Rewriting Real Estate Insolvency: The Mansi Brar Mandate for Viability and Project Segregation

[Arjun is a student at Pravin Gandhi College of Law.]

The legal evolution of homebuyer rights under the Insolvency and Bankruptcy Code 2016 (IBC) shows a shift in how the Indian judiciary has interpreted and defined the role of an allottee in a real estate development project. For the longest time, the reliefs to home purchasers were relegated to a narrow remedial regime, with reliefs circumscribed within the contours of the Consumer Protection Act 2019 and the Real Estate (Regulation and Development) Act 2016 (RERA), which were the principal forums for channeling claims for compensation, interest, and possession. These statutory frameworks viewed the homebuyers primarily as consumers who suffered loss due to delay or deficiency in service, while the financing dimension of the transaction remained legally invisible.

This understanding shifted when courts recognized that homebuyers were not merely purchasers but contributors to the project capital. The National Company Law Appellate Tribunal's (NCLAT) decision in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited was pivotal in that sense. Since, the tribunal held that where allotment transactions contained assured return clauses or structures resembling commercial financing, the advance paid by the allottee in that arrangement carries with it the time-value of money and thus falls within the definition of 'financial debt' under Section 5(8) of the IBC. This recognition laid the foundational scaffolding for the second amendment (2018) to the IBC, which classified homebuyers as financial creditors.

Not much later, the amendment was challenged and was upheld by the Supreme Court (SC) in Pioneer Urban Land and Infrastructure Limited v. Union of India, where the court observed that monetary advances by the allottees play a dual function; while being investments towards the allotment of a finished unit, they also operate as a primary source for infusing capital in execution of the project. Additionally, on the contested question of whether this transaction embodied the concept of 'time value of money' since it constituted a necessary element for being a 'financial debt' under Section 5(8)f of IBC, the court held that since the allottees relinquished their present liquidity with the expectation of future delivery the time value of money was inherently embedded in the transaction.

Further, the court observed that allottees by the virtue of their advanced investment for receiving the units were  exposed to risks at par with institutional lenders, and therefore their inclusion was warranted within the financial creditor framework. However, the court was also equally unequivocal in holding that the IBC is not a mechanism for enforcing individual contractual refunds or facilitating withdrawal from delayed projects but is a collective economic remedy designed to address failure of the enterprise as a whole to meet its financial obligation and not dissatisfaction of individual contractual expectations. Yet, much to the chagrin, Pioneer did not translate this principle into an operational test. Without clear threshold standards, tribunals were left to determine on a case to case basis questions on whether delayed possession constituted as 'default' sufficient to trigger insolvency.

In the absence of clear guidance, post-pioneer jurisprudence began to drift. National Company Law Tribunals (NCLTs) increasingly admitted allottees’ Section 7 petitions merely on the basis of delay or non-refund, without examining whether the real estate project as an economic enterprise was in distress. Though a lot of these judgements were later reversed at the appellate stage but the admissions at the level of NCLT continued. IBC, which was meant to be a collective resolution mechanism, began functioning as a private exit route. Once a corporate insolvency resolution process (CIRP) was admitted, all construction activity halted, the project assets became part of the moratorium, the channels for financing the project froze and all allottees many of whom sought possession rather than refund were pushed into a process that often exacerbated their situation. Insolvency became less a remedy for collapse and more a tool of leverage. Although NCLAT stepped up and took a vigilante stance in Whispering Tower Flat Owner Welfare Association v. Abhay Narayan Mundane and Flat Buyers Association Winter Hills-77 v. Umang Realtech Private Limited where it experimented with concept of reverse CIRP to ensure project completion and at the same time prevent contamination risk on other ongoing projects, a more definitive check to such practices was observed after the SC in Manish Kumar v. Union of India held that relief under IBC lies only when a collective project distress is apparent and that it is not a tool for individual exit.

Meanwhile, in Newtech Promoters and Developers v. State of UP, the Supreme Court reaffirmed RERA as the statutory regulator responsible for securing completion of projects, monitoring escrow accounts, imposing penalties, and even replacing defaulting promoters under Section 8 of RERA. But the internal logic of RERA’s supervisory framework was undermined when allottees dissatisfied with delay in enforcement of refund orders as a pattern started relying on IBC to seek relief. Developers responded by arguing that the existence of RERA proceedings or RERA-directed regulatory oversight should bar the initiation of CIRP which was ultimately put down in Real Estate Regulatory Authority v. DB Corp Limited. Though aimed to be complementary, in practice, the two statutes came out to be positioned as competing avenues for enforcement. The law lacked a clear conceptual basis for distinguishing when the dispute remained regulatory and when it had escalated into insolvency.

A further structural difficulty compounded these tensions. Although, RERA provides a robust regulatory architecture on paper, its enforcement capacity remains limited. In multiple jurisdictions, RERA authorities had publicly noted their inability to ensure compliance with refund and penalty orders; adjudicating officers issued hundreds of non-bailable warrants that were never acted upon; recovery certificates got stuck with district collectors who are constrained by conflicting land-revenue laws and builders routinely ignore refund or penalty orders without consequence. While hundreds of compensation orders had been issued, only a small fraction had been executed. For reference, in Noida, only 5% of the RCs issued since 2018 have been successfully recovered, amounting to a total of INR 98.6 crore out of INR 875.6 crore. This made RERA a domain of paper remedies though strong in theory but weak in execution.

