Real estate bankruptcy resolution has received a fillip, with a recent change in law clarifying that land development authorities do not automatically get secured creditor status in the insolvency process. Lawyers said the amendment will be a major relief to banks and home buyers, as it will speed up the rescue of bankrupt projects.
Earlier, state-owned land authorities could claim the status of secured creditors under state laws. This meant they had priority to recover dues such as lease fees and taxes during the resolution process, putting them on the same level as banks and home buyers. The matter frequently landed in the courts, stalling the rescue process.
The Parliament amended Section 3(31) of the Insolvency and Bankruptcy Code (IBC) in April, defining the term “security interest”. Security interest is when a bank lends money after taking a security from the borrower. The security could be a mortgage or a deposit of title deeds. Essentially, a state body can no longer claim to have a security interest and demand priority merely because a state law says so.
“These amendments should provide relief to both home buyers and banks. Several resolutions were being held up due to the objections being taken by land authorities seeking that they be declared as secured creditors by virtue of holding statutory charge, and that the resolution plans treat them as secured creditors,” said Manmeet Singh, partner, Cyril Amarchand Mangaldas.
Some of India's major state land development agencies include the City and Industrial Development Corporation of Maharashtra Ltd (Cidco), West Bengal Industrial Development Corporation (WBIDC), Yamuna Expressway Industrial Development Authority (YEIDA) and Greater Noida Industrial Development Authority (GNIDA). Queries emailed to their spokespersons remained unanswered.
According to lawyers, the amendment will reduce litigation around insolvency claims, given that land authorities' claims as secured creditors had led to litigation.
“A significant amount of litigation over the past few years has centred on whether statutory authorities qualify as secured creditors. By legislatively settling that question, the amendment should reduce avoidable disputes and allow resolution professionals to implement resolution plans with greater certainty,” added Manmeet.
IBC was enacted in 2016 to provide a framework for resolving distressed companies. Under this law, the creditors are paid in a prescribed hierarchy. Workmen have a higher priority while employee dues rank below, often called a "waterfall mechanism" under Section 53 of the Act. Government dues and other operational creditors rank lower.
The Supreme Court in 2022 ruled that the Gujarat tax department could be treated as a secured creditor because state tax laws gave it a charge over the assets of Rainbow Papers, a defaulting company. It suggested that government authorities in some states could assume a position similar to that of banks in insolvency proceedings. Other land authorities have later cited this judgment to argue that state laws give them the power to be a statutory creditor.
According to Pulkit Gupta, partner, debt and special situations at EY India, the clarification of statutory changes in the law, including those of land development authorities, will settle years of legal uncertainty.
“The single biggest reason stressed real estate assets went unbid was that no one could underwrite the risk of a statutory charge silently jumping the queue after the deal closed. Waterfall disputes between authorities and creditors have consumed years of NCLAT and Supreme Court bandwidth in real estate cases,” he added.
So, what's next for land authorities, which have lost their secured creditor status? Shiv Sapra, partner at Kochhar & Co., said these authorities will now need to move towards focusing more on a structure which might include periodic payments of payouts for their land. This might also range in revising the sale deed between the land authority and real estate developer, making a stronger contract.
"Land authorities should shift their focus from litigation to transaction design. Wherever legally permissible, they should strengthen contractual protections at the inception of projects instead of depending upon statutory priority at the insolvency stage," said Sapra.
In March last year, finance minister Nirmala Sitharaman said in Rajya Sabha that 204 insolvency cases in real estate and construction were resolved under the bankruptcy law until March 2025, yielding an average recovery of 44.7% against the lenders' admitted claims. She also added that 1,552 cases of insolvency in realty and the construction sector were admitted till March 2025.
“The real shift is that land authorities lose the waterfall leverage based on statutory charge, but retain commercial, contractual and regulatory leverage as landowners and statutory authorities,” said Aastha, partner at Argus Partners.