A city on the docket: Inside Lavasa’s insolvency

“A city is a dream made visible.”

The conception of Lavasa was precisely in this spirit. Envisioned as a privately planned hill city in the Western Ghats, it aspired to translate the idea of urban living into reality by combining homes, public spaces and a shared civic life within a self-contained settlement. Inspired by the romances of the Italian town of Portofino, Lavasa represented an experiment in India’s urban imagination, where a private enterprise attempted to build a city and not just a project.

This vision, however, met an unfortunate fate of financial distress which led to insolvency proceedings against Lavasa Corporation Limited under the Insolvency and Bankruptcy Code, 2016 (IBC), putting an entire urban settlement under the corporate insolvency mechanism.

With over seven years into insolvency, Lavasa remains unresolved. The collapse of an approved resolution plan and renewed resolution efforts have left the city suspended in a prolonged corporate process before the Adjudicating Authority.

This article assesses the impact of applying corporate insolvency law to a privately planned city and how it reshapes the experience of all stakeholders.

The functions performed by Lavasa Corporation Limited are distinctly unique, in the sense that they extend way beyond those of a conventional real estate developer. The corporate entity assumed the responsibilities which ordinarily are associated with municipal governance, like urban planning and zoning, construction and maintenance of roads and public spaces, power and water supply, waste management, and the regulation of residential and commercial use within the city. Effectively, the company operated as a planner, service provider and a civic authority rolled into one. Therefore, because of this functional reality, the corporate veil becomes a legal fiction in the context of insolvency, because while Lavasa is merely a company, it exists in effect as a lived urban ecosystem which is inhabited by residents, students and businesses dependent on continuous provision of civic services.

One of the foundational assumptions of IBC is the fact that the corporate debtor is a discrete economic unit and that the assets of a typical corporate debtor can be frozen, transferred or liquidated without having any substantial social consequence. But in this case, the asset is a functioning city. Therefore, with the insolvency of Lavasa, the distinction between corporate failure and urban failure diminishes, which unveils the limitations that a purely corporate insolvency framework. The attempt to keep Lavasa as a “going concern” is far from the understanding of commercial continuity and treating it strictly as a corporate entity has resulted in prolonged proceedings, repeated extensions and judicial interventions. With Lavasa being under the IBC framework, the abstract statutory assumptions are transformed into lived tensions for creditors, homebuyers and the Adjudicatory Authority, all of whom have to adapt to an unprecedented city-scale failure.

The corporate debtor

The corporate debtor is not a conventional business which can be restructured without having wider ramifications. Being a living city, it cannot be reduced into a balance sheet, because the insolvency framework will pigeonhole multi-faceted urban functions into claims, assets and liabilities. Lavasa Corporation Limited, along with its wholly owned subsidiaries, was judicially characterised as a single economic unit dependent upon coordinated and continued operations for its survival. This characterisation implicitly acknowledged that the debtor could not be treated as a closed factory, but has to be preserved as a “going concern” in the literal sense of sustaining daily urban routine.

As a consequence, the resolution professional assumes an unconventional role. Far removed from standard insolvency administration, he becomes the city’s custodian, taking care of utilities, maintaining infrastructure and safeguarding control over essential services during the moratorium, in addition to managing claims and compliances. The corporate debtor is stripped of managerial autonomy, yet has to function continuously.

Financial creditors

Aa problem of valuation arises in the case of Lavasa’s insolvency, which is unlike any ordinary corporate debtor, given that the asset base is not a project capable of segmented sale, but an urban settlement whose value is associated to continuity, habitability and public confidence. The commercial wisdom of the Committee of Creditors is well settled as being supreme in corporate insolvency processes, but time and again, judicial interventions have prevented skewed prioritisation, particularly in instances where aggressive recovery attempts threaten broader stakeholder interests or long-term viability. The emphasis on invoking bank guarantees or restarting the process when a plan fails further underscores the limitations of purely financial solutions. Insofar as a city-scale restructuring is considered, creditor recovery is intertwined with continued urban settlement. Yet, there is an absence of doctrinal tools under the IBC to reconcile the two, leaving financial creditors to navigate on their own, through a framework that undervalues the cost of urban decay.

Homebuyers as residents

Homebuyers, out of all stakeholders, experience possibly the sharpest dislocation produced by treating the collapse of Lavasa as a conventional corporate insolvency. Homebuyers are classified as financial creditors and represented as a whole in the Committee of Creditors. However, this formal recognition captures merely their monetary exposure and not their lived realities, given that in practice, many of them are residents of an incomplete albeit functioning city, dependent on the incessant supply of water, power, access to roads and basic civic maintenance.

Haircuts imposed through resolution plans are not just financial losses in the traditional sense, but manifest as uncertainty over possession, stalled amenities and deteriorating living conditions. Although the Adjudicating Authority has, in cases where allotments predated insolvency, recognised the entitlement of certain homebuyers to possession, their major concerns as residents have largely remained outside the basic logic of Corporate Insolvency Resolution Process (CIRP). Their efforts to intervene in disputes central to the resolution process have often been curtailed on procedural grounds. This lacuna exposes a deeper tension within the IBC framework. That being the case, homebuyers in Lavasa are treated as creditors negotiating recovery, whereas in reality they are residents negotiating the viability of daily life.

The Adjudicating Authority

Judicial improvisation compelled by statutory silence best defines the role of the Adjudicating Authority in Lavasa’s insolvency. The NCLT sanctioned group consolidation of an urban settlement fragmented across various entities to preserve value and ensure continuity of operations, adopting an outcome-driven approach, not expressly contemplated by the Code. To similar effect, extensions of the CIRP timeline, and restoring the process upon the failure of an approved resolution plan indicate an acknowledgement of the need for flexible timelines to accommodate the complexities of a city-scaled insolvency. The Adjudicating Authority is expected to manage urban collapse using mechanisms designed for corporate revival, with no legislative guidance whatsoever on prioritising habitability, or infrastructural continuity. Thus, it oscillates between enforcing the statute and compensating for its inadequacies, consequently, acting less as an arbiter of claims and more as a custodian attempting to stabilise a city through a framework never intended for that task.

Detroit, which in 2013 became the largest municipality in the history of the US to file for bankruptcy owing to decades of fiscal decline and inability to serve its obligations, can be considered a useful point of contrast. Detroit, unlike Lavasa, was explicitly recognised as a financial failure, subject to a statutory regime designed for municipal debt adjustment. Nevertheless, its urban character was treated as central to its resolution process, thus preserving core services and civic continuity even while restructuring debt. 

On the contrary, the insolvency of Lavasa unfolds as a corporate process, treating an urban settlement as a company under the IBC, resultantly highlighting a critical distinction. Detroit failed as a city whose municipal debt was restructured, whereas Lavasa is failing as a company acting like a city without a legal framework that recognises this identity.

Lavasa represents itself as a jurisprudential outlier in Indian insolvency law, laying bare the difficulty of addressing the collapse of a city through a framework meant to remedy corporate distress. Treating an urban settlement as a corporate debtor has pushed for constant judicial adaptation to preserve continuity, habitability, value and a slew of other objectives the IBC was never meant to pursue. As private capital is progressively participating in township developments, Lavasa will not remain an isolated experiment. With its insolvency still unfolding, close attention will be warranted to how the Adjudicating Authority navigates the path ahead. When a city is a dream made visible, its failure calls for a legal response that appreciates the nature of what is being lost and what must be preserved.

Anushka Vasishth is an advocate enrolled with the Bar Council of Delhi, and is currently pursuing PGIP-LL.M. in Insolvency at National Law University, Delhi.