Whether the execution of penalty orders passed by the NCDRC can be stayed under the interim moratorium provisions of Section 96 of the IBC?

In a recent decision of the Hon’ble Supreme Court of Saranga Anilkumar v. Bhavesh Dhirajlal Sheth & Ors., a crucial question emerged with respect to:

 whether execution proceedings under Section 27 of the Consumer Protection Act, 1986 (the “Act”), can also be stayed during an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code (IBC). 

In this case, multiple penalties were imposed by NCDRC during the pendency of the insolvency proceedings and the said decision of NCDRC was challenged. The core contention of the appellant was that imposition and execution of the penalties should be stayed on account of the pendency of the insolvency proceedings.  

Let us read through the facts of the case: 

 

The Appellant is engaged in real estate development and had several pending consumer complaints before NCDRC, filed by home buyers alleging delay in possession, deficiency in service, and breach of contractual obligations. NCDRC had allowed the complaints and directed the appellant to complete construction, obtain the requisite occupancy certificate, and hand over possession and imposed penalties on the appellant for deficiency in service by failing to deliver possession within a reasonable time. Subsequently, the Respondent No. 1 and 2 as Decree Holders filed execution applications seeking execution of the order of NCDRC. Thereafter, the appellant faced insolvency proceedings before NCLT and moved an application before the NCDRC to stay the execution proceedings. However, the NCDRC rejected the application holding that the consumer complaints did not form part of the moratorium. In effect, NCDRC concluded that interim moratorium under Section 96 of the IBC did not bar the continuation of the criminal proceedings under Section 27 of the Consumer Protection Act for its personal liability as a guarantor. 

 

The Hon’ble Supreme Court observed that civil and criminal proceedings concerning debt moratorium are distinct, while civil side proceedings are generally stayed, criminal proceedings including penalty enforcement, do not automatically fall within this ambit. The penalties imposed by NCDRC are regulatory in nature and arise out of non-compliance of the consumer law, they are different from the debt recovery proceeding under the IBC. 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." 

 

The said Section 96 applies only to ‘debt’ and not to the regulatory penalties as imposed for non-compliance with the consumer law. The Hon’ble Court also highlighted the distinction between punitive action 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. Sec. 27 of the Act empowers consumer fora to impose penalties to ensure adherence to consumer protection norms. Unlike criminal proceedings, which involve establishment of mens rea, the penalties allegedly imposed by NCDRC are regulatory in nature that aim to protect public interest. The Hon’ble Court noted that Section 96, with respect to personal insolvency, is limited than the corporate insolvency process, wherein the goal is comprehensive resolution of company’s liabilities. Therefore, a blanket stay on all regulatory penalties under Section 96 of the IBC, would result in defeating the objective of the Act. The Hon’ble Court noted that 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. In the present case, the damages imposed to compensate the consumer for the loss suffered and to deter the unethical business practices. Such debts 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 rationale behind their exclusion is rooted in public policy consideration. 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 penalties imposed by NCDRC constitute a regulatory function rather than constituting "debt recovery proceedings." Penalties, if any, imposed under Section 27 of the Act are to ensure compliance and cannot be equated with recovery of an outstanding debt. The Hon’ble Court held that staying the penalties under the CP Act would render the consumer protection mechanisms ineffective and erode trust in the regulatory framework and would also be contrary to public policy. 

 

Distinction between cheque dishonour proceedings under mortarium and the CP Act proceedings. 

 

The Hon’ble Court also examined the distinction between proceedings under Section 138 of the NI Act and those under Section 27 of the CP Act. Proceedings under Section 138 of the NI Act pertain to dishonour of cheques and are criminal in nature, where the assumption of debt is inherent in the offence itself. The dishonour of a cheque indicates a failure to honour financial obligations, and the proceedings are initiated for the recovery of the debt in question. In contrast, Section 27 of the CP Act deals with non- compliance with consumer protection orders, which are remedial in nature rather than 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. The proceedings under the CP Act 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. 

 

Cumulatively, the Hon’ble Court held that 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 appeal was, therefore, dismissed.

 

Read the entire case at:- https://www.sci.gov.in/sci-get-pdf/?diary_no=104472024&type=j&order_date=2025-03-04&from=latest_judgements_order