Abhishek Kumar & Aditya Singh Raghuvanshi
Introduction
The burgeoning real estate sector in India, one of the most sought-after sectors for investment, has been a double-edged sword for homebuyers, with many enduring endless delays in receiving possession of their dream homes on account of failure by the real estate developers to promptly complete the project or even not complete it at all. This subsequently results in a stalemate between the homebuyers and the real estate developer, leaving buyers grappling with financial losses and emotional distress as their lives are locked in investments that fail to materialise.
The Real Estate (Regulation and Development) Act, 2016 (“the Act”) was introduced to address these challenges, seeking to regulate the sector to ensure transparency and accountability. Simultaneously, remedial measures also exist in the Insolvency and Bankruptcy Code, 2016 (“IBC”) which provides a resolution framework and a liquidation process in case the former cannot be implemented.
However, stalled projects raise fundamental questions about the efficacy of these regulatory frameworks in achieving their respective objectives, as the issue lies not merely in the existence of robust statutes but in their actual implementation and the ability of the stakeholders to access not only effective but also their desired remedies. This article explores this very same issue at hand, focusing on the challenges in implementation and suitable remedies for stakeholders
Struggles in IBC for Homebuyers
While the Act primarily focuses on monitoring and regulating project execution, IBC provides remedy through a resolution mechanism. Subsequent to the 2018 amendment to the IBC, homebuyers were accorded the status of financial creditors, validity of which was upheld in Pioneer Land Infra v. Union of India, granting them the ability to initiate the insolvency resolution process (IRP) and a seat in the committee of creditors. However, despite this upgradation of status of homebuyers to financial creditor, the homebuyers find themselves squeezed between interest of other financial creditors who strongly prefers recovery of their investment or loans rather than completion of the project. By the 2020 amendment to IBC, this became subject to the requirement that the Insolvency Resolution Proceeding can only be initiated jointly by either hundred homebuyers or ten percent of all homebuyers, whichever is less.
This means that Homebuyers can initiate the developer company into CIRP proceedings against a developer under section 7 of IBC, subject to minimum requirement to initiate such proceedings. Subsequently, the Committee of creditors (“CoC”) will be formulated, including homebuyers who shall be represented by “Authorised Representative” (AR) mandated by section 21(6A)(b) and 25A, AR shall vote according to the majority decision of the allottee. Stalled projects can then be completed through a resolution plan, and if that cannot be worked out, homebuyers can get their debited money back through a liquidation process. The pivotal issue at this stage is that homebuyers hold a weaker position compared to other financial creditors, such as institutional lenders. Homebuyers, here, often end up drawing up the short straw as they have conflicting interest with other creditors in “CoC” which lies in obtaining liquid money for debt repayment. Moreover, the precedents show that the CIRP has been highly ineffective in rehabilitating or making resolutions for stalled real-estate projects. As of September 2024, out of 1760 real-estate companies against whom the CIRP proceeding has been started, with only 160 companies achieving resolution, reflecting a low success rate of nine percent. Additionally, only thirty one percent claims of creditors have been realised, further showcasing the inability of the homebuyers to even get adequate compensation.
The evolution of reverse Corporate Insolvency Resolution Process (CIRP) in insolvency proceedings has significantly shaped the protection of homebuyers’ interests. In Flat Buyers Association v. Umang Realtech Pvt. Ltd., the NCLAT introduced the concept of reverse CIRP. This mechanism allows developers to continue construction even while insolvency proceedings is undergoing. Over time, reverse CIRP has evolved into a more pragmatic mechanism. In Whispering Tower Flat Owner Welfare Association v. Abhay Narayan Manudhane, the principle of project-wise resolution was established, ensuring that each stalled project is resolved independently Similarly, in Ram Kishor Arora v. Union Bank of India & Anr., it was mandated that a separate bank account be created under RERA guidelines for each project. The Insolvency Resolution Professional is responsible for maintaining records of inflows and outflows. While such judicial interventions have played a crucial role in addressing stalled projects under the IBC framework. However, the Act itself is a special statute formulated to regulate the real estate sector in India. Section 8 of the Act, 2016, empowers the Real Estate Regulatory Authority (“RERA”) to take necessary actions for the completion of development projects through a competent authority after revoking the developer’s registration. If properly implemented and strengthened, Section 8 could serve as an effective resolution mechanism within RERA itself, reducing the need for homebuyers to resort to a general insolvency statute like the IBC. By incorporating structured resolution mechanisms akin to those established under IBC, RERA can provide a more streamlined and sector-specific approach to stalled projects.
