The Supreme Court, on Friday, called for significant reforms in the Insolvency and Bankruptcy Code to regain trust in the regulatory framework. The Court also urged the government to create a revival fund to finance distressed real estate projects that are undergoing insolvency proceedings.
The bench, composed of Justice J.B. Pardiwala and Justice R. Mahadevan, emphasized that the Right to Housing transcends mere contractual obligations, forming a core aspect of the Right to Life under Article 21 of the Indian Constitution. The government cannot adopt a “mute spectator” stance and must protect the interests of homebuyers and the economy.
Insanity reforms are deemed essential “to restore faith in the regulatory and insolvency framework, deter speculative misuse, and ensure that homeownership aspirations do not morph into lifelong nightmares.” The Union Government has been advised to consider forming a revival fund under the National Asset Reconstruction Company or extending the Special Window for Affordable and Mid-Income Housing Fund, which would provide crucial funding for projects undergoing Corporate Insolvency Resolution Process (CIRP) to avoid liquidation of viable projects and protect homebuyer interests.
The Court also directed that contracts deviating from the Model RERA Agreement, specifically involving returns or buyback clauses for allottees aged over 50, must be accompanied by a sworn affidavit certifying that the allottee understands the associated risks. Additionally, it mandated that all residential transactions for new housing projects must be registered with local authorities after buyers pay at least 20% of the property cost.
For projects in early stages, such as those where land acquisition is pending or construction has yet to begin, funds from allottees must be deposited into an escrow account, with disbursements aligned to project milestones, per a RERA-approved Standard Operating Procedure (SOP). All RERA authorities are required to create such SOPs within six months.
The Court remarked that while this falls within the government’s policy domain, it cannot remain silent, as this issue impacts not just housing but also the banking sector and employment for many. “Genuine homebuyers are essential for India’s urban future; their protection is intertwined with constitutional mandates and economic policy,” it stated.
The Supreme Court has urged the government to expedite the filling of vacancies in the National Company Law Tribunal and the Appellate Tribunal. Within three months, the Centre must file a compliance report detailing actions taken to enhance the infrastructure of these tribunals nationwide, as recent issues such as water damage in the Chandigarh tribunal highlight the need for urgent support.
A committee, chaired by a retired high court judge, will be established within three months, comprising representatives from the Ministry of Law, Ministry of Housing, real estate, and finance experts, along with two industry specialists. This committee is tasked with proposing systemic reforms to enhance credibility in the real estate sector. The NITI Aayog and the National Institute of Urban Affairs will provide research and secretarial support, with the committee submitting its recommendations within six months.
Given that real estate comprises a significant aspect of insolvency cases, the Insolvency and Bankruptcy Board of India (IBBI), in collaboration with real estate authorities, will create guidelines for real estate insolvency proceedings, including project timelines and safeguards for allottees. The Court specified that real estate insolvency resolutions should generally occur on a project basis to shield solvent developments and genuine buyers from unintended consequences.
Looking ahead, the Court suggested that the IBBI could implement an early warning system similar to Basel’s, focusing on pre-bankruptcy mediation and proactive restructuring, urging directors to initiate restructuring before problems escalate.
The ruling also urged the Union Government to create uniformity in RERA rules across states to eliminate ambiguities in this landmark legislation. Furthermore, housing boards and state Urban Development Authorities should form dedicated teams to revive and complete stalled projects via IBC mechanisms.
Collaboration with Indian think tanks and academic institutions is encouraged to build sectoral restructuring capacities, potentially boosting India’s business environment and stimulating economic growth. Additionally, the Centre should consider establishing a corporate body, akin to NARCL, led by public sector units focused on real estate or through public-private collaborations to take over and complete stalled projects under insolvency frameworks. Unsold units from such projects could fulfill affordable housing needs or serve government quarters, thereby addressing both housing shortages and the revival of distressed projects.
