2025 (3) TMI 373 - SC - Indian Laws

Stay of penalty orders - whether the execution of penalty orders passed by the NCDRC can be stayed under the interim moratorium provisions of Section 96 of the IBC? - HELD 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 noncompliance with consumer protection laws. They are distinct from debt recovery proceedings under the IBC. 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. 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 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. However 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. In the present case the damages awarded by the NCDRC arise from a consumer dispute where the appellant has been held liable for deficiency in service. Such damages are not in the nature of ordinary contractual debts but rather serve to compensate the consumers for loss suffered and to deter unethical business practices. Courts and tribunals including the NCDRC exercise their statutory jurisdiction to award such damages and these are distinct from purely financial debts that may be subject to restructuring under the IBC - Since such damages are covered under excluded debts as per Section 79(15) of the IBC they do not get the benefit of the moratorium under Section 96 of the IBC and their enforcement remains unaffected by the initiation of insolvency proceedings. Judicial precedents support the view that statutory penalties and regulatory actions do not automatically fall within the ambit of an insolvency moratorium. In P. Mohanraj 2021 (3) TMI 94 - SUPREME COURT this 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. Conclusion - 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 imposed for non-compliance with consumer protection laws. 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 - Appeal dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal question considered in this judgment is whether the execution of penalty orders imposed by the National Consumer Disputes Redressal Commission (NCDRC) can be stayed under the interim moratorium provisions of Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC). This involves determining whether such penalties constitute "debt" under the IBC, thereby warranting a stay of proceedings during the interim moratorium applicable to personal guarantors.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents: The legal framework involves the interpretation of Section 96 of the IBC, which provides for an interim moratorium on proceedings related to debts when an insolvency application is filed against a personal guarantor. The IBC is designed to facilitate the resolution of financial distress, while the Consumer Protection Act, 1986 (CP Act) aims to protect consumer rights and ensure compliance with consumer forum orders. Precedents include the Supreme Court's decisions in State Bank of India v. V. Ramakrishnan and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., which clarify the scope of moratoriums under the IBC.

Court's interpretation and reasoning: The Court distinguishes between civil and criminal proceedings concerning debt moratoriums. It emphasizes that 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 noncompliance with consumer protection laws, distinct from "debt recovery proceedings" under the IBC.

Key evidence and findings: The Court notes that the penalties imposed by the NCDRC are not merely monetary claims but punitive measures to deter unfair trade practices. The penalties are regulatory actions meant to ensure compliance with consumer protection laws and are not debts owed to creditors. The damages awarded by the NCDRC arise from a consumer dispute and are classified as "excluded debts" under Section 79(15) of the IBC.

Application of law to facts: The Court applies the statutory scheme of the IBC, which suggests that penalties arising from regulatory infractions are not covered under the ambit of "debt." The interim 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, but it does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.

Treatment of competing arguments: The appellant argues that the penalties constitute financial obligations or debts and must be stayed under the interim moratorium. The respondents contend that the penalties are not merely monetary claims but punitive measures to deter unfair trade practices. The Court sides with the respondents, emphasizing that the penalties are regulatory actions meant to ensure compliance with consumer protection laws and are not debts owed to creditors.

Conclusions: The Court concludes that the penalties imposed by the NCDRC are regulatory in nature and do not constitute "debt" under the IBC. Therefore, the moratorium under Section 96 of the IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.

SIGNIFICANT HOLDINGS

The Court establishes that there is a fundamental distinction between civil and criminal proceedings concerning debt moratoriums. 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 noncompliance with consumer protection laws, distinct from "debt recovery proceedings" under the IBC.

The Court holds that the interim 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, but it does not extend to regulatory penalties imposed for non-compliance with consumer protection laws. The penalties imposed by the NCDRC are regulatory actions meant to ensure compliance with consumer protection laws and are not debts owed to creditors.

The Court dismisses the appeal, directing the appellant to comply with the penalties imposed by the NCDRC within a period of eight weeks from the date of the judgment.