RERA’s Section 8 Fumbles Before the Finish Line
RERA, introduced as a specialised statute to provide remedies to homebuyers and regulate the real estate sector, has a variety of extensive provisions for the very same purpose. These include, but not limited to, mandatory registration of the real estate projects with RERA, providing of proformas along with an affidavit specifying the time period within which the builder will complete the project as well as prohibition upon collecting more than ten percent of the property cost as an advance or booking amount without executing a registered sale agreement. A creation of an escrow account comprising a minimum seventy percent of the amount collected from buyers which can only be used for land acquisition and construction has also been mandated to prevent the common practice of diverting funds to other projects. Section 7 of the Act vest power in RERA Authority to penalise the developers or promoters by revoking their registration granted under section 5, for the reason, inter alia, if any developer makes default in doing anything required by the Act. Specific provisions regarding compensations and refunds for homebuyers along with plethora of compliance and reporting requirements with an obligation to follow approved plans have been provided as well.
Maharashtra RERA Authority revoked the registration of DSK Sadaphuli in 2019 which came to standstill after February 2018. Section 8 of the Act provides for rehabilitation of stalled projects. After revocation of registration, section 8 can come into effect. RERA Authority in consultation with appropriate government can take action in furtherance to complete stalled projects by competent authority, Association of Allottees (AoA) or in any other manner. In Jaypee Kalypso, Uttar Pradesh RERA invoked section 8 coupled with section 37 of the Act and passed an order to complete the following project rather than providing refund. Kalypso project was completed with partnership between promoter and AoA in pursuant to the order passed by the court. Whereas, in DSK Sadaphuli the court gave authority to AoA to complete the stranded project, completion of the remaining ten percent of the project was carried out by a new contractor appointed by that AoA. A committee under the chairmanship of Mr. Amitabh Kant, former CEO of NITI Aayog released a report on issues related to Legacy Stalled Real Estate Projects in 2023, recommendation was proposed that allotment can be made on ‘as is where is’ basis through which allottees can finish up the project from the money they have not paid yet.
As of now, there is no centralized database tracking the exact number of stalled real estate projects revived specifically under Section 8 of the RERA Act, 2016 with state authorities rarely disclose aggregated data of such cases. Most examples come from high profile court rulings or government statements. In Uttar Pradesh three to four projects were revived under section 8, but only Amrapali saw a full takeover. In Maharashtra, more than ten projects were planned to be revived but only five to seven saw new promoters. In Karnataka, two to three projects flagged for Section 8, but no public confirmation of completion of these projects where ever given.
Having said that, in all precedents where stalled projects were restarted under Section 8 of the Act, a common factor was observed that those projects were in their last leg of completion or near completion. In all these scenarios, section 8 was only invoked because the projects were halted at the last stage, if it would be somewhere in between, refund would have been provided to homebuyers instead of completing the project.
Section 8 needs accommodation for the stalled project which has work left more than the near completion scenarios. AoA is competent to conduct the completion in the cases where little of the project is left. However, the situation gets disconcerted where a large part of the project is yet to be completed. RERA fails to provide resolution to such stalled projects.
A drastic revamp of the provision is necessary to effectively address this issue. One potential solution is for the RERA Authority to appoint an independent and experienced resolution officer who can assess the viability of the stalled project and oversee its completion. This officer should have the authority to engage third-party contractors, secure necessary funding, and coordinate with financial institutions and homebuyers to ensure a structured resolution. Additionally, RERA should integrate resolution mechanisms from the IBC, such as a framework for project-specific resolution plans, to ensure that stalled projects with significant pending work can be revived efficiently. This would provide a more structured and legally backed approach to project completion, preventing homebuyers from prolonged uncertainty.
A Missing Link
While the above-mentioned legal frameworks do sound well and good, the practical application of them is plagued with one problem that is to provide homebuyers with their desired remedy which is getting possession of their dream homes, which they prefer over any refunds or compensation. Their investment has one purpose, having a roof rather than even a larger amount of credited money by way of compensation and damages.
RERA has failed to provide for an effective execution of stalled projects, while it issues direction to do so, in the event of failure by the developer it only awards the homebuyers with refunds and compensations. Similarly in an IRP, the only way homebuyers get their dream homes is contingent on a resolution plan being approved by the “CoC” otherwise they can only get essentially a ‘refund’ through a liquidation process. IBC has been largely ineffective, with most real estate insolvencies failing to achieve resolution and homebuyers struggling to recover their investments.
The reason often cited for the inability to complete these stalled projects by the real estate developers is lack of monetary funds for completing the construction itself. However, the question then remains, how can there be lack of monetary funds when there is a statutory mandate of deposit of at least seventy percent of buyer funds into a separate bank account which can only be used for land acquisition and construction purposes as per Section 4(2)(l)(D) of the Act? Further, eyebrows can be raised from the additional requirement that withdrawals can only be made from that account in proportion to the percentage of completion of the project and shall for that purpose be certified by an engineer, an architect and a chartered accountant. Patently, this question has remained unanswered.
