When Boardrooms Fail: The Collision of Corporate Governance Breakdowns, Real Estate Insolvency, and Arbitration in India

Introduction

The real estate sector in India works under various layers of regulation to safeguard investors and homebuyers. The Companies Act, 2013, prescribes boards to have audit committees and independent directors as preventive measures against fraud. The Real Estate Regulation and Development Act, 2016, provides that 70% of the buyer money is to be kept in different escrow accounts. Despite these safeguards, governance failures, whereby either an audit committee failed to detect fraud or an independent director did not raise an alarm on the misuse of funds, resulted in massive collapses among developers.

When such fraud comes to light, developers start insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). On admission, Section 14 automatically imposes a “moratorium”, a freeze on legal proceedings. This freeze covers arbitration clauses that creditors and investors had relied upon to recover losses. This article confronts this critical problem-what boardroom failures trigger insolvency, how insolvency law then blocks arbitration remedies, and what reforms are needed to protect all stakeholders.

Governance Structures and the Paradox of Transparency

Real estate developers function in concurrent regulatory environments. The Companies Act, 2013, has provisions for audit committees under Section 177, independent directors, and whistleblowing mechanisms.

In Jaypee Infratech, forensic audits revealed that despite statutory audit committees, a systematic diversion of ₹12,806 crores occurred to unrelated entities. The Supreme Court’s observations showed how audit committee negligence allowed multi-year fraud. In the Amrapali case, forensic auditors found that 40% of ₹14,270 crores raised was diverted through dummy companies and bogus billing. Forensic findings revealed that the statutory auditors failed in their gatekeeping function, thereby allowing information asymmetry between the boards and their creditors.

This produces a sort of “reverse CIRP” effect. Audit committees identify diversions early, and remedial measures are taken well before bankruptcy becomes inevitable. In a failed governance structure, however, detection only occurs after depletion. By the time independent directors submit their reports, as required under the disclosure duty in Section 49, event notices have stimulated the interest of creditors, and banks begin to file Section 7 applications. The transparency obligation on the board, when finally followed, becomes the prompt that starts the very CIRP that prior non-compliances render unavoidable.

What Section 14 Actually Does (And Doesn’t Do)

The moratorium under IBC and its interaction with arbitration create some complex difficulties. Section 14 imposes a moratorium upon CIRP admission and restricts “institution or continuation of suits or arbitral proceedings” against the corporate debtor. The Supreme Court in Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited held that the arbitration proceedings initiated after moratorium imposition are non est in law, since allowing such proceedings would defeat the asset preservation objective of CIRP.

However, judicial interpretation soon brought out the nuances. The Delhi High Court explained in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. that a moratorium does not stay those proceedings that benefit the corporate debtor by increasing the asset base of the corporate debtor. Further finetuning this jurisprudence, the Guwahati High Court’s 2024 ruling in Pallab Ghosh v. Simplex Infrastructures Limited held that homebuyers could invoke arbitration clauses despite concurrent RERA remedies and signalled that arbitration and sectoral remedies can coexist without forum shopping concerns.

Cross-border arbitration further adds the element of complexity. When there is an arbitration clause interposed between foreign investors and the Indian developer who enters CIRP, the territorial application of Section 14 becomes contested. The foreign-seated arbitrations may remain unaffected by the Indian moratorium; however, such awards would remain stayed throughout CIRP for its enforcement in India, thereby creating a temporal paradox.

The judgment of the Supreme Court in Mansi Brar Fernandes v. Shubha Sharma & Anr. introduced the “speculative investor test” and changed the landscape of IBC-arbitration fundamentally. The Court held that investors with buy-back clauses or assured returns cannot invoke IBC to trigger CIRP; their remedies lie within RERA or consumer fora. However, arbitration clauses in such contracts remain enforceable outside the framework of IBC. The judgment reiterates that IBC is a resolution framework, not a recovery tool for speculative arrangements.

The Tripartite Trap: When Fraud, Arbitration, and Insolvency Collide

The whole situation sits at a crossroads of governance breakdown, arbitration, and insolvency-and it’s anything but simple. Visualise a cross-border real estate project: Developer A, an Indian entity, partners with Investor B, a foreign institutional investor, whereby a Development Agreement is executed between the two, providing for arbitration seated in Singapore. Developer A siphons off project funds, and over three years, the audit committee misses the scheme due to collusion between the promoter and the auditor.

