IBC Moratorium Does Not Provide Immunity from Consumer Law Penalties Supreme Court

March 5, 2025

In a landmark ruling, the Supreme Court has clarified that an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not extend to penalty proceedings under Section 27 of the Consumer Protection Act, 1986 (“CP Act”). The decision, delivered by a bench comprising Justices Vikram Nath and Prasanna B. Varale, reinforces the principle that insolvency proceedings cannot be used as a shield to evade regulatory liabilities imposed under consumer protection laws.

Key Legal Findings

The Court observed that under Section 79(15) of the IBC, certain liabilities, such as fines and penalties, are classified as “excluded debts,” meaning they do not fall under the moratorium’s purview. Therefore, penalties imposed by consumer redressal forums serve a regulatory purpose and cannot be equated with debt recovery mechanisms.

The case arose from an appeal by Saranga Anilkumar Aggarwal, a property developer facing multiple penalties (27 in total) imposed by the National Consumer Disputes Redressal Commission (“NCDRC”) for failing to deliver possession of residential units to homebuyers within the agreed timeline. The appellant contended that since insolvency proceedings had been initiated against him under Section 95 of the IBC, triggering an interim moratorium under Section 96, the penalties should be stayed. He further argued that such penalties were akin to debt recovery proceedings and should be suspended under the moratorium.

Court’s Rationale

Rejecting the appellant’s argument, the Supreme Court held that penalties under Section 27 of the CP Act are punitive and regulatory, aimed at ensuring compliance with consumer protection laws. These penalties do not constitute “debt” under the IBC, and therefore, the moratorium under Section 96 does not apply to them.

The Court also addressed the appellant’s reliance on the precedent set in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) 6 SCC 258, where a moratorium under Section 14 of the IBC was held to apply to proceedings under the Negotiable Instruments Act. However, the Court clarified that this ruling pertained to debt recovery actions and did not extend to regulatory penalties imposed for statutory violations.

Upholding Consumer Rights

The Court emphasized that consumer protection laws exist to uphold consumer rights and prevent unfair trade practices. Allowing a stay on regulatory penalties due to insolvency proceedings would be contrary to public policy and would enable defaulting developers to escape liability at the cost of aggrieved consumers.

Accordingly, the Supreme Court dismissed the appeal and directed the appellant to comply with the penalties imposed by the NCDRC within eight weeks from the date of the judgment.

Case Details

- Case Title: Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors.

- Legal Provisions Involved: Section 96 & Section 79(15) of IBC; Section 27 of CP Act

- Bench: Justices Vikram Nath and Prasanna B. Varale

This judgment reinforces the fundamental distinction between financial distress resolution under the IBC and statutory compliance obligations under consumer law, ensuring that errant developers cannot exploit insolvency mechanisms to evade penalties.

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