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Synopsis

The Supreme Court has said the penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) are regulatory in nature and do not constitute "debt" under the Insolvency and Bankruptcy Code and the moratorium under Section 96 does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.   

A bench of Justices Vikram Nath and Prasanna B Varale dismissed an appeal filed by Saranga Anilkumar Aggarwal against the 27 penalties imposed by the NCDRC on August 10, 2018, upon the appellant for failing to deliver the possession of residential units to homebuyers as per the agreed timeline. 

The appellant contended that the imposition and execution of these penalties should be stayed due to the pendency of insolvency proceedings initiated under Section 95 of the IBC.

The NCDRC by the impugned order on February 07, 2024, rejected the application, which claimed further legal proceedings were barred due to moratorium, holding that consumer claims and the penalty imposed did not fall within the moratorium under the IBC.

The bench pointed out the present case did not involve a mere financial dispute but concerned the enforcement of consumer rights through regulatory penalties. 

"Given that the legislative intent behind the CP Act is to ensure compliance with consumer welfare measures, staying such penalties would be contrary to public policy. Further, the appellant cannot invoke insolvency proceedings as a shield to evade statutory liabilities. The objective of the IBC is to provide a mechanism for resolving financial distress, not to nullify obligations arising under regulatory statutes," it said.  

The bench said it found no merit in the appellant’s arguments. The court also rejected the analogy drawn by the appellant between the moratorium on Section 138, NI Act proceedings and Section 27, CP Act proceedings as "misconceived and legally untenable".

"If the appellant’s argument is accepted, homebuyers, who have already suffered immense delays and financial hardship, would be further deprived of relief. The legislative intent behind consumer protection laws is to safeguard the interests of consumers and ensure accountability from service providers," the court said. 

Through a timeline of events the respondents sought to demonstrate the appellant’s continued non-compliance, starting from the booking of flats in 2011, the filing of consumer complaints in 2017, the NCDRC's ruling in favour of the consumers in 2018, and the subsequent delays in execution proceedings. They said non-bailable warrants were issued against appellant Saranga Aggarwal in 2021 due to non-compliance, yet the appellant had failed to take steps to honour its obligations.   

The bench said, "Permitting a stay on regulatory penalties under the guise of insolvency proceedings would undermine the very purpose of the CP Act and embolden errant developers to escape liability through insolvency proceedings. Homebuyers, many of whom invest their life savings in purchasing residential units, are already in a precarious position due to delays in possession and breaches of contractual obligations. Staying penalties that serve as deterrence against such unfair practices would render consumer protection mechanisms ineffective and erode trust in the regulatory framework".   

Judicial precedents support the view that statutory penalties and regulatory actions do not automatically fall within the ambit of an insolvency moratorium, the bench said.

In P Mohanraj and Others Vs Shah Brothers Ispat Private Limited (2021), the bench pointed out, the apex court held that a moratorium under Section 14 of the IBC extends to proceedings under Section 138 of the NI Act. However, a distinction between debt recovery proceedings and punitive actions needs to be created, and therefore all criminal liabilities do not fall within the scope of the moratorium unless explicitly covered under the IBC. Consequently, penalties imposed by regulatory bodies in the public interest cannot be stayed merely because insolvency proceedings are ongoing, the court held.

"We find that there is a fundamental distinction between civil and criminal proceedings concerning a debt moratorium. While civil proceedings are generally stayed under IBC provisions, criminal proceedings, including penalty enforcement, do not automatically fall within its ambit unless explicitly stated by law. The penalties imposed by the NCDRC are regulatory in nature and arise due to non compliance with consumer protection laws. They are distinct from "debt recovery proceedings" under the IBC," the bench said.

The court pointed out that a moratorium under Section 96 of the IBC is distinct from a corporate moratorium under Section 14 of the IBC. Section 96 of the IBC applies to individuals and personal guarantors and provides that during the interim moratorium period, "any legal action or proceedings relating to any debt shall be deemed to have been stayed." 

However, it is pertinent to note that this provision applies only to "debt" as defined under the IBC and not to regulatory penalties imposed for non-compliance with consumer protection laws. A careful reading of the statutory scheme of the IBC suggests that penalties arising from regulatory infractions are not covered under the ambit of "debt" as envisioned under the Code, the court said.

The bench also said it is well settled that there exists a distinction between punitive actions and criminal proceedings. 

While a criminal proceeding is initiated by the State against an accused to determine guilt and impose penal consequences, punitive actions in the regulatory sphere, such as those imposed by the NCDRC, are meant to ensure compliance with the law and to act as a deterrent against future violations. Section 27 of the CP Act empowers consumer fora to impose penalties to ensure adherence to consumer protection norms, the bench said.  

These penalties do not arise from any "debt" owed to a creditor but rather from the failure to comply with the remedial mechanisms established under consumer law. Unlike a criminal prosecution, which requires the establishment of mens rea, the penalties imposed by NCDRC are regulatory in nature and aim to protect the public interest rather than to punish criminal behaviour, the bench added. 

The court also said the moratorium under Section 96 of the IBC is intended to provide temporary relief to debtors by preventing certain proceedings against them during the resolution process. 

"However, this protection is not absolute and does not extend to all categories of debts. The legislative intent behind the moratorium is to ensure that the debtor's assets are preserved for an efficient resolution process and to prevent creditors from taking unilateral actions that may frustrate the objective of insolvency proceedings," the court said.

The statutory scheme of the IBC makes it clear that the protection under the moratorium does not cover all forms of liabilities, particularly those classified as "excluded debts" under Section 79(15) of the IBC, the bench said.

The court agreed with a submission by the respondents that Section 94(3) of the IBC explicitly limits the scope of the moratorium by carving out exceptions for certain categories of debts. 

Section 79(15) of the IBC defines "excluded debts" to include liabilities arising from fines imposed by courts or tribunals, damages for negligence or breach of obligation, maintenance liabilities, student loans, and other prescribed debts. This classification is based on the nature of such obligations, which are either statutory, penal, or personal in nature, and therefore, they do not form part of the insolvency estate that can be discharged under the resolution process, the bench said. 

Case Title: Saranga Anilkumar Aggarwal Vs Bhavesh Dhirajlal Sheth & Ors