Case for the Codification of the Reverse CIRP in India

[Farzeen is a student at National Law School of India University.]

The real estate sector is fraught with inordinate delays. Despite the 2018 amendment to the Insolvency and Bankruptcy Code 2016 (IBC) granting the status of financial creditors to homebuyers, sector-specific gaps persist, forcing the courts to go beyond the traditional insolvency framework. 

Under the IBC, once a corporate insolvency proceeding starts, the corporate debtor’s (CD) board is suspended and replaced by the committee of creditors (CoC) and the resolution professional (RP). The entire company is earmarked under the plan to maximise the value of the debtor’s assets and balance stakeholder interests. In the Flat Buyers Association v. Umang Realtech Private Limited, the court noted that in real estate insolvencies, the CD’s asset is the infrastructure being constructed for the allottees, and it cannot be distributed to secured financial creditors, whose interest lies in repayment. In contrast, unsecured creditors, including allottees, have rights over infrastructure and prioritise possession. The inability of homebuyers to accept a haircut as opposed to institutional creditors highlights a clear conflict of interest amongst financial creditors. Recognising this problem, the court endorsed the reverse corporate insolvency resolution process (reverse CIRP) to ensure that allottees’ interests are preserved.

The author argues that reverse CIRP has evolved through judicial interpretation, leading to inconsistent application and the absence of safeguards against fund diversion. Should India adopt the reverse CIRP, which is opposed to the creditor-in-possession (CIP) model followed by the IBC? Can an exception be created to achieve the objectives of the IBC, namely, speedy recovery and resolution? The author argues that codifying reverse CIRP would resolve ambiguities and introduce protections. This article examines the Real Estate (Regulation and Development) Act 2016 (RERA), Indian case law, and the US Chapter 11 bankruptcy framework (US Code) to propose an effective regime. 

Justifying Reverse CIRP in Real Estate Insolvencies 

Reverse CIRP endorses a debtor-in-possession model (DIP), wherein promoters are allowed to continue operations and act as lenders, prioritising the completion of the stalled project. Since promoters have hands-on experience, it is easier for them to bring timely completion. No third party is invited for bidding, making the process less time-consuming and reducing the risks of litigation, and thereby upholding the objective of speedy resolution under IBC. 

The limitations of the traditional CIRP came to the fore when the NCLT prioritized resolving corporate debt over project completion, leading to delays even after payment by thousands of homebuyers. It highlights how the CIP model could often subdue homebuyers’ interests, as CoC is dominated by institutional creditors who prioritise repayment. The focus on asset maximisation creates another challenge, recognised by the IBBI colloquium report. It noted that the CDs have multiple ongoing projects at different stages of construction, and the resolution applicants would want to take over projects that are near completion. As a result, other healthy projects are subsumed post-CIRP, causing further duress. On the recommendation of the Ministry of Corporate Affairs, project-wise resolution has been introduced. To address this, reverse CIRP focuses on the timely completion of the stressed project, giving effect to project-wise resolution and homebuyers’ interests.

However, there are concerns over reverse CIRP, which need to be addressed. To begin, the traditional CIRP envisages the resolution of the entire CD, based on the CIP model, which bars the erstwhile management from submitting resolution plans. Since reverse CIRP departs from this framework by permitting project-wise resolution through promoters, it may invite scrutiny. Upholding the project-wise resolution, the Supreme Court had outlined that it secures allottees’ interests and facilitates completion by allowing continuance of other projects. While the process is reversed, it remains consistent with the IBC’s objective of speedy recovery, thus passing the test on this front. 

On another front, there may be concerns regarding the DIP model due to historical experience under the pre-IBC regime, where allowing defaulters to retain control led to misuse and delayed resolutions. Due to this, IBC adopted a CIP model by disqualifying defaulting promoters. In my view, concerns over diversion and delays are valid, but they could be addressed via other mechanisms. The first step is to recognise the limitations of the CIP model. As of June 2025, over 2,800 companies have ended in liquidation post initiation of CIRP, and creditors recover less than one-third of claims. Stakeholder theory puts faith in debtors’ operational knowledge to ensure quick resolutions. By preserving management during insolvency, reverse CIRP allows effective resolution. The author does not intend to propose a full-fledged DIP model, but rather hybridisation. Recognising the advantages and limitations of both models, there is a trend of hybridisation. For instance, Singapore has adopted a blended approach, allowing CD to retain control under judicial supervision. Similarly, India has moved towards hybridisation through the introduction of a pre-packaged insolvency process for MSMEs. It is worth noting that the IBC facilitates experimentation, as reflected in the generality of its provisions. In line with judicial support for experimentation, India should now codify reverse CIRP in the spirit of hybridisation. 

