IBC Moratorium Does Not Bar Execution Of Penalties Imposed Under Consumer Protection Act : Supreme Court

In a significant development, the Supreme Court today (March 4) ruled that an interim moratorium under Section 96 of the Insolvency & Bankruptcy Code, 2016 (“IBC”) does not apply to penalty 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, such as fines and penalties, from the moratorium's effect. As a result, penalties imposed by Consumer Redressal Forums under the regulatory statutes like the CP Act do not fall within the scope of the moratorium. “The present case does not involve a mere financial dispute but concerns the enforcement of consumer rights through regulatory penalties. Given that the legislative intent behind the CP Act is to ensure compliance with consumer welfare measures, staying such penalties would be contrary to public policy. Further, the appellant cannot invoke insolvency proceedings as a shield to evade statutory liabilities. The objective of the IBC is to provide a mechanism for resolving financial distress, not to nullify obligations arising under regulatory statutes.”, the court observed. The bench comprising Justices Vikram Nath and Prasanna B. Varale delivered the verdict where the property builder, who faced multiple penalties (27 in total) imposed by the National Consumer Dispute Redressal Commission (“NCDRC”) for failing to deliver possession of residential units to homebuyers within the agreed timeline, filed the appeal cotnteding that since aapplication under Section 95 of the IBC has been filed against them triggering an interim moratorium under Section 96 of the IBC, the penalties cannot be enforced against them.The appellant sought a stay on the penalty proceedings, arguing that the moratorium barred further legal actions, including the execution of penalties. He further argued that the penalties imposed by the NCDRC were akin to debt recovery proceedings and should be stayed during the moratorium. He cited the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) 6 SCC 258, where the Court stayed the proceedings under the Negotiable Instruments Act against the corporate debtor after taking effect of a moratorium.Opposing the Appellant's argument, the Respondents (home buyers) contended that the penalties under Section 27 of the CP Act are regulatory and punitive, aimed at ensuring compliance with consumer protection laws, and do not constitute "debt" under the IBC. They added that penalties are "excluded debts" under Section 79(15) of the IBC, which include fines and damages imposed by courts or tribunals. Rejecting the Appellant's argument, the judgment authored by Justice Vikram Nath emphasized that the penalties imposed by the consumer redressal forums are punitive measures to deter unfair trade practices. The Court reasoned that including regulatory penalties within the scope of the moratorium would be a travesty of justice for homebuyers, who have already faced significant delays and financial hardship. Allowing a stay on such penalties would undermine consumer protection laws and enable errant developers to evade liability through insolvency proceedings. “The penalties imposed by the NCDRC arise due to non-compliance with consumer protection laws and serve a regulatory function rather than constituting "debt recovery proceedings." This distinction is crucial. The IBC is designed to deal with insolvency resolution and financial distress, whereas consumer protection laws exist to uphold consumer rights and ensure fair business practices. The penalties under Section 27 of the CP Act are aimed at compelling compliance and cannot be equated with recovery of an outstanding debt. The appellant cannot claim that such penalties fall within the scope of a debt moratorium, as they do not constitute financial liabilities owed to a creditor but rather statutory obligations enforced to uphold consumer rights. Allowing the stay of such penalties would effectively enable businesses to flout consumer protection mandates by merely initiating insolvency proceedings, which would be an unintended and dangerous consequence of a misinterpretation of the law.”, the court observed. The Court said that the appellant's reliance on P. Mohanraj's case was misplaced because the moratorium stays the debt recovery proceedings (like proceedings initiated under NI Act) against the applicant invoking insolvency proceedings, but the moratorium effect cannot be extended against the penalties imposed for statutory non-compliances. “Judicial precedents support the view that statutory penalties and regulatory actions do not automatically fall within the ambit of an insolvency moratorium. In P. Mohanraj (supra) this Court held that a moratorium under Section 14 of the IBC extends to proceedings under Section 138 of the NI Act. However, a distinction between debt recovery proceedings and punitive actions needs to be created, and therefore all criminal liabilities do...

IBC Moratorium Does Not Bar Execution Of Penalties Imposed Under Consumer Protection Act : Supreme Court

Yash Mittal

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