SC Clarifies: Insolvency Moratorium Can’t Be Used to Evade Consumer Penalties

Introduction

In expanding the interpretation of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘the Code’), the Hon’ble Supreme Court, in the judgement of Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth and Ors.[1], ruled that an interim moratorium under the Code does not extend to execution proceedings for penalties imposed under the Consumer Protection Act, 1986 (hereinafter referred as ‘Consumer Protection Act’). The Court clarified that once an insolvency application is accepted by the National Company Law Tribunal (NCLT), a moratorium under the Code is triggered, temporarily halting legal proceedings against the debtor.

The SC also distinguished between the scope of moratoriums under Section 96[2] and Section 14[3] of the Code, emphasizing that the former is more limited in its application. Section 14[4], which pertains to corporate debtors, imposes a broad stay on all legal actions, including execution and enforcement proceedings. In contrast, Section 96[5], applicable to individuals and personal guarantors, only suspends ‘legal actions or proceedings in respect of any debt’, explicitly excluding ‘liability to pay fines imposed by a Court or Tribunal,’ as outlined in Section 79(15)[6] of the Code.

Context & Legal Framework: Understanding the Case Background

The appellant, a real estate developer, is facing multiple consumer complaints before the National Consumer Disputes Redressal Commission (hereinafter referred as ‘NCDRC’) from homebuyers alleging delays in possession, deficiency in service, and breach of contractual obligations. In its final judgment dated 10-08-2018, along with related cases, the NCDRC upheld these complaints, directing the appellant to complete the construction, secure the necessary occupancy certificate, and hand over possession. Additionally, NCDRC imposed 27 penalties on the appellant for failing to deliver possession within a reasonable timeframe.

As decree holders, respondents 1 and 2 later initiated execution applications to enforce the NCDRC’s order after the appellant failed to comply. Meanwhile, with insolvency proceedings underway before the NCLT, the appellant sought a stay on the execution proceedings before the NCDRC. The present case arises from the appellant’s challenge to the enforcement of multiple penalty orders imposed by the NCDRC while insolvency proceedings against appellant were still pending. The appellant argued that both the imposition and execution of these penalties should be halted due to the ongoing insolvency proceedings under Section 95[7] of the Code.

Petitioner’s Stand: Challenging Consumer Penalties Under Insolvency Shield

• The petitioner argued that once an insolvency application is admitted under Section 95[8] of the Code, an interim moratorium under Section 96[9] is triggered. This moratorium bars all legal actions against the debtor, including the execution of penalty orders imposed by the NCDRC. Since the penalties arise out of financial obligations, they should be treated as debts, falling within the protection of the moratorium.
• The petitioner contended that the execution proceedings under Section 27[10] of the Consumer Protection Act, are recovery proceedings in disguise. Since the homebuyers had abandoned other reliefs and were only seeking monetary penalties, the proceedings should be seen as an attempt to recover a financial claim.
• The petitioner cited Mohanraj and Others v. Shah Brothers Ispat Private Ltd.[11] to argue that even quasi-criminal proceedings related to financial obligations (such as cheque bounce cases) are covered under a moratorium. They also relied on SBI v. V. Ramakrishnan & Anr.[12], where the Court observed that the “moratorium under Section 96[13] is even broader than that under Section 14[14]”, further reinforcing their claim.
• The petitioner claimed that allowing the penalties to be executed would result in double jeopardy, as insolvency law prevents preferential payments to specific creditors. If the execution proceedings were allowed to continue, it would violate the parity principle among creditors under the Code.

Respondent’s Stand: Defending Consumer Rights Against Insolvency Shield

• The respondents asserted that the moratorium in the Code applies only to financial debts, whereas the penalties imposed by the NCDRC are regulatory in nature. These penalties serve a punitive function, ensuring compliance with consumer protection laws rather than acting as mere debt recovery mechanisms.
• Section 79(15)[15] of the Code defines “excluded debts”, which include fines imposed by courts or tribunals. Since the penalties imposed by NCDRC fall within this category, they are not subject to the moratorium under Section 96[16].
• The respondents argued that proceedings under Section 27[17] of the Consumer Protection Act are not civil recovery actions but penal proceedings meant to deter unfair trade practices. The provision allows for imprisonment and fines, distinguishing it from mere debt enforcement.
• If the petitioner’s argument were accepted, developers could indefinitely delay consumer redress by invoking insolvency proceedings. The Code was not intended to be used as a shield to escape liability for statutory violations.
• The respondents cited Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd.[18], where the Hon’ble Supreme Court ruled that insolvency does not absolve individuals from criminal or penal liability. They also referred to Satyawati v. Rajinder Singh[19], where the Hon’ble Supreme Court emphasized the right of decree holders to timely enforcement of consumer protection judgments.

Judicial Verdict: Supreme Court Upholds Consumer Penalties Amid Insolvency

The Court, upon reviewing the case, distinguished between civil and criminal proceedings in the context of a debt moratorium. While civil proceedings are generally suspended under the Code, criminal proceedings, including the enforcement of penalties, do not automatically fall under this protection unless explicitly stated by law. The penalties imposed by the NCDRC are regulatory in nature and stem from violations of consumer protection laws, making them distinct from ‘debt recovery proceedings’ under the Code.