Proposed Safeguards 

By ensuring statutory validity, concerns over delay by promoters, internal collusion, and diversion of funds could be addressed. Key features of the US Code and RERA can inform the codification of safeguards. Analysis shows that many of these protections already exist in India, albeit in a fragmented form. 

First, both the US DIP model and India's reverse CIRP operate under court supervision, ensuring judicial scrutiny. Under Section 1107 of the US Code, the debtor is vested with fiduciary duties to all creditors. The court monitors the debtor’s actions and decisions involving asset sales and large borrowings, which require prior judicial approval. This ensures that creditor interests are not compromised by mismanagement. Similarly, under reverse CIRP, the law could require the promoter to seek NCLT’s approval for all material actions. In fact, the court directed the promoter to cooperate with the RP.  The presence of RP ensures that the interests of all the stakeholders are protected.

Second, US law mandates the formation of a creditors’ committee under Section 1102, which consists of unsecured creditors. It can participate in the formulation of a plan and investigate the debtor’s conduct. Similarly, in India, the CoC can oversee the debtor's conduct, thereby increasing scrutiny.

Third, the US Code also requires a court-approved disclosure statement, ensuring transparency and viability of the plan, and a proposed timeline. Similarly, RERA imposes duties on promoters to make disclosures, including quarterly project updates, sanctioned plans, and stage wise schedule of completion of the project. It imposes the duty to adhere to sanctioned plans. The IBC can incorporate these provisions. To further ensure that the plan is being adhered to, a monitoring committee consisting of insolvency professionals and representatives of the resolution applicant and creditors can be created as envisaged under Regulation 38(4). 

Fourth, Section 4(2) of RERA mandates a separate escrow account where at least 70 percent of the funds received from allottees must be deposited to be exclusively used for construction costs. This could be statutorily mandated for reverse CIRP, as one of the biggest concerns remains diversion of funds.

Currently, courts have taken an inconsistent approach. In the case of Anand Murti v. Soni Infratech Private Limited, the court allowed reverse CIRP without mandating compliance with the 70% fund requirement. Codifying this provision would ensure that safeguard mechanisms are adopted in all cases. By integrating RERA provisions, the view that IBC prioritises financial creditors over others can be changed, while also harmonising IBC and RERA through a blended approach. The final recommendation is to instill a sense of responsibility in the DIP (promoters). In the US, the DIP owes a fiduciary duty to act in the best interests of the bankruptcy estate as a whole, ensuring the collective good of all stakeholders rather than any specific class of creditors. Just as a board of directors owes a fiduciary duty to the company, promoters during the insolvency process should owe similar duties to creditors. The CD must discharge its duty to safeguard the estate in the collective interest, acting through the existing management. Attention must be given to New York law, which requires directors to consider the long-term interests of the corporation and its shareholders, and also the impact of the corporation's actions on other stakeholders in the long term. It is recommended that a similar provision be codified, expressly imposing a fiduciary duty on the DIP. In the author's view, the courts must judge the promoter's conduct in light of their fiduciary duty and assess whether their actions align with the core objectives of India's insolvency law, that is, resolution and the balancing of stakeholder interests.

Conclusion   

The growing use of reverse CIRP and the acknowledgment received by the IBBI and MCA highlight that the traditional insolvency mechanism is ill-suited to address the challenges of real estate insolvency. It is also established that reverse CIRP, while it is well-suited, could be misused by promoters. The reasonable scepticism toward the DIP model could be assuaged by codifying reverse CIRP along with necessary safeguards. By mandating disclosures, monitoring committees, escrow accounts, and creating a fiduciary duty of the DIP, it can balance promoter-driven completion with accountability.