When the forensic auditors are finally called in after the admission under CIRP, the fraud is discovered, and 40% of the corpus is already gone. Investor B heads to Singapore arbitration. Meanwhile, homebuyers, now financial creditors after the Pioneer Urban Land and Infrastructure Ltd. v. Union of India decision in 2019, file Section 7 applications. The NCLT admits the petitions and orders a moratorium.

Thus, we have created a three-way knot: the Singapore arbitrator renders an award against Developer A; Investor B moves to enforce it in India, but enforcement in India is stalled by the Section 14 moratorium, while the Committee of Creditors treats the award as a contingent liability.

The fraud unearthed by the forensic audit is another layer altogether. Section 66 grants Insolvency Professionals the authority to file applications for the clawback of transactions involving fraudulent transfers. If such funds are recovered, they increase the pool available for distribution to creditors. However, now competing with the claims of homebuyers and banks is the arbitral award, which also seeks a pro-rata share. Simply put it is the governance failure which is a direct determinant of the arbitration recovery rates, which typically yield only 5-10% of the awarded amounts.

The Four Blind Spots in India’s Insolvency Framework

The prevailing provisions of the IBC lack clarity on the linkage between governance, arbitration, and insolvency. First, whether foreign-seated arbitrations are protected under the moratorium in Section 14 remains vague; thus, the fates of foreign creditors remain in jeopardy. Second, arbitral awards are not consistently classified-either they are allowed as statutory dues by some tribunals or rejected as contingent liabilities for being filed belatedly. Third, while RERA has made 70% escrow requirements mandatory, the IBC does not extend priority to those creditors whose claims arise out of such escrow defaults. Fourth, the Amendment to the CIRP Regulations, introduced in February 2025, provided for project-wise resolution mechanisms; the role of arbitration vis-à-vis project-specific CIRP remains unclear.

Amending Section 14, to carve out arbitration proceedings and maintain an enforcement moratorium expressis verbis, should be the starting point for legislative reform: “Notwithstanding anything contained in any law for the time being in force, arbitral tribunals may conduct arbitration and pass awards determining the liability of the corporate debtor but any action to enforce such an award shall be stayed until the plan implementation commences.” This allows arbitration to continue, with enforcement deferred, to harmonise creditor interests with the objectives of CIRP.

Second, the IBBI must make governance audits, necessary to scrutinise the functionality of audit committees and mechanisms for fund diversion, requisite. These reports on governance audits shall feed into Section 66 avoidance applications so that governance failures are repaired through recoveries of funds. Third, for multi-project developers, the regulations should allow arbitration disputes to be “ringed” or apportioned among specific projects, thereby precluding any one project’s arbitration liabilities from depleting the asset pool of the others.

Finally, a saving clause needs to be added to RERA Section 79: “Where an allottee’s claim arises from a project entered into CIRP under the IBC, arbitration rights shall be subject to CIRP procedures.” This would prevent parallel arbitration and insolvency proceedings for the same disputes.

Conclusion

The coexistence of governance failures, insolvency legislation, and the arbitration approach in India’s real estate sector underlines systemic weaknesses that need urgent attention. In recent times, the progress made by the Supreme Court-from Pioneer Urban Land , which treated homebuyers as financial creditors, to Mansi Brar Fernandes, which applied the speculative investor test formulated earlier as a cause for insolvency in the real estate sector, signals an emerging consolidation around the idea that real estate insolvency is essentially a matter of governance and stakeholder protection.

The arbitration, initially intended as an expeditious ADR, faces fresh challenges as governance failure allows fraud to spiral into insolvency, with attendant moratoriums leading to disruptions in the enforcement of arbitration judgments while creditors try to recover. This sets up a vicious cycle in which asset security is depleted by governance issues, leading to CIRPs that order moratoriums of this kind and culminate in minimal recoveries.

This calls for coordination reforms, including the clarification of the role of arbitration in CIRP through the amendment of Section 14, the use of governance audits prior to the declaration of real estate insolvencies, and the inclusion of arbitration reserves in project resolution plans. In their absence, uncertainty will deter foreign investors, leaving homebuyers vulnerable and jeopardising the stability of India’s real estate market.

This post has been authored by Abhishek Sharma, a 3rd-year student at Rajiv Gandhi National University of Law, Patiala

CITE AS: Abhishek Sharma, ‘When Boardrooms Fail: The Collision of Corporate Governance Breakdowns, Real Estate Insolvency, and Arbitration in India’ (The Contemporary Law Forum, 4 February 2026) < https://tclf.in/2026/02/04/when-boardrooms-fail:-the-collision-of-corporate-governance-breakdowns,-real-estate-insolvency,-and-arbitration-in-india/> date of access.