Residential real-estate projects are fundamentally different from manufacturing or infrastructure businesses which invest in productive assets that generate income over a long economic life. In a conventional business, returns are realised over two broad stages—the capital recovery phase, or discounted payback period, followed by the net present value (NPV) surplus phase over the remaining economic life of the business.
Residential real estate and, to some extent commercial real estate, operates very differently. There is little or no permanent property, plant and equipment (PPE). Land and the structures constructed on it are essentially inventory intended for advance or immediate sale to a relatively small number of one-time buyers. A typical residential real-estate project is completed within two to four years, and the developer starts earning revenue from home-buyers during the construction stage itself.
This gives the business some distinctive characteristics. Unlike manufacturing, where capital is deployed well before revenues are generated, cash inflows in real estate run broadly parallel to construction. Home-buyers fund the project through milestone-linked advance payments, while banks typically finance periodic cash-flow gaps. Value is also concentrated among a relatively small group of buyers—often a few dozen to a few hundred—rather than being generated through millions of transactions with customers over a long period.
The result is that external debt and equity requirements can remain relatively small compared with the overall scale of the project. Since home-buyer cash flows begin almost immediately after a project is launched, this funding structure can substantially increase project returns.
A stylised comparison, using identical investment and enterprise values for a residential real-estate project and a steel manufacturing project, brings out the difference:
The prevalence of non-tax cash components in some real-estate transactions can further raise the effective returns available to developers.
Insolvency, Fnd Diversion and Impact on Home-buyers
The existence of supernormal returns in residential real estate introduces a significant moral hazard. It creates a structural temptation to divert short-term project cash surpluses into other projects, land-bank acquisitions and other ventures during the construction phase. Such overtrading can lead to liquidity stress, defaults on debt servicing and ultimately, insolvency.
Real-estate projects can fail for several reasons, including title disputes, design flaws and a contraction in demand. However, empirical data confirms that overtrading and fund diversion represent the predominant causes of insolvency in Indian real estate.
When a real-estate entity approaches insolvency, developers may strip cash balances through complex networks of transactions involving multiple entities and shell companies. The diverted funds may continue to appear on the corporate debtor's balance sheet as 'receivables' or 'advances'. Transaction audits carried out during the corporate insolvency resolution process (CIRP), however, can reveal that such accounting entries have little or no underlying economic value.
The result is a substantial gap between the nominal book value of the inventory and the value of the physical assets actually available when the company enters CIRP. This erosion of value is particularly damaging to homebuyers and lenders who are then left to recover what remains.
The Insolvency and Bankruptcy Code (IBC) contains provisions intended to undo improper pre-insolvency transactions involving diversion of funds. These include preferential transactions under Section 43, undervalued transactions under Section 45, extortionate credit transactions under Section 50, and transactions defrauding creditors, as well as fraudulent and wrongful trading, under Sections 49 and 66. These are commonly referred to as the Avoidance or PUFE (Preferential, Undervalued, Fraudulent and Extortionate) provisions.
According to the Insolvency and Bankruptcy Board of India (IBBI) quarterly newsletter for January-March 2025, as of 31 March 2025, avoidance claims aggregated ₹3.85 lakh crore across 1,396 applications. By that date, 368 cases had been disposed. The claims involved in these disposed cases amounted to ₹65,650 crore, against which ₹7,931 crore was recovered—a recovery of only 12.1%.
The scale of the claims increased further by 31 March 2026, when avoidance claims had risen to ₹4.382 lakh crore across 1,878 applications.
These figures raise serious questions about the effectiveness of the Code's Avoidance/ PUFE framework. The problem is particularly acute in real-estate insolvencies, where the recipients of diverted funds may themselves be empty shells. Resolution applicants entering the CIRP can therefore encounter projects whose assets have already suffered substantial impairment. The resulting loss is ultimately borne by homebuyers and lenders.
The experience of C&C Towers illustrates the problem.
C&C Towers: How Fund Diversion Eroded Value
The insolvency proceedings of C&C Towers Limited illustrate the limitations of the IBC's avoidance mechanisms in real-estate projects.
C&C Towers Limited, incorporated in March 2009, awarded an engineering-procurement-construction (EPC) contract for its public-private partnership (PPP) project in June 2009 to C&C Construction Limited, a related party.
The corporate debtor disbursed mobilisation and 'pre-construction events' advances of ₹110.78 crore to the EPC contractor. This represented 35% of the total contract value of ₹316.50 crore, far exceeding the standard commercial limit of 10%. Lending banks entered the project financing at a later stage.
The company entered the CIRP in October 2019. At the time, its books showed capital work-in-progress (CWIP) of ₹398.89 crore. However, the average fair value and liquidation value were estimated at approximately ₹120 crore and ₹75 crore, respectively.
By October 2023, the approved resolution plan proposed a CIRP value of ₹84.80 crore, with ₹81.50 crore allocated to financial creditors on a deferred basis. This represented a recovery of only 14.08% of the admitted claims and indicated substantial erosion of value.
