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TMI Blog2025 (3) TMI 373X X X X Extracts X X X X X X X X Extracts X X X X ..... RC, 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 mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed timeline. The appellant seeks a stay on the penalty proceedings before the NCDRC, contending that an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 IBC has been filed against them, triggering an interim moratorium under Section 96 of the IBC. 2. This Court is called upon to adjudicate whether execution proceedings under Section 27 of the Consumer Protection Act, 1986 CP Act, can also be stayed during an interim moratorium under Section 96 of the IBC. The present matter arises from an application filed by the appellant, who is the proprietor of proforma respondent no. 3 - East & West Builders (RNA Corp. Group Co.), in an execution application filed by respondent nos. 1 and 2 before the NCDRC, challenging the execution of multiple penalty orders imposed by the NCDRC during the pendency of insolvency proceedings against the Corporation. The appellant contends 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. 3. The appellant is engaged in real estate development and has several pending consumer complaints before the NCDRC filed by homebuyers alleging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Section 96 of the IBC, which the appellant claimed barred further legal proceedings, including the ongoing execution proceedings before the NCDRC. 5. 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 IBC. 6. The NCDRC relied on this Court's decision in State Bank of India v. V. Ramakrishnan & Anr. (2018) 17 SCC 394, which clarified that Sections 96 and 101 of the IBC provide a distinct moratorium applicable to personal guarantors, separate from the moratorium under Section 14 applicable to corporate debtors. The NCDRC emphasized that the stay under Sections 96 and 101 extends only to proceedings concerning the debt and does not necessarily shield the guarantor from all legal actions. 7. Additionally, the NCDRC placed significant reliance on this Court's ruling in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545. In that case, this Court reaffirmed that criminal proceedings against directors or signatories of a company do not abate merely because the corporate debtor is undergoing insolvency resolution. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the IBC when an application is filed under Section 94 or Section 95 of the IBC, an interim moratorium shall commence on the date of the application, in relation to all debts. In the present case the application under Section 95 of the IBC was filed against the appellant on 20.01.2022 and therefore, as per the provisions of Section 96 of the IBC, the interim moratorium commenced against the appellant from 20.01.2022 and thus the proceedings under Section 27 of the CP Act pending before the NCDRC shall be deemed to have been stayed since as per Section 96(1)(b)(i) of the IBC during the interim moratorium period, "any legal action or proceedings, pending in respect of any debt, shall be deemed to have been stayed." 14. The appellant further submitted that the proceedings under Section 27 of the CP Act are effectively recovery proceedings. Respondent No. 1 and 2 in their execution application have primarily sought for an award of Rs. 1,55,00,000/- while abandoning the other prayers or reliefs granted in the Consumer Complaint. Therefore, the execution proceedings initiated by the Respondent Nos. 1 and 2 are proceedings to recover the amounts under the garb of seeking an award. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissing the application filed by the appellant. Furthermore, in view of the settled legal position as enunciated hereinabove, the execution proceeding pending against the appellant must be stayed till the operation of interim moratorium under Section 96 of the IBC. 18. On the other hand, the respondent nos. 1 and 2, primarily homebuyers, contend that the penalties imposed by the NCDRC are not merely monetary claims but punitive measures to deter unfair trade practices. They argue that consumer protection proceedings serve a vital public function in ensuring compliance with orders protecting homebuyers, who are already vulnerable due to the developer's delays. The respondents assert that staying such penalties would set a dangerous precedent where developers can indefinitely delay justice by invoking insolvency proceedings. 19. The respondents submitted that the moratorium imposed under Section 96 of the IBC does not extend to criminal proceedings under Section 27 of the CP Act. The respondents contend that 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. It is submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded debts" under Section 79(15) of the IBC. As per this provision, liabilities arising from fines imposed by courts or tribunals, damages for negligence or breach of obligation, maintenance liabilities, student loans, and other prescribed debts are excluded. Since the damages awarded by NCDRC and their execution fall under "excluded debts," the moratorium under Section 96 of the IBC does not apply. 22. The respondents emphasize that Section 27 of the CP Act, imposes criminal liability, including imprisonment for non-compliance with consumer court orders. This Court in Satyawati v. Rajinder Singh and Another ( 2013 ) 9 SCC 491, highlighted the severe impact of delays in execution proceedings, observing that such delays deprive decree-holders of the fruits of litigation. Given that the NCDRC award falls within the category of "excluded debts," the moratorium does not extend to criminal proceedings initiated for its enforcement, these proceedings are merely delay tactics on part of the appellant. 23. The respondents highlighted the prolonged hardship faced by the decree holders due to the appellant's repeated delays in execution proceedings. Despite this Court's ruling in Vijay M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 28. 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. 29. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 33. 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criminal. The primary focus of proceedings under Section 27 of the CP 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 the failure to comply with consumer redressal mechanisms. Thus, the analogy drawn by the appellant between the moratorium on Section 138, NI Act proceedings and Section 27, CP Act proceedings is misconceived and legally untenable. 37. 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. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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