The Judicial Pragmatic Birth of Reverse CIRP

Navigating the Regulatory Labyrinth: A Deep Dive into the RERA vs. IBC Conflict and the Innovation of Reverse Corporate Insolvency

~By Adithi Anupama Baskar, NMIMS School of Law, Bengaluru

The Supremacy Clash between RERA and IBC

The intersection of RERA (Real Estate (Regulation and Development) Act, 2016) and IBC (Insolvency and Bankruptcy Code, 2016) primarily governs the real estate sector. While RERA prioritizes project regulation, consumer protection, timely delivery of homes, IBC is time bound and focuses on resolving corporate debts while maximizing asset value for creditors. This inherently creates a clash.

The IBC (Amendment) Ordinance, 2018 provided the inclusion of homebuyers as financial creditors, on level with banks and financial institutions. This was further affirmed in Pioneer Urban Land and Infrastructure Ltd. v. Union of India. This granted homebuyers, i.e. allottees, a voice in the decision making body of the insolvency process: the Committee of Creditors (CoC). However, this provided no immediate efficient remedies to allottees as per RERA. Thus, although it provides inclusion, it suspends immediate execution power derived from RERA. Homebuyers thus transition from specific performance or monetary refunds under RERA to participating in complex finance-driven collective recovery process prioritizing financial returns over possession of homes.

Section 14 Moratorium and the Homebuyer as Financial Creditor

The most significant immediate impact of IBC proceedings is a moratorium under Section 14.  This creates a “standstill” period essential to protect the corporate debtor's assets from individual debt recovery actions. In the Jyoti Structures Limited case, it was determined that “proceedings” signifies debt recovery actions, including those initiated under RERA. Thus, everything halts when CIRP (Corporate Insolvency Resolution Process) is admitted, and decrees by allottees cannot be enforced till conclusion.

Nonetheless, a “moratorium trap” is created in the real estate sector in which half-built assets are degraded to structural deterioration, rising costs and missed market opportunities. Such a failure lies with the statutory framework of IBC which does not differentiate real estate with other corporate sectors. Moreover, if the National Company Law Tribunal (NCLT) approves the resolution plan, the homebuyer's final opportunity to protect their interests is lost as it is binding on all stakeholders and extinguishes all claims not included in it.

The Failure of Traditional Corporate Insolvency in the Real Estate Ecosystem

The standard CIRP model is incompatible with the distinct demands of the real estate sector: it requires construction to stop until a resolution plan is approved, which causes uncertainty and delay, not only halting project progress but destroying value for homebuyers as future occupants in the process.

When traditional CIRP fails to find a solution, developers would proceed to liquidation, in which financial creditors would claim the major stake, leaving homebuyers a pittance. A critical clash presents itself here: traditional CIRP prioritizes maximizing financial recovery, whereas homebuyers prioritize delivery of possession.

The Genesis of Reverse CIRP and Judicial Invention

The NCLAT (National Company Law Appellate Tribunal) recognized allottees’ interest of getting possession of units in Flat Buyers Association, Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd.. From this judicial pragmatism emerged the Reverse CIRP (R-CIRP). R-CIRP shifts insolvency resolution from the level of the corporate entity to the level of individual projects

This was further endorsed and upheld by the Honourable Supreme Court in Anand Murti vs. Soni Infratech Pvt. Ltd. and Amit Katyal vs. Meera Ahuja, demonstrating a willingness to bypass the rigidity of the Code.

Operational Mechanics: The Promoter as Lender and the Resolution Professional’s Oversight

R-CIRP represents a version tailored for rapid project completion by allowing promoters to keep control over stalled project under strict supervision of the RP (Resolution Professional) and thereby ensuring immediate resumption of construction. Thus, promoter acts as an external financier as they are allowed to infuse fresh funds to complete the project. The promoter must additionally submit a resolution plan that requires approval from the CoC with a 66% majority vote. The major requirements include an affidavit containing project completion timeline, funds infused, and a guarantee that original Builder-Buyer Agreements (BBAs) will be honoured.