A comprehensive technical-cum-cost audit, together with a forensic audit of all relevant entities and subsequent recipients of funds, could have established the actual cost incurred on the project, identified the extent of diversion and traced the complete money trail. This could, in turn, have enabled effective steps to recover the diverted funds. However, this was not possible because the Code did not provide for such an exercise.
The transaction auditor, nevertheless, identified preferential, undervalued and fraudulent transactions and wrongful trading aggregating ₹168.57 crore. This established that fund diversion caused the erosion in value.
The Code also contains a specific criminal provision dealing with fraudulent removal of the corporate debtor's property. Section 68(i)(b) stipulates: “Where any officer of the corporate debtor has, fraudulently removed any part of the property of the corporate debtor of the value of ten thousand rupees or more, such officer shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years, or with fine.”
Yet, the provision was not invoked in this case. The persons responsible for the diversion therefore escaped the consequences contemplated under the provision.
The C&C Towers case is not an isolated illustration. It points to the need for substantially strengthening the avoidance provisions of the Code so that diverted funds can be traced and recovered and those responsible can be held accountable.
A second vulnerability in real-estate insolvency arises from the statutory definition of 'financial debt' under Section 5(8) of the Code.
Section 5(21) defines operational debt in terms of the provision of goods or services, establishing a clear link between the debt and the underlying operational or asset-creating activity. Section 5(8), however, does not apply a uniform economic test to financial debt.
Some provisions are directly connected to asset creation or commercial transactions. Clause (d), for example, covers finance leases and hire-purchase agreements tied to specific physical assets. Clause (e) covers receivables financing and discounting linked to commercial transactions. Clause (f) covers amounts raised under forward contracts, including amounts raised from homebuyers for real-estate units.
Other provisions—clauses (a), (b), (c), (g) and (h)—define financial debt primarily by the form of the transaction, such as money borrowed against payment of interest, credit facilities, bonds and debentures. They do not necessarily test whether the funds were actually deployed to create the assets for which the borrowing was intended. Loans disbursed by financial institutions without verified end-use monitoring can qualify as financial debt even where the funds were not used to create the project assets.
The consequence is that even the lenders whose funds do not actually finance the project can acquire dominant voting control in the committee of creditors (CoC), while homebuyers who directly financed construction are left with a much smaller voice in the resolution process.
Iridium Estate: When Financial Debt Does Not Fund the Project
The insolvency of Iridium Estate Limited (name altered for confidentiality) illustrates the structural distortion that can arise when financial debt is recognised based on the form of a transaction rather than whether the borrowing actually funded the underlying project.
The corporate debtor had undertaken a premium residential project in Mumbai comprising 800,000sqft (square feet) of built-up area, including 35% fungible floor space index (FSI), on a land base of about 21,700sqft. The project was financially viable.
When the CIRP commenced in September 2021, independent valuers assessed the average fair value of the project at ₹820 crore. The admitted claims on the CIRP commencement date totalled ₹3,000 crore, comprising about ₹2,000 crore of principal and ₹1,000 crore of accrued interest, against recorded balance-sheet debt of ₹1,600 crore.
'A-HFL', a non-banking financial company (NBFC) had extended a secured loan facility of ₹1,200 crore to the corporate debtor. The loan was disbursed in two tranches within 30 days, and the entire amount was transferred to related and unrelated entities within hours and days of receipt. No funds were used for project construction. The claim was subsequently assigned to an asset reconstruction company and admitted in the CIRP at ₹2,340 crore, inclusive of interest.
NBFC 'B-HFL' provided an unsecured loan of ₹370 crore, which was similarly transferred out of the corporate debtor on the date of disbursement. This claim too was admitted in full as financial debt.
The consequences for the CoC were stark. Since these claims were recognised as financial debt under Section 5(8), A-HFL and B-HFL together secured a 90% voting share in the CoC, with A-HFL alone commanding more than 75%. The homebuyers, who had collectively contributed more than ₹100 crore towards direct construction financing, were left with only 4% of the voting share.
The NBFCs could not have been unaware of Reserve Bank of India (RBI) guidelines requiring minimum asset-cover ratios of 1.33x to 1.50x and end-use monitoring. Thus, the diversions would not have been possible without the blessings of these NBFCs.
The case also highlights a weakness in the treatment of the causes of default under CIRP Regulation 38. The regulation requires the resolution applicant to address the causes of default, but this exercise has been handled perfunctorily, with general and inconsequential observations rather than a meaningful diagnostic analysis.
Determining the actual causes of default and insolvency is important because it can help address the root causes and identify responsibility. If fund diversion is established as the cause, the promoter of the corporate debtor can be held accountable. If lenders have contributed to the diversion through lax monitoring, they too should be held accountable.
The Home-buyer: Creditor or Owner?
Section 5(31) defines security interest as a right, title, interest or claim to property created for a secured creditor to secure payment or performance of an obligation, including mortgage, charge, hypothecation, assignment and encumbrance.
In 2018, homebuyers were recognised as financial creditors through an amendment to Section 5(8)(f). Subsequently, the 2019 amendment to Section 7 introduced thresholds for a group of home-buyers seeking to initiate CIRP.
