When Insolvency Substitutes for Real Estate Regulation

[Aditya is a student at NALSAR University of Law.]

Half-finished towers and frozen cranes mark the peripheries of India's major cities. Behind many of these sites is a homebuyer still paying a home loan for an apartment that does not exist. The Real Estate (Regulation and Development) Act 2016 (RERA) was meant to be their remedy. A growing number now reach instead for the Insolvency and Bankruptcy Code 2016 (IBC).

This is usually read as a story about litigant strategy: buyers choosing the forum with sharper teeth. It is better read as an institutional story. Since 2018, homebuyers have been recognised as financial creditors, entitled to trigger insolvency proceedings against developers and sit on the committee of creditors. The Supreme Court upheld this in Pioneer Urban Land and Infrastructure Limited v. Union of India, and nothing here argues for reversing it. The more interesting question is why Parliament reached for insolvency law to fix this problem, rather than fixing the regulator built specifically to solve it.

Why Homebuyers Needed a Creditor's Seat

The IBC's original definition of 'financial debt' was built around loan disbursement against consideration for the time value of money. A buyer's advance did not obviously fit. In Nikhil Mehta and Sons v. AMR Infrastructure Limited, the National Company Law Appellate Tribunal reached financial-creditor status only for buyers under assured-return schemes, leaving ordinary allottees unprotected. Jaypee Infratech's collapse exposed the gap starkly: thousands of allottees held no security and no standing in the insolvency process against the company holding their money. The Supreme Court intervened directly in Chitra Sharma v. Union of India, fashioning protection outside the IBC's text because the text gave allottees none.

What Jaypee shows is not simply that insolvency law had a gap. The exposure was created upstream, by the absence of any mechanism preventing developers from treating buyer advances as freely usable capital. The Insolvency Law Committee's March 2018 report recommended treating allottee payments as financial debt on exactly this premise. Parliament amended Section 5(8)(f) to deem such amounts to carry the commercial effect of borrowing, and Pioneer Urban upheld the fiction on the analogy that developers used buyer money much as they would debenture proceeds.

The Regulation That Was Already There

This is where most accounts stop, and where the real question begins. Section 4(2)(l)(D) of RERA already existed to prevent exactly the practice that made the debenture analogy plausible: developers must deposit at least 70% of amounts realised from allottees into a project-specific escrow account, released only against certified construction progress. The provision exists because pre-RERA developers routinely treated buyer advances as a fungible pool financing one project's land acquisition with another project's bookings. Jaypee and Amrapali were not aberrations from this pattern; in Bikram Chatterji v. Union of India, the Supreme Court found the Amrapali group had diverted thousands of crores of homebuyer funds, prompting it to invoke its writ jurisdiction directly rather than rely on either statute's ordinary machinery.

Had Section 4(2)(l)(D) been rigorously enforced, the fact pattern in Pioneer Urban would look considerably different. The debenture analogy worked because escrow compliance did not. Studies of RERA's implementation, as summarised by the citizen consumer and civic Action Group, point to uneven enforcement across states, delays in adjudication, and recovery proceedings that must often be routed through district revenue authorities even after a favourable order. The Supreme Court itself has said as much. Hearing an appeal on relocating Himachal Pradesh's RERA office in February 2026, a bench led by the Chief Justice observed that state RERA authorities were, in substance, “facilitating the builders in default,” leaving buyers “depressed, disgusted and disappointed.” In September 2024 the court described RERA authorities as functioning like rehabilitation postings for retired bureaucrats. Parliament's response to this pattern was not to strengthen enforcement. It amended a different statute, so that insolvency law could absorb the consequences of the abuse rather than a regulator preventing it at source.

From Creditor Status to Enforcement Lever

Financial creditor status gave allottees standing to file under Section 7. What made that attractive was leverage RERA cannot replicate. Section 14's moratorium freezes action by every creditor, not just the applicant; Section 29A threatens the incumbent promoter with losing the company outright. RERA's Section 18 refund order binds only the individual claim before that authority. For a genuinely insolvent developer, the IBC's collective machinery is a real advantage. The distortion appears when the same lever is used against a developer who is merely slow, where the threat of losing the company functions as a faster substitute for RERA's remedies.

The 2020 amendment, requiring at least 100 allottees or 10% of a project's allottees to jointly bring a Section 7 application, targeted exactly this use, and the Supreme Court upheld the threshold in Manish Kumar v. Union of India as necessary to preserve the collective character of insolvency proceedings. Parliament gatekept access rather than removing it confirming that the IBC's machinery still does work RERA cannot, while conceding that individual recourse had drifted toward debt collection.

Why the Boundary Matters

Even if the IBC delivers better outcomes for homebuyers than RERA does, the boundary between the two statutes still matters, for two reasons. First, timing: insolvency law is a generalist, ex post tool that intervenes only after default; RERA's registration, disclosure, and escrow mandate operate ex ante, before a project fails. A buyer whose developer has not yet defaulted seriously enough to trigger insolvency has no Section 7 remedy, however badly the project is slipping RERA is the only thing standing between that buyer and a stalled project in the first place. Second, specialisation: NCLT benches are generalist tribunals with no institutional advantage in assessing housing projects, and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta held that a committee of creditors' commercial wisdom is largely non-justiciable. That deference sits uneasily with a class of “creditors” whose only interest is a home, not a return on capital.

The deepest cost is institutional incentive. If a regulator's failures can be absorbed by a different statute's remedy, the pressure to fix that regulator diminishes. Every homebuyer who obtains relief through Section 7 rather than a functioning RERA order is one fewer data point demonstrating that RERA needs reform. Scholars including MP Ram Mohan and Vishakha Raj have argued that extending financial-creditor status to buyers pushes the Code's creditor-centred model past its coherent limits, since homebuyers are not commercial lenders bargaining over recovery. Adam Feibelman was similarly sceptical on functional grounds. This article shares that scepticism but locates the difficulty one step further upstream: the awkwardness persists because it lets Parliament treat a RERA enforcement failure as solved once an insolvency remedy exists to absorb its consequences.

The overlapping non-obstante clauses compound this. Section 238 of the IBC and Section 89 of RERA each claim overriding effect. In Vishal Chelani v. Debashis Nanda, the Supreme Court held that Section 238 gives the IBC primacy, so a homebuyer who has already obtained a refund decree from a state RERA authority remains, for insolvency purposes, in the same class as any other allottee. The ruling is doctrinally sound and prevents an inequitable two-tier class within a single resolution plan. However, it also confirms, structurally, that a buyer can pursue RERA and the IBC in parallel, with the IBC prevailing if the two diverge evidence that neither statute alone is trusted to be sufficient.

Conclusion

None of this supports narrowing homebuyers' financial-creditor status. The 2018 amendment and Pioneer Urban addressed a genuine deficiency, and the 2020 threshold, upheld in Manish Kumar, already separates collective insolvency claims from individual leverage-seeking. What it does support is honesty about what that inclusion has been doing since: allowing a regulatory enforcement failure, the unchecked diversion of escrowed buyer funds and the slow enforcement of RERA's own orders to be managed through insolvency law rather than corrected at its source.

The real question is not whether homebuyers belong within the IBC. It is why insolvency law has become the institution through which failures of real estate regulation are increasingly corrected, and how long a regulator can keep failing before the statute quietly covering for it is mistaken for the solution.