SARANGA ANILKUMAR AGGARWAL VS BHAVESH DHEERAJ LAL SHETH : MORATORIUM UNDER SECTION 96 IBC NOT APPLICABLE TO PENALTIES UNDER CONSUMER PROTECTION ACT

The Supreme Court in Saranga Anilkumar Aggarwal Vs. Bhavesh Dheerajlal Sheth (Civil Appeal 4048 of 2024) held that the penalties imposed by the NCDRC are regulatory in nature and donot constitute “debt” under IBC. Moratorium under Section 96 of the IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.

FACTS OF THE CASE

The appellant was engaged in development of Real Estate Development. Several complaints were field before NCDRC alleging delay in possession, deficiency of service and breach of contractual obligations. NCDRC issued direction for obtaining occupancy certificates, handover of possession and imposed penalties. The Respondents filed application for execution of orders of NCDRC.  The Appellant took several defenses including the defense that an interim moratorium was triggered against the appellant as per Section 96 of IBC, which the appellant claimed barred further legal proceedings, including ongoing execution proceedings before the NCDRC.

NCDRC held that consumer claim and penalty imposed did not fall within moratorium imposed under IBC. The NCDRC relied on judgment of the Supreme Court on State Bank of India Vs. Ramakrishnan & Anr, 5 (2018) 17 SCC 394 which clarified that Section 95 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 Section 96 and 101 extends only to proceedings concerning the debt and does not necessarily shield the guarantor from all legal actions.  The NCDRC also relied on judgment of Supreme Court in Ajay Kumar Radheshyam Goenka Vs. Tourism Finance Corporation of India Ltd.  6 (2023) 10 SCC 545 wherein it was held that criminal proceedings against directors or signatories of a company do not abate merely because the corporate debtor is undergoing insolvency resolution.

FINDINGS OF THE SURPEME COURT

The Supreme Court observed that there is a fundamental distinction between civil and criminal proceedings concerning 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 Supreme Court further observed that moratorium under Section 96 IBC is distinct from a corporate moratorium under Section 14 IBC. Section 96 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 applied 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.

The Supreme Court further observed 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 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. 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 behavior.

The Supreme Court further observed that a distinction must be drawn between the moratorium applicable to a corporate debtor under Section 14 of IBC and the interim moratorium applicable to individuals and personal guarantors under Section 96 of IBC. The former is much broader in scope and stays all proceedings against the Corporate Debtor including execution and enforcement actions. However, Section 96 is more limited in its scope, staying only “legal actions or proceedings in respect of any debt”. Unlike corporate insolvency proceedings, where the goal is a comprehensive resolution of the company’s liabilities, individual insolvency proceedings are designed primarily for restructuring personal debts and providing relief to the debtor. The legislative intent behind limiting the scope of the interim moratorium under Section 96 of the IBC must be respected and a blanket stay on all regulatory penalties would result in defeating the objective of consumer protection of laws. The moratorium under Section 96 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. The statutory scheme of IBC makes it clear that the protection under the moratorium does not cover all form of liabilities, particularly those classified as “excluded debts” under Section 79 (15) of IBC. Section 94 (3) of the 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.

The Supreme Court held that 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.

The Appeal was dismissed by the Supreme Court.

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