In a recent case, the Hon’ble Supreme Court of India in Saranga Anilkumar Aggarwal Versus Bhavesh Dhirajlal Sheth & Ors. (Civil Appeal No. 4048/2024), ruled that an interim moratorium under Section 96 of the Insolvency & Bankruptcy Code, 2016 (“IBC”) does not apply to proceedings under Section 27 of the Consumer Protection Act, 1986 (“CP Act”). The Court explained that Section 79(15) of the IBC excludes certain liabilities, including fines and penalties, from the moratorium’s effect. Consequently, penalties imposed by consumer redressal forums under the CP Act would not be halted merely because insolvency proceedings have been initiated.

Elaborating on the scope of the IBC, the Court observed that the present case went beyond a purely financial dispute, as it involved the enforcement of consumer rights through regulatory penalties. It reasoned that staying such penalties would be contrary to public policy, since the CP Act aims to ensure compliance with consumer welfare measures. Accordingly, the appellant (a property builder) could not invoke insolvency as a shield to evade statutory liabilities. The IBC, the Court clarified, is intended to facilitate resolution of financial distress, and not to nullify obligations stemming from regulatory statutes.

The builder, who approached the Court seeking a stay on the penalty proceedings before the National Consumer Dispute Redressal Commission (“NCDRC”), where he faced 27 separate penalties, contended that once an application under Section 95 of the IBC triggered an interim moratorium under Section 96, any further legal action, including penalties, must be stayed. Referring to the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) 6 SCC 258, the appellant likened consumer penalties to debt recovery proceedings, insisting they should be barred during the moratorium. However, the homebuyers argued that penalties under Section 27 of the CP Act are both regulatory and punitive in character, intended to ensure compliance with consumer protection laws. Since Section 79(15) of the IBC classifies fines and damages as “excluded debts” they contended that such liabilities lie outside the protective ambit of an insolvency moratorium. Rejecting the appellant’s plea, the judgment highlighted the punitive nature of these penalties, emphasizing that they deter unfair trade practices and safeguard consumer rights.

The Court further noted that staying proceedings under the CP Act would effectively undermine the Act, allowing developers to exploit insolvency proceedings to escape accountability. It distinguished between debt recovery proceedings (which may be stayed under a moratorium) and statutory fines (which do not qualify as debts in the IBC sense). On the appellant’s reliance on P. Mohanraj (supra), the Court clarified that while proceedings under the Negotiable Instruments Act, 1882, may be stayed if they involve debt recovery, penalties aimed at enforcing public welfare measures cannot simply be swept into an insolvency moratorium unless expressly covered by the IBC.

Lastly, the Court ruled that the penalties imposed by the NCDRC are not “financial liabilities” but are statutory obligations to uphold consumer rights, and thus remain fully enforceable. Holding no merit in the appellant’s arguments, the Supreme Court dismissed the appeal and directed the appellant to comply with the NCDRC’s penalties within eight (8) weeks. This judgment reaffirms that the IBC cannot be used to evade statutory liabilities under consumer protection laws, ensuring that the moratorium does not erode essential consumer safeguards.

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By - Vaibhav Mehra