In the case of Saranga Anilkumar Aggarwal vs. Bhavesh Dhirajlal Sheth & Ors. (Civil Appeal No. 4048 of 2024), the Supreme Court adjudicated upon whether execution proceedings under Section 27 of the Consumer Protection Act, 1986 (CP Act), could be stayed during an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC).
Background
The Appellant, a real estate developer and proprietor of East & West Builders (RNA Corp. Group Co.), faced multiple penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) for failing to deliver residential units to homebuyers on time. During the pendency of insolvency proceedings under Section 95 of the IBC, the Appellant sought a stay on the penalty proceedings, invoking the interim moratorium provisions under Section 96 of the IBC.
Contentions Raised
The Appellant argued that under Section 96 of the IBC, all legal actions and proceedings related to debts are automatically stayed once an interim moratorium is in place. It was contended that the penalties imposed by the NCDRC were essentially financial liabilities or debts and thus, the execution proceedings should be stayed. The Appellant also claimed that the penalties under Section 27 of the CP Act were effectively recovery proceedings and cited precedents such as P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. to support the argument that a moratorium under IBC should extend to quasi-criminal and recovery proceedings.
On the other hand, the Respondents (primarily homebuyers) argued that the penalties imposed were not merely monetary claims but served a punitive and deterrent function to uphold consumer rights. They contended that allowing a stay on such penalties would create a loophole for developers to escape compliance with consumer protection laws by initiating insolvency proceedings.
Court Analysis
The Supreme Court analyzed the scope of the interim moratorium under Section 96 of the IBC and distinguished between ‘debt recovery proceedings’ and ‘regulatory penalties.’ The Court emphasized that while civil proceedings related to debts may be stayed under IBC, penalties imposed for non-compliance with consumer protection laws are regulatory in nature. The Court relied on precedents, including Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., which clarified that not all proceedings against personal guarantors are stayed under an IBC moratorium.
The Court also highlighted that Section 79(15) of the IBC classifies certain liabilities, including fines and damages for negligence, as ‘excluded debts’ not covered under the moratorium. The Court observed that the penalties under Section 27 of the CP Act, which could include imprisonment, are inherently punitive and serve a public function distinct from debt recovery mechanisms.
Ratio of the Judgment
On 04.03.2025, the Supreme Court held that the interim moratorium under Section 96 of the IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws. It maintained that the penalties imposed by the NCDRC under the CP Act were not ‘debts’ as envisaged under the IBC but were statutory obligations aimed at deterring unfair trade practices and protecting consumer rights. Consequently, the appeal was dismissed, and the Appellant was directed to comply with the penalties within eight weeks.
Concluding Insights:
- This judgment sets a crucial precedent that regulatory and penal actions under consumer protection laws cannot be thwarted by invoking an interim moratorium under the IBC.
- It safeguards the rights of vulnerable homebuyers and ensures that developers cannot misuse insolvency proceedings to delay or avoid compliance with judicial orders.
- Going forward, this interpretation will strengthen the enforcement of consumer rights and uphold the integrity of consumer forums. The judgment may also prompt legislative clarity on the interplay between consumer protection and insolvency laws, ensuring that insolvency processes do not become a safe haven for entities seeking to escape accountability for regulatory breaches.
