INTRODUCTION
While expanding the jurisprudence of the Insolvency and Bankruptcy Code, 2016, (“IBC”), the Division Bench of the Supreme Court (“SC”), in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth and Ors.,[1] held that an interim moratorium under the IBC does not apply to execution proceedings for penalties imposed under the Consumer Protection Act, 1986 (“Consumer Protection Act”). Once an insolvency application is admitted by the National Company Law Tribunal, moratorium under the IBC comes into effect, which is a temporary suspension of legal actions against the debtor.
While holding that the scope of moratorium under Section 96 of the IBC is narrower than that under Section 14 of the IBC, SC drew a distinction between the two. Section 14 of the IBC applies to corporate debtors and provides for a comprehensive stay on all proceedings against the corporate debtor, including execution and enforcement actions. In contrast, Section 96 of the IBC applies to individuals and personal guarantors and stays only ‘legal actions or proceedings in respect of any debt’, to the exclusion of ‘liability to pay fine imposed by a Court or Tribunal’, as provided under Section 79(15) of the IBC.
FACTUAL MATRIX
In Saranga Anilkumar (supra), the SC was dealing with a case where the National Consumer Disputes Redressal Commission (“NCDRC”) had imposed multiple penalties upon a builder for failing to deliver possession of residential units to homebuyers within the agreed timeline. The decree-holders (respondents in the appeal before the SC) initiated execution proceedings under Section 27 of the Consumer Protection Act before the NCDRC. The builder challenged these proceedings, citing pending insolvency proceedings against him. However, the NCDRC dismissed his application, ruling that consumer claims and penalties do not fall within the ambit of moratorium under the IBC. The NCDRC placed reliance on Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd.,[2] wherein the SC had held that criminal proceedings against directors or signatories of a company do not abate merely because the corporate debtor is undergoing insolvency resolution and that individuals associated with the corporate debtor remain liable for their acts. Against the said NCDRC order, the builder-appellant preferred an appeal before the SC, contending that since an application to initiate insolvency resolution process had been filed against him, triggering an interim moratorium under Section 96 of the IBC, the penalties imposed by the NCDRC could not be enforced against him.
The appellant contended that during the interim moratorium period, ‘any legal action or proceedings, pending in respect of any debt, shall be deemed to have been stayed’. The appellant relied on P. Mohanraj and Others v. Shah Brothers Ispat Private Limited,[3] where the SC had held that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (“Negotiable Instruments Act”), are covered under ‘any legal action or proceeding pending’ and thus are stayed by the moratorium under Section 14 of the IBC. The appellant further contended that the proceedings under Section 27 of the Consumer Protection Act are similar to proceedings under Section 138 of the Negotiable Instruments Act, which are effectively recovery proceedings and are quasi-criminal in nature, thereby they assume the existence of a ‘debt’.
On the other hand, the respondents contended that moratorium under Section 96 of the IBC does not extend to criminal proceedings under Section 27 of the Consumer Protection Act, which are regulatory and punitive in nature and do not constitute ‘debt’ under the IBC. The respondents argued that the penalties imposed by the NCDRC are not just monetary claims, but punitive measures to deter unfair trade practices. The respondents further asserted that the execution proceedings under the Consumer Protection Act serve a crucial public function by ensuring compliance with orders that protect homebuyers, who are already vulnerable due to the developer’s delays. The respondents also relied upon Section 94(3) of the IBC, which limits the scope of an interim moratorium by carving out exceptions for certain categories of debts, such as ‘excluded debts’ defined under Section 79(15) of the IBC. The respondents relying on Satyawati v. Rajinder Singh and Another[4], contended that delays in execution proceedings deprive decree-holders of the fruits of litigation and since the NCDRC order falls within the meaning of ‘excluded debts’, the moratorium does not extend to criminal proceedings initiated for its enforcement. The respondents asserted before the SC that staying such penalties would set a dangerous precedent, resulting in developers indefinitely delaying justice by invoking insolvency proceedings and undermining the ultimate purpose of consumer protection laws.
RULING OF THE SUPREME COURT
The SC, while taking note of the distinction between civil and criminal proceedings in the context of debt moratorium, held that civil proceedings are generally stayed under IBC provisions. It further held that “…criminal proceedings, including penalty enforcement, do not automatically fall within its ambit unless explicitly stated by law.” Further, Section 138 of the Negotiable Instruments Act addresses cheque dishonour, involving debt recovery. In contrast, Section 27 of the Consumer Protection Act addresses non-compliance with orders that cannot be construed as financial debt.
The SC, while dismissing the appeal filed by the appellant, further explained that the penalties imposed by the consumer forum are not ‘debts’ that can be restructured or discharged under the IBC, but rather punitive measures to ensure compliance with consumer protection laws. The SC held that allowing a stay on such penalties would undermine the very purpose of the consumer protection laws and embolden errant developers to evade liability under the garb of insolvency proceedings. It was held that penalties imposed by the NCDRC under Section 27 of the Consumer Protection Act are ‘excluded debts’ under Section 79(15) of the IBC, which includes liability to fine imposed by a court or tribunal.
The SC, while examining the legislative intent behind the Consumer Protection Act, emphasised upon the fact that staying penalties would be contrary to public policy as the same is aimed at ensuring compliance with consumer welfare measures. Moreover, the SC noted that the appellant cannot use insolvency proceedings to avoid statutory liabilities, stating that “…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.” The SC further held that stay on such penalties would effectively enable defaulting businesses to flout consumer protection mandates under the garb of insolvency proceedings, which would be an unintended and dangerous consequence of a misinterpretation of the law.
The SC judgment in Saranga Anilkumar affirms and expressly clarifies that insolvency proceedings cannot absolve a defaulter from penalties imposed under welfare legislations such as the Consumer Protection Act. The judgment is instrumental in ensuring that statutory liabilities are not evaded under the guise of insolvency proceedings.
For further information, please contact:
Shikha Tandon, Partner, Cyril Amarchand Mangaldas
shikha.tandon@cyrilshroff.com
[1] Civil Appeal No. 4048 Of 2024.
[2] (2023) 10 SCC 545.
[3] (2021) 6 SCC 258.
[4] (2013) 9 SCC 491.
