The Hon’ble Supreme Court of India in a recent judgement in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors., Civil Appeal No. 4048 of 2024 has held that penalty proceedings under Section 27 of the Consumer Protection Act, 1986 (“CP Act”) cannot be stayed during an interim moratorium imposed under Section 96 of Insolvency and Bankruptcy Code, 2016 (“Code”).

The Respondent Nos. 1 and 2 had filed a consumer complaint against Respondent No. 3 and the Appellant for delay in possession of flat, deficiency in service and breach of contractual obligations before the National Consumer Disputes Redressal Commission (“NCDRC”). The NCDRC allowed the complaint and directed the Appellant to complete the construction and hand over the possession along with all statutory compliances and also imposed penalties on the Appellant for deficiency in service. Thereafter, the aforesaid Respondents filed execution application before the NCDRC seeking execution of the aforesaid order passed by the NCDRC.

Subsequently, State Bank of India initiated insolvency proceedings under Section 95 of the Code and an interim moratorium under Section 96 was imposed against the Appellant. Therefore, the Appellant filed an application for stay of the execution proceedings before the NCDRC. The NCDRC rejected the said application and held that consumer claims and the penalty imposed does not fall within the interim moratorium imposed under Section 96 of the Code. Hence the present appeal was filed.

The Supreme Court observed that Section 96 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, the said provision applies only to debt as defined under the Code and not regulatory penalties imposed under consumer protection laws. It was further observed that penalties imposed by the NCDRC are regulatory in nature and not criminal. They are aimed at protecting public interest rather than punishing criminal behaviour.

The Supreme Court further observed that the scope of Section 96 is limited as it stays only legal actions or proceedings in respect of a debt only. The legislative intent behind Section 96 is to provide temporary relief to debtors by preventing certain proceedings against them during the resolution process.

The Supreme Court held that the purpose of Section 27 of CP Act is to enforce consumer rights and ensure that service providers fulfil their obligations and permitting a stay on these proceedings would undermine the legislative intent behind the CP Act. The Court further held that the objective of the Code is to provide a mechanism for resolving financial distress and not to regulatory obligations. Therefore, the Court dismissed the appeal.

This judgment marks a key development in consumer protection, addressing the issue of developers/builders using insolvency to frustrate proceedings and avoid compliance with consumer forum orders.

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By - C. George Thomas and Ansh Mittal