Escrow Enigma
While redressal of bureaucratic inefficiency is an endless discussion, more actionable solutions lie in amendments to the existing legal framework itself, starting with addressing the inherent ambiguity in Section 4(2)(l)(D) of the Act. Although the section mandates that withdrawals from the escrow account must be certified by an engineer, an architect, and a chartered accountant, it remains silent on whether these professionals should be appointed by RERA or by the developer. In practice, this leads to self-appointed professionals by the developers who obviously prioritise the developer’s interests. The obvious rectification to this problem is by mandating that the professionals responsible for certifying fund withdrawals must be appointed and approved by RERA, ensuring that they are independent and the certification remains impartial along with conducting regular on-site inspections and submitting project progress reports to RERA before granting withdrawal approvals. This will prevent arbitrary fund disbursements and improve accountability in project execution.
Inspiration can also be drawn from successful models in countries like UAE where a whole separate regulation, Law No. 8 of 2007, exists with regards to these escrow accounts to prevent any mismanagement providing for recording of proper transactional information. Similar sets of specialised provisions, instead of regulation, can be included in RERA for better regulation of these accounts. Section 9 of Housing Developers (Control and Licensing) Act 1965 of Singapore and Part III of Housing Development (Control and Licensing) act, 1966 of Malaysia where the requirement for funds collected from purchasers to be put into escrow accounts is hundred percent, along with strict monitoring of these accounts by regulators themselves can also be similarly implemented within the Act itself.
A pre-2008 crisis was faced by UAE where prior to enactment of escrow regulation in UAE, an unregulated market was palpable in the country where developers diverted buyer’s funds to other projects. Due to artificial demand, property prices surged by three hundred percent. The 2008 crash dropped the prices of real estate drastically. Consequently, government intervention by the introduction of escrow fund regulation restored transparency and accountability. In Malaysia, these regulations have solved the wave of abandoned housing projects in 1990s-2000s.
A viable remedy in addition to this would be a mandatory preliminary capital to be deposited into the escrow account before collecting funds from homebuyers. This preliminary capital would act as a financial buffer, demonstrating the developer’s financial commitment and ensuring that initial construction work can commence independently of early buyer contributions. And, a mandate for formation of an Association of Allottees for every registered project to monitor construction progress will be essential to all this, ensuring homebuyer’s active involvement in the process without any significant decision-making power so as to not become a hindrance to conduct of the business itself.
Protection in Insolvency
With regards to the insolvency process, additional safeguards can also be made to protect homebuyer’s interest. Homebuyers are currently classified as unsecured financial creditors and therefore are subordinate to secured financial creditors in the repayment hierarchy. However, upon entering into a builder-buyer agreement, homebuyers acquire an interest in specific immovable property, thereby establishing a contractual right to receive a particular unit in the real estate project. In instances where the developer defaults, RERA converts this contractual right into a debt obligation, further substantiated by the definition of security interest in IBC Section 3(31), making it enforceable under both RERA and the IBC. This transformation from a sale agreement to a debt claim, backed by the right to a specific property, parallels the characteristics of a mortgage, involving the transfer of an interest in specific immovable property to secure payment of a debt or performance of an obligation.
The Ministry of Corporate Affairs (MCA), in its January 2023 discussion paper, suggested project-wise resolution under the IBC, for individual real estate projects to be resolved separately instead of treating the entire developer entity as a whole. This proposal aims to address conflicts of interest among creditors tied to specific projects and improve outcomes for homebuyers. However, this runs the risk of opening a floodgate of sector-specific demands if special provisions for real estate are introduced in the IBC.
Conclusion
The crisis of stalled real estate projects demands a legal framework that prioritizes effective remedies, ensuring homebuyers obtain possession of their homes. While the IBC provides a broad insolvency framework, RERA is better suited for sector-specific resolutions and project rehabilitation. Rather than resorting to refunds, revamping Section 8 to facilitate stalled project completion should be the focus, restoring trust in real estate investments.
Despite recognizing homebuyers as financial creditors, the IBC has largely led to liquidation rather than resolution. Harmonizing RERA and IBC, particularly through a stronger Reverse CIRP mechanism, is crucial to avoiding jurisdictional conflicts. Legal reforms should mandate preliminary capital requirements, stricter oversight of escrow funds, and active allottee associations to monitor progress. Additionally, enhancing homebuyers’ creditor status will safeguard their investments, ensuring stalled projects are completed efficiently.
In 2019, the Central Government instituted SWAMIH (Special Window for Affordable and Mid-Income Housing) Investment Fund, with the objective of extending last-mile financing to stalled but financially viable real estate projects. Disbursement under SWAMIH is restricted to RERA-registered projects within the affordable and mid-income housing segment, wherein unit prices range between ₹25 lakh and ₹1.5 crore. Eligibility criteria necessitate a minimum of sixty percent project completion and demonstrable positive cash flow. As of 2023, the initiative has facilitated the delivery of over twenty-three thousand housing units, with an extended mandate to address upwards of four lakh stressed units. Replication of such targeted funding interventions by the State will further prove instrumental in mitigating the crisis of stalled developments.
Abhishek Kumar & Aditya Singh Raghuvanshi are second-year law students at Rajiv Gandhi National University of Law, Punjab.
NUALS Law Journal 