SC Demands IBC Overhaul, Revival Fund for Stressed Realty

The Supreme Court delivered a strong message on Friday (September 12^th), pushing for urgent reforms in the Insolvency and Bankruptcy Code (IBC) to fix flaws that have eroded public confidence in India's insolvency process.

The court highlighted the need for a dedicated revival fund to inject capital into distressed real estate ventures caught in insolvency, aiming to avoid unnecessary liquidations and protect homebuyers who often bear the brunt of developer failures.

In a detailed judgment, the bench led by Justice J.B. Pardiwala and Justice R. Mahadevan made it clear that the right to housing goes beyond simple contracts, it's tied to the fundamental right to life guaranteed by Article 21. "The government can't just watch from the sidelines," the judges noted, underlining the state's duty to step in and shield ordinary citizens and the broader economy from the fallout of stalled projects.

The court's call for action comes amid growing concerns over the real estate sector, which ranks second in insolvency filings. Many projects have dragged on for years, leaving buyers in limbo and triggering ripple effects across banking, construction, and jobs. To tackle this, the bench suggested the Union government explore options like a revival fund managed through the National Asset Reconstruction Company or an extension of the Special Window for Affordable and Mid-Income Housing Fund. This would offer temporary financing to keep viable projects afloat during corporate insolvency resolution processes (CIRP).

But the court didn't stop at suggestions, it laid down strict measures to curb abuse. For starters, it mandated performance audits by the Comptroller and Auditor General (CAG) on a regular basis, with findings made public in simple terms for everyone to understand. This transparency push aims to deter developers from gaming the system and ensure funds are used properly.

On the buyer protection front, the judgment introduced new safeguards. All new residential deals must be registered with local authorities once buyers pay at least 20% of the cost. For seniors over 50 or genuine homebuyers, any contract straying from the standard Real Estate (Regulation and Development) Act (RERA) model—especially those with risky buyback or return promises—needs an affidavit confirming the buyer knows the dangers.

For early-stage projects where land acquisition or building hasn't started, buyer payments must go into escrow accounts. Funds would then be released in stages based on progress, following standard operating procedures (SOPs) approved by RERA. The court ordered every state RERA to create these SOPs within six months.

The bench didn't mince words on the bigger picture: "This isn't just about bricks and mortar—it's about banks, supply chains, and livelihoods for millions." It pointed out how unresolved insolvencies hurt India's urban growth and called for filling gaps in tribunals like the National Company Law Tribunal (NCLT) and Appellate Tribunal (NCLAT) immediately. Vacancies must be addressed "on a war footing," and the government has three months to report on infrastructure upgrades. The court cited recent issues, like water leaks shutting down parts of the Delhi and Chandigarh tribunals, as proof of neglect.

To drive long-term fixes, the Supreme Court directed the formation of a committee headed by a retired high court judge, including officials from law and housing ministries, experts in real estate, finance, and insolvency, plus industry voices. NITI Aayog and the National Institute of Urban Affairs will assist, with a report due in six months on practical reforms to clean up the sector.

The Insolvency and Bankruptcy Board of India (IBBI) got specific instructions too. It must work with real estate regulators to set guidelines for handling property insolvencies, including project-by-project resolutions instead of lumping everything under one corporate debtor. This approach would spare healthy parts of a developer's portfolio from damage. The board should also allow completed units to be handed over to buyers ready to take possession.

Looking ahead, the court floated ideas like "Basel-like" early warning systems for companies, inspired by global practices such as pre-insolvency mediation. Directors could be required to start restructuring before debts snowball. It also urged the Centre to standardize RERA rules across states to plug holes in the law.

State housing boards, urban authorities like the Delhi Development Authority, and public sector units should create special teams to revive stuck projects under IBC. The court encouraged ties with think tanks and universities to boost local expertise in turnarounds, which could lift India's business rankings and spur growth.

Finally, the bench proposed a new entity, similar to the National Asset Reconstruction Company Limited (NARCL), backed by public sector players or public-private tie-ups, to acquire and finish delayed projects. Leftover units could feed into schemes like Pradhan Mantri Awas Yojana or government housing, tackling shortages while resurrecting assets.

This ruling marks a turning point, balancing economic needs with citizen rights in a sector plagued by delays and disputes.