Why RERA is a Better Shield Against Insolvency for Homebuyers

Introduction

Imagine putting all your savings into a home, only to see construction getting stalled, which leaves you unsure whether you’ll ever get the possession of the same or not. As of August 2024 there are 1,981 real estate projects comprising 5.08 lakh units across 42 cities are stalled, and because of these delays buyers need clear way to either get their homes or fair refunds of their hard earned money. This is what Real Estate (Regulation and Development) Act, 2016 (RERA) aimed to address, to bring transparency, protect homebuyers' interests. The Insolvency and Bankruptcy Code, 2016 (IBC) handles situations when developers default. But when a project heads towards insolvency, overlaps between RERA and IBC can confuse and delay relief. This article examines why RERA often serves homebuyers in a better way with more practical and feasible relief when the project get stalled.

RERA's Role in Protecting Homebuyers

One of the first things RERA does is require developers to register their projects before advertising or selling any unit. On the surface, it’s a simple step, you get access to details like land title status, expected timelines, and how the funds will be used, all on a public portal. This is not just a bureaucracy rather it shifts the balance toward buyers by making key information visible early. Of course, it relies on timely and accurate updates by the developer; if those aren’t maintained, transparency can be more theoretical than real. Still, having this baseline means you enter the deal with a clearer picture, rather than discovering critical issues only after booking.

Apart from this, RERA requires builders to deposit 70% of the collected funds into an escrow account. In practice, this forces a strong regulation on cash flow, funds can’t be easily diverted to other ventures or personal expenses. From my standpoint, this reduces one major reason of projects getting stalled as the probability of fund shortfalls or misallocation get reduced. However, it also demands stricter financial planning from developers because there are chances of squeezing of liquidity, especially in tight markets. Yet for you as a buyer, it’s a safeguard as your payments are meant to be used directly for construction or land costs not for the personal expenses of the builder.

Additionally builders are required to declare completion dates up front. If they miss these deadlines then they are liable to penalties (upto 10% of the project cost) and must pay buyers compensation for each month of delay. In serious breaches, there can even be criminal action. These provisions makes timely delivery a must compliance rather than an option. They also give buyers a clear right to compensation when things drag on.

If a developer fails repeatedly, RERA authorities can cancel the project’s registration. More importantly they can work with government agencies to ensure project completion. The idea to deliver homes rather than fighting over the money is what gives RERA a upper hand.

Interplay Between RERA and IBC

While RERA gives buyers a direct route to address delays or defects, IBC provides a corporate insolvency resolution framework for defaulted developers. In 2019, the Supreme Court in Pioneer Urban clarified that you, as a homebuyers are the ‘financial creditors’ under IBC, so you can initiate insolvency proceedings if the developer defaults. On paper that sounds very good but the real question is how this insolvency proceedings kicks in alongside RERA remedies.

Could RERA and IBC interact more smoothly? When the Supreme Court in Pioneer Urban said RERA and IBC should work together, held that buyers could use RERA for getting possession or compensation and turn to IBC if they wanted to change the developer’s management or want liquidation. But it didn’t address the practical clash that homebuyers want their homes, not smaller payouts for the same and also most of them lack this much of financial knowledge and technicality of laws and how to judge complex resolution plans alongside banks and other creditors. As a result, tribunals have tried “reverse CIRP” or project-wise resolution, skipping a full creditor committee and asking the interim insolvency resolution professional to finish construction.

Why RERA is a Better Forum for Consumer Redressal

RERA presents a more consumer-friendly approach compared to IBC because it sees homebuyers as consumers with real-life needs like getting the possession of the thing what they were promised for rather than just ‘financial creditors’ participating in a corporate insolvency resolution process. The main goal of RERA is to prioritize project completion by ensuring that  homes are delivered. In comparison IBC focuses on recovering money for lender through liquidation or sale, which often leaves homebuyers waiting in a long queue and in the state dilemma.

What makes RERA more effective than IBC is that it steps in early before any of the defaults by developers. By mandating project registration, enforcing financial safety through escrow accounts, and other condition precedents to project sale, RERA reduces the likelihood of projects being stalled that means that RERA has the potential to reduce the chance of a project reaching insolvency. In other words, RERA tries to stop problems before they become crises.

Another key advantage of RERA is the faster dispute resolution it promises. RERA  tribunals are bounded to resolve complaints within 60 days, which is very crucial for buyers who are either waiting to move into their homes or get their money back. On the other hand insolvency cases under IBC often drag on. In 2023–24, the average time taken by the NCLT to resolve such cases was 716 days, more than double of the statutory limit of 330 days, mainly due to delays in court processes and appeals. For buyers waiting to move in or get their hard-earned money back this much of delay in resolution matters a lot as it is financially draining and frustrating for a layman.

