Supreme Court Holds That Insolvency Moratorium Does Not Bar Consumer Protection Penalties, Directs Compliance with NCDRC Orders
Kiran Raj
The Supreme Court has dismissed an appeal challenging the execution of penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) against a real estate developer for failure to deliver possession of residential units to homebuyers within the stipulated time. The bench comprising Justice Vikram Nath and Justice Prasanna B. Varale held that the moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) does not extend to penalties imposed under consumer protection laws. The Court found that regulatory penalties are distinct from debt recovery proceedings and cannot be shielded under insolvency laws. The appellant was directed to comply with the penalties imposed by the NCDRC within eight weeks.
The appellant, a real estate developer, faced multiple consumer complaints before the NCDRC for delay in delivering possession of residential units. In its final judgment dated August 10, 2018, the NCDRC allowed the complaints, directing the appellant to complete construction, obtain occupancy certificates, and hand over possession to the homebuyers. Additionally, the NCDRC imposed 27 penalties on the appellant for deficiency in service.
As the appellant failed to comply with these directions, the respondents, who are decree-holders in the matter, initiated execution proceedings before the NCDRC. The appellant, however, sought a stay on these execution proceedings, contending that insolvency proceedings had been initiated against them under Section 95 of the IBC before the National Company Law Tribunal (NCLT). The appellant argued that an interim moratorium under Section 96 of the IBC was in effect, which barred all legal actions, including the execution of penalties.
The NCDRC rejected the appellant’s application for a stay, holding that consumer protection penalties did not fall within the scope of the moratorium under the IBC. The appellant subsequently approached the Supreme Court, seeking relief against the NCDRC's decision.
The Supreme Court considered whether execution proceedings under Section 27 of the Consumer Protection Act, 1986, could be stayed under the interim moratorium provided in Section 96 of the IBC.
The appellant argued that Section 96 of the IBC places an absolute bar on proceedings against a debtor in respect of any debt once an interim moratorium is in place. It was contended that the penalties imposed by the NCDRC arise from financial obligations and should, therefore, be treated as debt, making them subject to the moratorium. The appellant also cited P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, wherein this Court held that proceedings under Section 138 of the Negotiable Instruments Act, 1881, were covered under the IBC moratorium. The appellant argued that the same principle should apply to penalties under consumer protection laws.
The respondents, on the other hand, contended that the penalties imposed by the NCDRC were not mere monetary claims but regulatory sanctions intended to ensure compliance with consumer protection norms. The respondents argued that a blanket stay on penalties due to insolvency proceedings would allow developers to delay justice for homebuyers.
The Supreme Court noted that while the IBC provides a moratorium on civil recovery proceedings, it does not extend to regulatory penalties. The Court observed:
"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 Court further stated that a moratorium under Section 96 of the IBC is distinct from a corporate moratorium under Section 14 of the IBC. Section 96 applies to individuals and personal guarantors, providing that during the interim moratorium period, any legal action or proceeding related to a debt is stayed. However, the Court clarified that this provision applies only to "debt" as defined under the IBC and not to penalties imposed for regulatory non-compliance.
The Court noted:
"The IBC is designed to deal with insolvency resolution and financial distress, whereas consumer protection laws exist to uphold consumer rights and ensure fair business practices. The penalties under Section 27 of the Consumer Protection Act are aimed at compelling compliance and cannot be equated with recovery of an outstanding debt."
The Court also distinguished between proceedings under Section 138 of the Negotiable Instruments Act, which relate to dishonour of cheques and are based on financial obligations, and penalties imposed under consumer protection laws. The Court recorded:
"The primary focus of proceedings under Section 27 of the Consumer Protection Act is to enforce consumer rights and ensure that service providers fulfil their obligations. These proceedings do not assume the existence of a financial debt but rather deal with deficiencies in service and failure to comply with consumer redressal mechanisms."
The Supreme Court upheld the NCDRC’s decision and rejected the appellant’s argument that the execution of penalties should be stayed. It held:
"The penalties imposed by the NCDRC arise due to non-compliance with consumer protection laws and serve a regulatory function rather than constituting 'debt recovery proceedings.' This distinction is crucial. The IBC is designed to deal with insolvency resolution and financial distress, whereas consumer protection laws exist to uphold consumer rights and ensure fair business practices."
The Court further observed that allowing a stay on regulatory penalties under insolvency proceedings would enable developers to escape liability, defeating the purpose of consumer protection laws. It held that:
"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 directed:
"The appeal is accordingly dismissed, and the appellant is directed to comply with the penalties imposed by the NCDRC within a period of eight weeks from the date of this judgment."
Case Title: Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors.
Neutral Citation: 2025 INSC 314
Case Number: Civil Appeal No. 4048 of 2024
Bench: Justice Vikram Nath, Justice Prasanna B. Varale
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