The RP plays a hybrid role of facilitator and regulator with both IBC and RERA by managing the situation and ensuring adherence to agreed terms. The ultimate viability rests on allottees to adhere to financial commitments, a withdrawal of which would revert to traditional CIRP, shifting the RP's role back toward maximizing asset value for creditors.

A Comparative Lens to International Models

While allowing the promoters to infuse fresh funds seems alien to the IBC’s original intent, it aligns unusually well with Western restructuring regimes like the Title 11 of the US Code pertaining to Bankruptcy. This Chapter, being built on the Debtor-in-Possession (DIP) model, allows existing management to remain in control, under the belief that they know the business the best. India, by allowing the Promoter as a Lender, is effectively performing a judicial borrowing of this philosophy. This makes the promoter “in control” of the solution, even if they cannot necessarily be “in control” of the board.

Additionally, under the UK’s model prescribed in the UK Insolvency Act 1986, a “pre-pack” allows a company to negotiate the sale of its business before an administrator is appointed. This prioritizes business values by avoiding the stigma of insolvency, and often results in a sale back to existing directors. India’s R-CIRP Model attempts to achieve the same by using a different structural anchor. It relies on the RP who acts as the bridge between the old management and the new law, and also on the approval of the CoC which ensures that the nature of the solution is a viable path forward.

The Legal Lacuna of Section 29A of the IBC

The disputable challenge of R-CIRP remains the circumvention of Section 29A of the IBC which was enacted to prevent defaulters from regaining control of their companies. Critics argue that allowing promoters to complete stalled projects by infusing fresh funds, defeats the purpose of Section 29A.

The judicial system essentially trades strict corporate governance for social utility. The risk of this moral hazard necessitates extreme scrutiny from the NCLT and the RP, resulting in the initiation of legislative proposals to formalize the process as an exception under Section 29A.

The Analysis of RERA’s 70% Escrow Mandate Adherence

There exists a significant governance deficit, i.e., the inconsistent enforcement of the anti-fund mechanism. As per S.4(2)(l)(D) of RERA, 70% of homebuyers’ funds for the project must be kept in a separate account to be used only for construction and land costs.

However, judicial precedents upholding R-CIRP, including the formative Flat Buyers Association case and the Supreme Court rulings in Anand Murti  and Amit Katyal have deviated from this 70% fund requirement. This is due to the fact that these funds may financially cripple the construction process, in turn creating a high risk of the misuse of the money.

This thereby creates a legal cavity in which the promoters could benefit at the expense of homebuyers. To combat this, policy discussions are now more focused on transparency and auditing, which are deemed more effective than a simple 70% segregation.

By invoking Article 142 in both the cases, the Supreme Court prioritized social utility, i.e. the homebuyer’s right to possession, over the literal penal rigidity of Section 29A. This creates a form of “Selective Ring-Fencing” theory where the project is isolated from the corporate debtor’s broader failures to prevent a moratorium trap. This acknowledges that for homebuyers, financial recovery under traditional CIRP is often inadequate compared to the value of a completed home. And thus, the court treats the promoter as a resource to be regulated rather than a defaulter to be ousted.

Formalizing Project-Specific CIRP

Success as a judicial innovation has established the need for its statutory codification. In Mansi Brar Fernandes vs Shubha Sharma & Anr., the Supreme Court recognized the project-specific necessity resulting in the initiation by the Insolvency and Bankruptcy Board of India (IBBI) towards developing a Project-Specific CIRP (P-CIRP) framework. The proposed legislative safeguards under consideration includes strict escrow discipline, personal liability of promoters, inclusion of Land Authorities in CoC meetings, and requirements for RPs to upload CoC minutes to a secure platform.

Conclusion

Emerging as a necessary and pragmatic judicial intervention, R-CIRP filled the vacuum of the concerns of homebuyers in the real estate sector. However, the non-statutory circumvention of Section 29A of the IBC as well as the 70% fund segregation rule of RERA compromise long-term accountability and transparency.

Formalizing P-CIRP promises to establish benefits of R-CIRP while installing necessary safeguards. It would stand not just a procedural amendment, but a vital evolution towards predictive guidelines that fulfil the core promise of maximising value for all stakeholders.