects may not want their units drawn into bankruptcy proceedings, fearing delays.

The ministry and IBBI are consulting experts to evolve a new regime as mandated by the apex court. These proposals are likely to form a part of future amendments to the IBC. The Bankruptcy (Amendment) Bill 2025, now before a Lok Sabha select committee after extensive government deliberations, is likely to be taken up for passage before the current discussions on real estate–specific reforms are finalised.

Niranjan Hiranandani, chairman of real estate industry association NAREDCO said the move to develop a dedicated bankruptcy framework for real estate is a welcome step.

“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," said Hiranandani.

“A tower-wise approach can help ensure that work on other parts of the project continues without affecting the entire development or the company. What matters is that the system stays fair for all stakeholders and prevents misuse. We need a balanced structure that protects buyers and lenders while allowing genuine developers to finish homes without long delays," added Hiranandani.

Insolvency resolution at corporate level should remain the last resort, reserved for cases where financial stress is pervasive across the developer's entire portfolio, said Manmeet Kaur, Partner at law firm Karanjawala & Co.

“A project-wise resolution framework offers the most balanced and practical approach as it fences each project's cash flows and liabilities, safeguards buyers of that specific project, and prevents the insolvency of one project from bringing the entire company/entity to a standstill. That being said, in certain large townships or multi-tower developments where each tower is functionally and financially distinct, a tower-level resolution could offer even greater precision," said Kaur.

However, such an approach can only be adopted where there is a clear delineation of financial cash flows, approvals, and construction stages, added Kaur.

A tailored insolvency framework for real estate is critically needed to address sector-specific complexities, said Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm.

Resolving insolvency at the project level strikes a practical balance by protecting affected homebuyers and creditors without unnecessarily crippling the developer's entire operations, said Maheshwari.

“Where feasible, a tower-wise resolution within large, independently-funded projects could offer even more granular relief by isolating default risks to specific segments, thus safeguarding the interests of unaffected stakeholders. However, project-wise resolution remains the most viable and administrable approach overall, given current regulatory and operational realities," said Maheshwari.

Any new framework must also incorporate clear, objective criteria to prevent misuse while promoting timely revival and completion of stalled projects, he said.

The Supreme Court had said in its judgement on Mansi Brar Fernandes vs Shubha Sharma and others case on 12 September that resolution of real estate insolvency should, as a rule, proceed on a project-specific basis, rather than the entire corporate debtor, unless circumstances justify otherwise.

Real estate and construction sectors together account for a little more than a third of the over 8,600 companies undergoing bankruptcy proceedings since the Insolvency and Bankruptcy Code came into being in 2016.

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