However, these provisions do not fully recognise the nature of the homebuyer's interest. A homebuyer is not someone who has simply lent money to a developer expecting repayment. The buyer has contracted to acquire a specific apartment or house, together with an undivided or demarketed interest in the project land. During construction, the home-buyer's economic interest is directly tied to the property being created.
The home-buyer therefore has a superior 'ownership interest' relative to a secured lender, whose security interest is intended to secure repayment by the developer. Yet this ownership interest has been completely missed in the Code, to the detriment of home-buyers. It needs to be recognised and protected.
IBBI Real Estate Framework
Following the judgement of the Supreme Court of India in Mansi Brar Fernandes vs Shubha Sharma & Ors, the IBBI established the Committee on Framing Guidelines for Insolvency Proceedings in the Real Estate Sector.
The key recommendations of the IBBI committee include formalising project-level insolvency proceedings to isolate distressed developments from a developer's wider portfolio; prioritising completion of the project over financial liquidation; encouraging homebuyer associations to submit resolution plans; engaging public sector undertakings as project management consultants; and reorganising the CoC and monitoring committees.
These recommendations are well-intentioned. However, administrative measures cannot override the statutory distribution hierarchy under Section 53 or rectify the definition of financial debt under Section 5(8). The statutory conflicts therefore require direct legislative reform.
What Needs To Change
The first change should recognise the homebuyer's ownership interest in the apartment and the underlying land in the Code and give that interest appropriate priority over the security interests of lenders, both within the CoC framework and in the distribution waterfall under Section 53.
Second, Section 5(8) should incorporate an asset-creation test. Financial debt sanctioned for a specific asset should qualify as such only to the extent that the money has actually been used for that purpose. Amounts that have not been used for asset creation could instead be treated as other debt under CIRP Regulation 9A, without CoC voting rights or the same seniority under Section 53.
Third, avoidance proceedings need a stronger investigative foundation. A comprehensive technical-cum-cost audit, combined with a forensic audit of the corporate debtor, related entities and subsequent recipients, should be undertaken at the beginning of the process. The objective should be to establish the actual cost incurred on the project, trace the money trail and recover diverted funds. The authors also propose strict timelines for adjudication and automatic personal liability for promoters where wilful diversion is established.
Fourth, the cause of insolvency itself should be independently determined rather than simply 'addressed' by a resolution applicant. The authors propose inserting a new Section 29B in the Code to provide for a formal determination of the causes of default and insolvency, undertaken by an independent transaction or forensic auditor selected at random by IBBI. Where any stakeholder is found responsible, appropriate action should follow.
There is also a need to impose greater responsibility on successful resolution applicants.
At present, distressed real estate assets can be acquired through resolution plans involving extended deferred-payment schedules, with no recourse beyond performance bank guarantees. The authors argue that this can create the same overtrading incentives that contributed to the original insolvency.
Deferred financial obligations under approved resolution plans should therefore carry full corporate recourse to the parent entity of the successful resolution applicant. In addition, the applicant's financial capacity should determine the aggregate commitments it can undertake across multiple CIRPs.
Finally, the authors propose an upfront cash financing requirement for larger real estate acquisitions under the Code. India’s mergers and acquisitions (M&A) market has demonstrated that significant acquisitions can be financed through cash. With RBI permitting banks to finance M&A transactions with debt of up to 75% of acquisition value, the authors argue that an upfront cash component in real estate acquisitions under the IBC is feasible.
For real estate acquisitions up to a prescribed value, the Code could require full upfront cash settlement along with committed schedules for delivery of units. The objective is to ensure that the successful resolution applicant has sufficient 'skin in the game' and is not simply taking on a distressed project through an excessively leveraged or deferred-payment structure.
The central problem in resolving a real-estate entity is not simply that homebuyers are unsecured creditors. It is that the insolvency framework often treats a residential real-estate company like an ordinary corporate debtor, even though its economics, stakeholders, failure mechanisms and impact on customers are fundamentally different.
The residential real-estate model can generate extraordinary returns because homebuyers finance construction while the project is being built. That same structure creates a powerful incentive for overtrading and diversion of funds. Once diversion occurs, the book value of assets may bear little relationship to the assets actually available for resolution. The result is low recovery, weak accountability and a homebuyer who has paid for a home but finds himself competing for value against lenders whose debt may itself have financed the diversion.
Real-estate insolvency therefore requires a framework centred on project completion, genuine homebuyer ownership, end-use monitoring of finance, independent identification of the cause of default, effective recovery of diverted funds and disciplined acquisition by resolution applicants. Without these structural changes, improvements in procedure alone will not prevent repeated CIRPs or ensure that the people who financed the project—the homebuyers—receive the protection and value they were promised.
(Dr Rajendra M Ganatra, ex-MD&CEO of an ARC & an insolvency professional, has over four decades of experience in industry & financial services. Ashit Badani, holds B Com & Master in Commercial Real Estate through Corenet Global, and has over 25 years of real estate project experience with reputed builders. He is currently a real estate developer in Mumbai.)
Author has done a good job by putting forth plight of the hapless homebuyer, who feels helpless in the situation.
The ongoing tinkering will not help.