RERA focuses on completing the project rather than liquidating it. Authorities under RERA can step in and ensure construction is finished either by involving government agencies or third-party developers. A good example is the case of Amrapali Group where NBCC was appointed to complete the stalled projects and handover the possession to the people. Under IBC, once the insolvency proceedings begin there is a high probability that the developer’s assets will be liquidated to recover the dues of the lenders and this doesn’t always lead to possession or fair compensation for the homebuyers.

Now seeing the newly evolved proceedings of reverse CIRP under IBC which again focuses on project completion similar to RERA but when it comes to completing stalled real estate projects, RERA is far more effective than relying on interim resolution professionals (IRPs) under reverse CIRP. While IRPs are appointed during insolvency proceedings, their role under Section 18 of the IBC is limited to financial management, not overseeing construction. IRPs often have lack of technical expertise or sector-specific knowledge required for real estate development, as their training is focused on law, finance, and corporate restructuring. Whereas, RERA authorities are specifically designed to regulate real estate projects and have the institutional capacity to ensure project completion by coordinating with government bodies or external agencies. This makes RERA a more practical and consumer focused mechanism for delivering homes, whereas reverse CIRP often burdens IRPs with tasks beyond their mandate and capability.

Challenges in Implementation of RERA Remedies

One of the major challenges in implementing RERA remedies is the difference in enforcement in different states. The law itself gives regulatory authorities the power to step in and ensure project completion but always the effectiveness of the same will heavily depends on how well each state enforces them. It is very true that it’s not practically feasible to initiate individual proceedings under RERA incase of insolvency while under IBC it can be addressed collectively through committee of creditors under CIRP. However, the problem does not lie with the RERA statue itself, as it does empower regulatory authority to complete the projects but with its implementation on the very field level. States, like Maharashtra and Uttar Pradesh, have successfully implemented RERA mechanisms to protect homebuyers, by having highest number of registered projects, regular online portal maintenance and many more but others lack this regulatory capacity or administrative efficiency to ensure effective implementation.

Section 8’s idea is to have agencies or new builders finish stalled projects needs financial backing. Unlike IBC, which recovers money via assets sales, takeovers led by RERA need external funding from the government budgets, special funds or private partners. The SWAMIH (Special Window for Affordable and Mid-Income Housing) fund is one such initiative by the government launched in 2019, aimed at providing funding for stalled housing projects, particularly those registered under RERA and are near completion. Phase 1 of the fund is already in operation and second phase is announced this year by the government. This fund plays a crucial role in reviving projects that are stuck due to a lack of financial resources, thereby safeguarding the interests of homebuyers. However, while the scheme is a step in the right direction, the amount allocated under SWAMIH is not adequate to complete the number of projects as the amount allocated is much less than the actual number of stalled projects in the nation so without structured funding channels stalled projects will remain stuck despite RERA authority orders.

Another concern is the legal overlap. IBC includes a non-obstante clause, meaning its provisions override conflicting laws. So, if a RERA order clashes with an insolvency resolution plan under IBC, the latter usually takes priority. The Pioneer Urban judgment attempted to harmonise the two statutes, yet in practice, homebuyers often face difficulties enforcing RERA orders when insolvency proceedings are underway. This makes some homebuyers hesitant to approach RERA if insolvency seems likely, even though RERA’s buyer focus is better. In a way they will be just wasting their money and time in chasing RERA first and fortunately if they get any relief then IBC has the authority to bring the buyer back to their initial position.

Conclusion

While both RERA and IBC both play significant roles in regulating insolvency in the real estate sector. For most homebuyers, RERA’s focus on finishing homes and better resolution makes it more feasible than creditor focused IBC route. Gaps which have been discussed in implementation of RERA mechanism and disparities from state to state are the core issues which are in a way becoming a hurdle to achieving the true intent behind this legislation. Along with that it is unnecessary and inefficient to address real state concerns by the means of CIRP or even reverse CIRP when we have a special legislation for the same. By strengthening the enforcement of RERA’s provisions and providing better financial and administrative support to regulatory authorities, RERA can become more empirical in its functioning, rather than allowing it to remain just a normative concept on paper. This not only helps each homebuyer but also builds trust in the market, pushing the real estate sector toward smoother, more reliable project delivery. As homes are more of a dream for the people rather than just having a monetary value.