In a landmark ruling on Tuesday, the Supreme Court declared that the interim moratorium provisions of the Insolvency and Bankruptcy Code (IBC) do not protect individuals or companies from penalties imposed under consumer protection laws.
Justices Vikram Nath and Prasanna B. Varale delivered the verdict while addressing whether execution proceedings under Section 27 of the Consumer Protection Act, 1986, should be halted during an interim moratorium as per Section 96 of the IBC.
The IBC’s Section 96 imposes an interim moratorium, temporarily suspending all legal actions against a corporate debtor, including the execution of any judgments.
The case involved Saranga Anilkumar Aggarwal, proprietor of East and West Builders, who is undergoing insolvency proceedings at the National Company Law Tribunal (NCLT). Aggarwal argued for a stay on the execution of a National Consumer Disputes Redressal Commission (NCDRC) order, which had imposed penalties due to the delayed possession of residential units.
“The penalties imposed by the NCDRC are regulatory in nature and do not constitute ‘debt’ under the IBC. The moratorium under Section 96 of the IBC does not extend to regulatory penalties for non-compliance with consumer protection laws,” the court concluded.
The appeal by Aggarwal sought relief from 27 penalty orders issued by the NCDRC, which stemmed from his failure to deliver residential properties on time. The initial complaint was filed by Bhavesh Dhirajlal Sheth and others, leading to a 2018 judgment that favored the homebuyers. The NCDRC had ordered the developer to complete the construction and transfer possession to the buyers.
Despite the insolvency proceedings initiated under Section 95 of the IBC, the court held that financial distress and ongoing settlements with other decree holders do not exempt Aggarwal from compliance with consumer laws.
The bench underscored a crucial distinction between civil debt-related proceedings, which are covered by the IBC moratorium, and regulatory penalties, which are intended to enforce compliance rather than recover debts.
