Is Project-Wise Insolvency Permissible Under the Insolvency and Bankruptcy Code?

In the complex world of corporate insolvency, real estate developers facing financial distress often raise a critical question: Whether Project Wise Insolvency is Permissible under Insolvency and Banking Code? With multiple ongoing projects, can insolvency proceedings be initiated or resolved on a project-by-project basis rather than for the entire corporate entity? This issue has gained prominence, especially in sectors like real estate and infrastructure, where projects are distinct assets tied to homebuyers and financial creditors.

This blog post delves into the legal framework of the Insolvency and Bankruptcy Code, 2016 (IBC), judicial interpretations, and practical implications. While the IBC primarily envisions a corporate-wide Corporate Insolvency Resolution Process (CIRP), recent rulings suggest project-wise approaches may be viable under specific conditions. Note: This is general information and not specific legal advice; consult a qualified professional for your situation.

Overview of Project-Wise Insolvency

Project-wise insolvency refers to segregating insolvency resolution to individual projects of a corporate debtor, rather than treating the entire company as one unit. This is particularly relevant for real estate firms with multiple stalled projects, where homebuyers—classified as financial creditors under Section 5(7) of the IBC—seek completion without affecting other assets.

The IBC does not explicitly endorse project-wise insolvency, but judicial bodies like the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have addressed it. For instance, the Supreme Court has directed project-wise processes in appeals, recognizing the need to balance stakeholder interests 2025 Supreme(Online)(NCLAT) 1468. As noted, vide order dated 05.08.2025, it shall continue project-wise separately for each project 2025 Supreme(Online)(NCLAT) 1468.

Key Legal Provisions Under IBC

The foundation of insolvency proceedings lies in core sections of the IBC:

1. Section 7: Enables financial creditors, including homebuyer associations, to initiate CIRP against a corporate debtor. This has been invoked in project-specific claims, though typically for the entity as a whole 2025 Supreme(Online)(NCLT) 7878.

2. Section 29-A: Disqualifies certain resolution applicants, ensuring only eligible entities bid, which applies equally in project-wise scenarios to protect creditor recovery.

3. Section 12: Imposes a moratorium halting legal actions against the corporate debtor, raising questions on its scope for segregated projects.

These provisions form the bedrock, but their application to projects requires judicial nod. The RBI's Resolution Framework 2.0 and Pre-Packaged Insolvency Resolution Process (PIRP) under IBC also influence approaches, creating rights for petitioners to seek tailored resolutions 2023 0 Supreme(Gau) 114.

Judicial Findings and Precedents

Courts have not outright prohibited project-wise insolvency but subject it to scrutiny. In a notable case involving a real estate company, the NCLAT directed conversion of CIRP into project-wise resolution. The higher court allowed this with modifications, awaiting further orders on post-voting processes, emphasizing impacts on homebuyers 2023 0 Supreme(SC) 506.

The Supreme Court, in (2023) SCC OnLine SC 612, directed project-wise insolvency, observing linkages with banking, steel, and cement industries 2025 Supreme(Online)(NCLAT) 1468. Similarly, NCLT has entertained bank applications for project revival under IBC when proponents default, appointing Insolvency Resolution Professionals (IRPs) for specific measures 2023 0 Supreme(Del) 795.

However, project-wise claims face hurdles. In one matter, the key issue was whether the Applicant herein is the Financial Creditor of the Corporate Debtor (project-wise) or not 2025 Supreme(Online)(NCLT) 7878. Approval of project-wise plans by homebuyers does not extinguish their rights under IBC 2025 Supreme(Online)(NCLT) 6387.

Practical Implementation and Challenges

While permissible in exceptions, project-wise insolvency contrasts with IBC's entity-wide norm. Tribunals scrutinize running vs. project-wise accounts, noting, going into the project wise claims will not serve any purpose if total claims meet thresholds 2024 Supreme(Online)(NCLAT) 364.

In real estate, incomplete projects risk stalling if insolvency hits the entity, depriving buyers of common facilities 2021 0 Supreme(SC) 23. Banks can approach NCLT for project revival beyond standard IBC remedies 2023 0 Supreme(Del) 795. Yet, deviations like PIRP must justify segregation 2023 0 Supreme(Gau) 114.

Challenges include:- Claim Verification: Project-specific claims must meet default thresholds and timelines 2025 Supreme(Online)(NCLT) 7878.- Stakeholder Balancing: Moratorium and resolution plans must protect all creditors, not just project allottees.- Feasibility: Projects must be distinct and segregable, as in infrastructure cases 2025 Supreme(Online)(NCLAT) 1468.

The IBC is a self-contained code which is exhaustive in nature when it comes to reorganisation and insolvency resolution

PUNJAB NATIONAL BANK VS SWASTIK COMMERCIAL PVT LTD - National Company Law Tribunal

Analysis: Permissibility and Evolving Trends

Project-wise insolvency is not the rule but an exceptional mechanism, permissible when:- Projects are independent and identifiable.- Judicial approval balances interests.- Compliance with IBC sections like 7 and 29-A.

Regulatory adaptations, such as Insolvency Regulations amendments, support this in real estate. Courts emphasize project-specific plans for asset segregation, especially post-Supreme Court guidance 2025 Supreme(Online)(NCLAT) 1468. However, it's case-specific; standard CIRP prevails otherwise.

Stakeholders should note: Financial creditors and homebuyers retain rights even post-project approvals 2025 Supreme(Online)(NCLT) 6387. Legal practitioners must monitor evolutions, as seen in Meghalaya Infratech Ltd., where CIRP was initiated under IBC 2021 0 Supreme(Gau) 155.

Conclusion and Key Takeaways

Project-wise insolvency under IBC is permissible in limited, justified scenarios—particularly for distinct real estate or infrastructure projects—but requires rigorous judicial validation. It offers a pragmatic solution for stalled developments while safeguarding the IBC's core objectives of timely resolution and asset value maximization.

Key Takeaways:- Primarily Corporate-Wide: IBC defaults to entity-level CIRP; project-wise is exceptional 2023 0 Supreme(SC) 506.- Judicial Flexibility: NCLAT/SC directions enable it for segregable assets 2025 Supreme(Online)(NCLAT) 1468.- Stakeholder Prep: Creditors and buyers face complexities; monitor claims and plans 2025 Supreme(Online)(NCLT) 6387.- Recommendations: Track NCLT/NCLAT orders; seek expert advice for filings.

This evolving area underscores IBC's adaptability. For tailored guidance, consult insolvency specialists.

Disclaimer: This post provides general insights based on public judgments and is not legal advice. Laws and interpretations may change.