Moratorium Under Section 96 of IBC Does Not Extend to Penalties by NCDRC and other Regulatory Bodies : Centrik Group

The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive legislation aimed at resolving insolvency and ensuring the revival of financially distressed entities. One of its key features is the concept of a Moratorium, which provides temporary relief to debtors by halting certain legal proceedings against them. However, a significant legal question has arisen regarding the scope of moratorium under Section 96 of the IBC—whether it extends to regulatory penalties imposed by statutory regulatory bodies?

The Supreme Court of India, in the case of Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors., has ruled that the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) does not extend to regulatory penalties imposed by bodies such as the National Consumer Disputes Redressal Commission (NCDRC). This ruling has significant implications for personal guarantors and debtors attempting to invoke insolvency as a defense against penalties for non-compliance with consumer protection laws.

Background of the Case

The dispute arose when the NCDRC, in its judgment dated August 10, 2018, directed the appellant, Saranga Anilkumar Aggarwal, to complete construction, obtain an occupancy certificate, and hand over possession to homebuyers. Additionally, the NCDRC imposed 27 penalties on the appellant for failing to deliver possession within a reasonable time.

Following this, the decree holders initiated execution proceedings against the appellant. Meanwhile, insolvency proceedings were initiated against the appellant under the IBC before the National Company Law Tribunal (NCLT). The appellant then sought a stay on the execution proceedings under Section 96 of the IBC, arguing that the interim moratorium granted in insolvency proceedings should extend to penalties imposed by the NCDRC.

The NCDRC, however, rejected this plea, holding that consumer claims and regulatory penalties did not fall within the ambit of the moratorium under the IBC. The appellant challenged this decision before the Supreme Court.

Key Legal Issues

The primary question before the Supreme Court was:

A.   Whether execution proceedings under Section 27 of the Consumer Protection Act, 1986, can be stayed under the interim moratorium provided by Section 96 of the IBC.

B.   Whether penalties imposed by regulatory bodies such as the NCDRC constitute "debt" under the IBC.

Supreme Court’s Ruling

🔵 A.   Regulatory Penalties Are Not "Debt" Under IBC

The Court distinguished between debt recovery proceedings and regulatory penalties. It held that penalties imposed by regulatory bodies do not constitute "debt" under the IBC. Section 96 of the IBC stays legal actions or proceedings relating to a "debt," but penalties imposed due to regulatory non-compliance do not fall within this definition.

🔵 B.   Moratorium Under Section 96 Differs from Corporate Moratorium Under Section 14

The Court noted a distinction between the moratorium under Section 96, applicable to individuals and personal guarantors, and the broader moratorium under Section 14, which applies to corporate debtors. While Section 14 stays all proceedings against a corporate debtor, Section 96 only covers proceedings related to "debt." Since penalties imposed by NCDRC are regulatory in nature, they do not fall under this provision.

🔵 C.   Consumer Protection Laws Serve a Public Interest

The Supreme Court emphasized that the penalties imposed by the NCDRC are intended to enforce compliance with consumer protection laws and act as a deterrent against unfair trade practices. Allowing a stay on such penalties under insolvency proceedings would frustrate the objectives of consumer protection laws and enable businesses to evade their obligations by merely initiating insolvency proceedings.

🔵 D.    Distinction Between Civil and Criminal Proceedings

The Court reiterated that while civil proceedings for debt recovery may be stayed under the IBC moratorium, regulatory penalties, which have a punitive aspect, are not covered. The penalties imposed under Section 27 of the Consumer Protection Act are not purely civil in nature but serve a broader purpose of ensuring compliance with consumer laws.

🔵 E.   Statutory Interpretation and Excluded Debts

The Court referenced Section 79(15) of the IBC, which lists "excluded debts," including fines imposed by courts or tribunals. Since NCDRC penalties arise from consumer protection violations, they qualify as "excluded debts" and are not subject to the moratorium under Section 96.

Conclusion:

The Supreme Court’s ruling in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors. affirms the principle that insolvency proceedings cannot be used as a shield against statutory liabilities. The decision upholds the intent of both the IBC and consumer protection laws, ensuring that regulatory penalties remain enforceable despite ongoing insolvency proceedings. This judgment provides clarity on the limited scope of the moratorium under Section 96 and strengthens the consumer redressal framework in India.