Execution of Penalties under Consumer Protection Act can still be carried out despite IBC moratorium: Supreme Court [Read Judgement]

In a recent case, the Supreme Court ruled that penalty procedures under Section 27 of the Consumer Protection Act, 1986 ("CP Act") are exempt from the interim moratorium provided by Section 96 of the Insolvency & Bankruptcy Code, 2016 ("IBC"). The appellant, Saranga Anilkumar Aggarwal, requested a halt to the penalty proceedings, claiming that the moratorium prohibited any additional legal action, including the imposition of penalties. Additionally, he contended that the NCDRC's penalties should be suspended during the moratorium since they were similar to debt recovery procedures. He referenced the P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) case, in which the court imposed a moratorium and halted the corporate debtor's actions under the Negotiable Instruments Act. How Does the Supreme Court Shape Tax Laws? Discover Landmark Rulings!, Click here The Respondents (home buyers) argued against the Appellant's position, stated that the penalties under Section 27 of the CP Act are punitive and regulatory in nature, intended to ensure adherence to consumer protection rules, and do not qualify as "debt" under the IBC. They further stated that fines and damages levied by courts or tribunals are "excluded debts" under Section 79(15) of the IBC. Read More: BUDS have No Precedence over proceedings under SARFAESI Act or IBC: Kerala HC rules in case of HDB Financial Services The Court reasoned that it would be unfair to homeowners, who have already experienced severe delays and financial hardship, to include regulatory penalties within the moratorium's purview. A stay on these fines would violate consumer protection regulations and allow negligent developers to avoid responsibility by filing for bankruptcy. It was believed that the current case dealt with the enforcement of consumer rights through regulatory fines rather than just a financial disagreement. It would be against public interest to maintain such fines, given the CP Act's legislative goal is to guarantee adherence to consumer welfare regulations. Furthermore, the appellant cannot avoid statutory obligations by using insolvency procedures as a shield. The IBC's goal is to offer a way to deal with financial difficulties, not to abolish duties imposed by regulatory laws. Read More: ICAI is My Guru, My Guiding Light: 73rd ICAI President Shares His Vision 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 Court ruled that under Section 79(15) of the IBC, some liabilities, such as fines and penalties, are not affected by the moratorium. As a result, fines imposed by Consumer Redressal Forums under regulatory statutes like the CP Act are exempt from the moratorium. Read More: Standard Form for Waiver of SCN and Personal Hearing Not a Substitute for Statutory Obligation: Delhi HC rules Seizure Without SCN Illegal The bench concluded that court decisions uphold the idea that regulatory measures and statutory fines do not always come under the purview of an insolvency moratorium. The Court held in P. Mohanraj that actions under Section 138 of the NI Act are covered by a moratorium under Section 14 of the IBC. All criminal liabilities do not, however, fall under the moratorium unless specifically addressed by the IBC since a distinction between debt recovery proceedings and punitive actions must be made. How Does the Supreme Court Shape Tax Laws? Discover Landmark Rulings!, Click here While dismissing the appeal, the court held that the moratorium under Section 96 of the IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws and the Appellant was directed to comply with the penalties imposed by the NCDRC within eight weeks. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates