THE MORATORIUM UNDER SECTION 96 OF THE INSOLVENCY AND BANKRUPTCY CODE DOES NOT EXTEND TO REGULATORY PENALTIES FOR NON-COMPLIANCE

[DR.MARIAPPAN GOVINDARAJAN]

In SARANGA ANILKUMAR AGGARWAL VERSUS BHAVESH DHIRAJLAL SHETH & ORS. - 2025 (3) TMI 373 - SUPREME COURT, the appellant, in the present case, is engaged in real estate development. Several complaints were filed against the appellant before the Consumer Forums under the Consumer Protection Act. The National Consumer Disputes Redressal Commission (‘NCDRC’ for short) entertained complaints against the appellant in which it was alleged delay in possession, breach in contract and deficiency in services. The NCDRC, in its final judgment dated 10.08.2018 along with other connected matters, allowed the complaints. The NCDRC directed the appellant to complete construction, obtain the requisite occupancy certificate, and hand over possession. NCDRC also imposed 27 penalties on the appellant for deficiency in service by failing to deliver possession within a reasonable time.

The respondents filed execution petition against the appellant since he failed to comply with the directions of NCDRC. In the meanwhile, insolvency resolution process was launched against the appellant. Therefore, the appellant filed an application for the stay of the execution proceedings before NCDRC. Further the appellant intended to contest the execution on various grounds, including financial distress, adverse market conditions in the real estate sector, and its ongoing insolvency proceedings before the National Company Law Tribunal (‘NCLT’ for short). The NCDRC, vide the impugned order dated 07.02.2024, rejected this application, holding that consumer claims and the penalty imposed did not fall within the moratorium under the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short).

The appellant filed the present appeal before the Supreme Court challenging the order of NCDRC. The appellant seeks a stay on the penalty proceedings before the NCDRC, contending that an NCDRC application under Section 95 of the Code.

The appellant submitted the following before the Supreme Court-

• The appellant had entered into settlement agreements with several decree holders and had already made significant payments, satisfying a substantial portion of the execution claims.
• A total amount of Rs. 11,57,34,925/- had been paid in execution proceedings.
• Some instalment payments were delayed due to reasons beyond its control, particularly adverse economic conditions in the real estate sector.
• SBI initiated proceedings under Section 95 of the Code against the appellant,
• An interim moratorium was triggered against the appellant as per Section 96 of the Code, and therefore, further legal proceedings, including the ongoing execution proceedings before the NCDRC shall be stayed.
• The dismissal of the application filed by him for stay of execution proceedings by NCDRC is a non-speaking order, without any discussion on legal principles.
• Section 96 of the Code creates an absolute bar on any proceedings against the debtor relating to any debt once an interim moratorium is in place.
• An interim moratorium shall commence on the date of the application, in relation to all debts.
• The penalties imposed by the NCDRC arise out of financial obligations or debts and must, therefore, be stayed.
• The execution proceedings initiated by the Respondent Nos. 1 and 2 are proceedings to recover the amounts under the garb of seeking an award.
• Since, the interim moratorium has commenced against the appellant, the appellant is estopped from undertaking any preferential payments, as such the continuation of the execution proceedings against the appellant would constitute an act of double jeopardy.
• The execution petition’s prayer is defective.

The appellant also relied upon the judgment of this Court in the matter of State Bank of India Versus V. Ramakrishnan And Anr. - 2018 (8) TMI 837 - Supreme Court, wherein it was held that when an application is filed under Part III of the Code, an interim moratorium or a moratorium is applicable in respect of any debt due and that the protection under Section 96 of the Code is far greater than that under Section 14 of the Code. The submission of the appellant is, the execution proceeding pending against the appellant must be stayed till the operation of interim moratorium under Section 96 of the Code.

The respondents submitted the following before the Supreme Court-

• The moratorium imposed under Section 96 of the Code does not extend to criminal proceedings under Section 27 of the Consumer Protection Act.
• The moratorium under Section 96 of the IBC is limited to recovery actions and civil proceedings against the debtor, with no applicability to criminal proceedings.
• Section 27 of the Consumer Protection Act provides for punitive action against those who fail to comply with orders of the consumer forum, which is penal in nature and distinct from debt recovery proceedings.
• The NCDRC rightly held that the moratorium under the Code does not cover criminal proceedings.
• The nature of proceedings under Section 27 of the Consumer Protection Act is inherently punitive, as it prescribes punishment, including imprisonment, for non- compliance with consumer forum orders.
• It cannot be considered a mere debt recovery mechanism and thus falls outside the scope of the Code moratorium.
• The moratorium under the Code is designed to protect the assets of the corporate debtor and the personal guarantor from alienation; not all debts are covered under this protection.
• Section 94 of the IBC clarifies that the moratorium applies only to debts that are not ‘excluded debts’ under Section 79(15) of the Code.
• Since the damages awarded by NCDRC and their execution fall under ‘excluded debts,’ the moratorium under Section 96 of the Code does not apply.
• The execution petition was filed only after the appellant failed to pay compensation or resume construction as per the consumer court’s orders.

The respondents contended that NCDRC’s order is legally sound and should be upheld, as the moratorium under Code does not bar the continuation of criminal proceedings for non-compliance with consumer court awards.

The Supreme Court considered the submissions of both the parties. The Supreme Court observed that there is a fundamental distinction between civil and criminal proceedings concerning a debt moratorium. While civil proceedings are generally stayed under provisions of the Code, criminal proceedings, including penalty enforcement, do not automatically fall within its ambit unless explicitly stated by law. Since the penalties imposed by the NCDRC are regulatory in nature and arise due to non-compliance with consumer protection laws distinct from ‘debt recovery proceedings’ under the Code.

The Supreme Court further observed that Section 96 applies only to ‘debt’ as defined under the Code and not to regulatory penalties imposed for non-compliance with consumer protection laws. Section 27 of the Consumer Protection 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. 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.

Section 96 of the Code is entirely different from Section 14 of the Code since it is more limited in its scope, staying only ‘legal actions or proceedings in respect of any debt.’

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. the NCDRC, exercises its statutory jurisdiction to award such damages, and these are distinct from purely financial debts that may be subject to restructuring under the Code. Since such damages are covered under ‘excluded debts’ as per Section 79(15) of the Code, they do not get the benefit of the moratorium under Section 96 of the Code, and their enforcement remains unaffected by the initiation of insolvency proceedings.

The Supreme Court further observed that if damages arising from legal violations, consumer protection claims, or penalties imposed by courts and tribunals were to be shielded under the moratorium, it would create an unfair advantage for errant entities and individuals, allowing them to evade their legal obligations under the guise of insolvency.

The Supreme Court held that the appellant cannot claim that such penalties fall within the scope of a debt moratorium, as they do not constitute financial liabilities owed to a creditor but rather statutory obligations enforced to uphold consumer rights. The moratorium under Section 96 of the Code does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.

The Supreme Court dismissed the appeal and directed the appellant to pay the penalties as ordered by NCDRC.