It is against this backdrop that the SC's decision in Mansi Brar Fernandes and Others v. Shubha Sharma and Others needs to be seen. The case presented a doctrinal tension, two sets of homebuyers were in conflict. One group sought insolvency and refund (primarily, the institutional investors) while the other sought continuation and completion of construction and eventual possession. The court therefore had to determine whether the initiation of CIRP could be justified when the project remained capable of completion under regulatory supervision.

The court held that the IBC trigger for homebuyer-initiated petitions must correspond to collective distress not individual disbelief in the project’s eventual completion. If the project remains viable, and if continuation remains feasible under RERA’s supervisory framework, the IBC cannot be invoked as an alternative route to exit.

A critical dimension of the judgment is its treatment of speculative investors. The court distinguished between genuine allottees seeking housing and those entering the project through instruments such as assured return agreements, buy-back guarantees, fixed interest exit clauses, and private MoUs that diverge from the RERA’s model agreement. The court held that such contracts indicate a financial investment strategy and not an intention of actual possession on the part of buyers. The court held that Section 7 cannot be used to facilitate strategic withdrawals from investment positions merely because market conditions or returns have changed, since insolvency law is not a hedge against investment risk.

The judgment, in substance proposes a structured, though non-explicit, viability test. It directs adjudicating authorities to assess construction progress, escrow account flows, developer responsiveness, the scale of non-delivery across allottees, and the feasibility of project continuation under RERA. Where these indicators signal a collapse, the shields of IBC must be invoked. However when there is a scope for viability, the dispute must remain within RERA’s regulatory ambit.

Project-Wise Insolvency: A Structural Correction

This judgment also addresses a structural issue in real estate insolvency administration, which is that when a CIRP is admitted against the developer under the existing framework, the insolvency is blanketly extended across all the projects, including the ones that may still be viable. Now, this results in an unintended contagion, where the financial distress of a single project jeopardizes the interests of homebuyers in other ongoing projects under the same developer. Acknowledging this systemic flaw, the SC directed the Insolvency and Bankruptcy Board of India (IBBI) to develop a framework for project-wise CIRP thereby, enabling each project to be assessed as an “independent financial unit” for the purpose of resolution. This reflects a fundamental shift as the insolvency intervention is no longer tied to the enterprise’s overall financial distress but to the economic viability of the specific project where distress arises.

This is also in consonance with the recommendations of the Amitabh Kant Committee on project wise CIRP and is consistent with global regulatory frameworks. For example in Singapore, under the Housing Developers (Project Account) Rules (1997), the law mandates a separate project account for every real estate development, therefore essentially legally ring-fencing buyer’s funds and insulating each projects from the developer’s other liabilities. Several jurisdictions have pre-emptive safeguards as against a post facto distinction between speculative and genuine homebuyers as in Indian legal system.

This shift towards project based insolvency resolution is going to reshape financing and administrative practices in the real estate sector. The developers will now face rigorous incentives to demonstrate transparent escrow segregation, construction linked utilisation of funds, and periodic public disclosures of project progress. Since demonstrating viability becomes a cardinal against insolvency triggers. The lenders including banks and private equity investors, may now increasingly insist on ringfencing of receivables and ensure tighter monitoring of withdrawal permissions. Further, the developers moving forward are likely to reduce reliance on pre-launch sale capital and “assured return” investors funding, since such instruments are now judicially recognized as indicators of commercial investment rather than genuine residential intent, thereby deterring buyers who want to avoid the “speculative investor” tag. The judgment therefore not only recalibrates the doctrinal trigger for insolvency but restructures the financing architecture of real estate development itself.

Concerns

However, the judgment exposes a critical fragility. In a market like India where demand for housing (especially in metropolitan areas) exceeds supply, buyers often rush to secure a unit, leaving little room for detailed scrutiny of contractual terms. This opens space for developers to insert buyback or assured-return clauses dressed up in convoluted legal language or sometimes presented overtly as part of a standard agreement. A bona fide purchaser, owing to information asymmetry in the industry, might unwittingly sign such clauses. And post-Mansi Brar, the presence of these very terms could categorize the buyer as a “speculative investor”, effectively rendering them remediless within the confines of IBC. What was intended as a safeguard against abuse may prove counterproductive to the genuine unsophisticated homebuyers who may inadvertently fall into such contractual traps.

Further, the judgment creates a critical loophole, it bars speculative investors from initiating CIRP but does not clarify the classification within the waterfall mechanism for their claims where the insolvency is initiated by other stakeholders. This ambiguity means these profit-seeking claims could potentially rank alongside genuine homebuyers, thereby undermining the ruling's intent to protect real homeowners.  

The IBC framework currently lacks formal statutory codification to facilitate project specific resolution. The recommendation, which can be found in the judgement as well, is for the institution of a committee by RERA and IBBI to formulate guidelines for the same. Codifying project-wise CIRP and strengthening buyer-side safeguards will be crucial to realize the judgment’s protective intent. Mansi Brar though provides the conceptual schema, but its success will ultimately depend on legislative and administrative follow through and regulatory vigilance.