The Court clarified that the moratorium under Section 96[20] of the Code differs from the corporate moratorium under Section 14[21]. Section 96[22] applies to individuals and personal guarantors, staying legal actions related to ‘debt’ during the interim moratorium. However, this protection is limited to ‘debt’ as defined under the Code and does not extend to regulatory penalties imposed for non-compliance with consumer protection laws. The purpose of the moratorium is to provide temporary relief to debtors, ensuring their assets are preserved during the resolution process and preventing unilateral creditor actions that could disrupt insolvency proceedings. However, this protection is not absolute and does not cover all forms of liabilities.

The Court further distinguished between criminal proceedings and punitive actions, explaining that criminal cases are initiated by the State to establish guilt and impose penal consequences, whereas penalties like those imposed by the NCDRC are intended to ensure compliance with the law and deter future violations. Under Section 27[23] of the Consumer Protection Act, consumer forums have the authority to impose penalties for non-compliance. The Code’s statutory framework makes it clear that not all liabilities fall under the moratorium’s protection, particularly those classified as “excluded debts” under Section 79(15)[24] of the Code.

In this case, the damages awarded by the NCDRC arose from a consumer dispute, where the appellant was found liable for a deficiency in service. These damages serve to compensate consumers for losses and deter unethical business practices, rather than being ordinary contractual debts. As such, they are classified as “excluded debts” under Section 79(15)[25] of the Code and are not covered by the moratorium under Section 96[26]. Therefore, insolvency proceedings do not prevent their enforcement.

The Court emphasized that the exclusion of such liabilities from the moratorium is based on public policy considerations. If penalties, consumer protection claims, or damages resulting from legal violations were shielded under the moratorium, it would create an unfair advantage, allowing violators to evade their statutory obligations under the guise of insolvency. The Code is designed to balance stakeholder interests and does not intend to protect individuals or entities found guilty of statutory breaches. While the Code focuses on financial distress and insolvency resolution, consumer protection laws aim to uphold consumer rights and promote fair business practices.

Penalties under Section 27[27] of the Consumer Protection Act serve to enforce compliance rather than recover financial liabilities. The appellant’s argument that these penalties should fall under the debt moratorium was rejected, as they do not represent financial liabilities owed to a creditor but rather statutory obligations imposed to safeguard consumer rights. Allowing a stay on such penalties would enable businesses to bypass consumer protection laws by simply initiating insolvency proceedings, which would be an unintended and undesirable outcome.

Since the case involves the enforcement of consumer rights rather than a mere financial dispute, staying the penalties would contradict the legislative intent of the Consumer Protection Act. The Court ruled that the appellant cannot use insolvency proceedings as a shield to avoid statutory liabilities, as the Code’s objective is to resolve financial distress, not to nullify obligations under regulatory statutes. Consequently, the appeal was dismissed, and the Court directed the appellant to pay the penalties imposed by the NCDRC within eight weeks from the date of the judgment.

Conclusion

The Supreme Court’s ruling in this case reaffirms that insolvency laws cannot be misused as a shield to evade regulatory penalties imposed under consumer protection statutes. By distinguishing between financial debts and statutory liabilities, the Hon’ble Court has emphasized that penalties for non-compliance with consumer laws do not fall within the scope of an interim moratorium under the Code. This judgment serves as a crucial precedent, ensuring that businesses cannot exploit insolvency proceedings to escape accountability for consumer rights violations. The decision upholds the legislative intent behind both the Code and the Consumer Protection Act, reinforcing the principle that insolvency resolution should not come at the cost of consumer justice and statutory compliance.

Authored By:
Varun S. Ahuja
Ahuja Law Offices
M: 9971673660

[1] 2025 SCC OnLine SC 493.
[2] Insolvency and Bankruptcy Code, 2016 (31 of 2016), S. 96.
[3] Insolvency and Bankruptcy Code, 2016 (31 of 2016), S. 14.
[4] Ibid.
[5] Supra Note 2.
[6] Insolvency and Bankruptcy Code, 2016 (31 of 2016), S. 79 (15).
[7] Insolvency and Bankruptcy Code, 2016 (31 of 2016), S. 95.
[8] Supra Note 7.
[9] Supra Note 2.
[10] Consumer Protection Act, 1986 (68 of 1986), S. 27.
[11] (2021) 6 SCC 258.
[12] (2018) 17 SCC 394.
[13] Supra Note 2.
[14] Supra Note 3.
[15] Insolvency and Bankruptcy Code, 2016 (31 of 2016), S. 79(15).
[16] Supra Note 2.
[17] Supra Note 10.
[18] (2023) 10 SCC 545.
[19] (2013) 9 SCC 491.
[20] Supra Note 2.
[21] Supra Note 3.
[22] Supra Note 2.
[23] Supra Note 10.
[24] Supra Note 15.
[25] Ibid.
[26] Supra Note 2.
[27] Supra Note 10.