Supreme Court’s recent judgment in Saranga Anilkumar Aggarwal vs. Bhavesh Dhirajlal Sheth sets at rest a significant issue regarding the fate of execution proceedings under Section 27 of the Consumer Protection Act, 1986 after the initiation of personal insolvency proceedings against a Guarantor and the applicability of an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC).

In an era where IBC has transformed the framework of commercial lending and the litigation arising out of default, there has been an increasing tendency amongst the debtors to misuse the provisions of the Code as one that can deflect any and all liabilities, including those arising from regulatory or quasi-judicial orders. The Apex Court, in this judgment, settled the legal position regarding the difference between the moratorium imposed under Section 14 and Section 96 of the IBC and upheld the sanctity attached to the orders passed under the Consumer Protection Act. While dealing with the said issue, the Apex Court also dealt with the delicate interplay between the law laid down under the Consumer Protection Act and IBC and also the difference between criminal and civil proceedings concerning a debt moratorium.

The Hon’ble Supreme Court, while protecting the interests of homebuyers and warranting greater responsibility by real estate developers, ensured that developers cannot evade monetary penalties imposed for consumer rights violations under the excuse of insolvency proceedings.

The Appellant, a real estate developer (East & West Builders of the RNA Corp. Group), in the matter before the Hon’ble Supreme Court faced multiple consumer complaints before the NCDRC for delays in handing over possession, poor service, and breach of contract. The NCDRC ruled in favour of the homebuyers and directed the Appellant to complete construction, obtain occupancy certificates and hand over possession. It also imposed 27 penalties for service deficiencies. When the Appellant failed to comply, homebuyers filed execution applications to enforce the NCDRC’s order. Separately, the Appellant was a personal guarantor for loans taken by A.A. Estates Pvt. Ltd. from SBI. Following a default, insolvency proceedings were initiated against both A.A. Estates and the Appellant under IBC. Requesting for a stay on the aforesaid execution proceedings, the Appellant submitted that several settlement agreements had been reached, over `11.57 crore had been paid and only 13 execution petitions out of 20 were pending. However, the Hon’ble NCDRC vide its Order dated 07.02.2024 rejected the stay request, wherein it was held that consumer penalties and claims are not covered under the given moratorium under IBC, allowing execution proceedings to continue.

The core issue before the Hon’ble Apex Court while adjudicating the appeal revolved around whether the execution proceedings under Section 27 of the Consumer Protection Act could be stayed due to an interim moratorium under Section 96 of the IBC. While adjudicating on the said issue, the Court also dealt with multiple other issues that are extremely significant in nature, such as the nature of penalties under the Consumer Protection Act imposed by NCDRC, the difference between proceedings under Section 138 of the Negotiable Instruments Act 1881 and those under Section 27 of the Consumer Protection Act. The said issues are significant due to the overlap of consumer protection statutes and insolvency law, as well as the difference between civil and criminal proceedings relating to a debt moratorium.

Under the Code, Section 14 declares a moratorium on corporate persons and Section 96 deals with an interim moratorium on individuals and partnership firms. The moratorium under Section 14 is declared after admission of an Application under Section 7, Section 9 or Section 10, whereas under Section 96, the moratorium is declared when an application is filed under Section 94 or 95, regardless of its admission by the Tribunal.

“Debt” as per the Code means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. However, penalties levied by the NCDRC for service deficiencies stem as a consequence of non-compliance with the law.

The moratorium under Section 96 under IBC is not absolute. It applies to actions “in respect of a debt”, a term which IBC defines narrowly as a liability arising from a claim. Consumer forum penalties, however, are not rooted in a creditor-debtor relationship. They are punitive in nature, meant to enforce compliance with consumer rights and deter market malpractices. Such damages are not ordinary contractual debts but serve to compensate consumers and deter unethical business practices. As such damages fall within the ambit of “excluded debts” under Section 79(15) of the Code, they are not covered by the moratorium prescribed under Section 96. Consequently, their enforcement remains unaffected and the imposition of such penalties cannot be disregarded merely on the ground that insolvency proceedings have been initiated.

It was held by the Hon’ble Supreme Court that the rationale for excluding such liabilities from the moratorium is rooted in public policy. Granting moratorium protection to damages arising from legal infractions, consumer claims or penalties imposed by courts and tribunals would confer an undue benefit upon defaulting entities, enabling them to sidestep legal accountability under the pretext of insolvency.

While deciding the nature of penalties levied by NCDRC, the Hon’ble Supreme Court held that, unlike a criminal prosecution, which necessitates proof of mens rea, the penalties imposed by Consumer Forum are regulatory in nature intended to uphold public interest rather than to punish criminal behaviour.

While also rejecting the Appellant’s analogy between the moratorium applicable to proceedings under Section 138 of the Negotiable Instruments Act and those under Section 27 of the Consumer Protection Act, the Supreme Court held that dishonor of a cheque signifies there being failure to honour the financial obligations and proceedings aim at debt recovery. In contrast, Section 27 of the Consumer Protection Act addresses the failure to comply with consumer protection orders and is remedial in nature rather than criminal. These proceedings uphold rights of the consumers and ensures service providers fulfil obligations, without assuming the existence of any financial debt. They address service deficiencies and non-compliance with consumer redressal mechanisms.

Accordingly, the Apex Court dismissed the appeal and instructed the appellant to adhere to the penalties imposed by the NCDRC within a period of eight weeks.

The Hon’ble Supreme Court’s judgment provides clarity and gives much-needed relief to homebuyers who cannot be left high and dry on mere filing of personal insolvency proceedings. This judgment reinforces the legislative intent underlying the Consumer Protection Act, ensuring that real estate developers remain accountable notwithstanding the initiation of insolvency proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016. This is a big step towards greater accountability and deterring the misuse of IBC. Delays in possession, substandard construction, and false promises are not just civil wrongs, they are statutory violations, and any attempts to evade consumer forum orders through insolvency shields will no longer find judicial favour.

The judgment will undoubtedly act as a deterrent against misuse of the IBC by defaulting promoters, reinforcing that the Code is not intended to be exploited as a shield to evade legal accountability. This judgment also provides clarity on the concurrent jurisdiction of consumer courts and insolvency laws, which is crucial for similar disputes in the future.

Most importantly, this judgment clarifies the difference between moratorium imposed under 96 of the Code and Section 14 of the Code stating that the scope of the moratorium under Section 96 is narrower, as it applies only to ‘legal actions or proceedings in respect of any debt’. By contrast, Section 14 imposes a broad moratorium that stays all proceedings, including enforcement and execution, against the corporate debtor upon admission of an insolvency application. In contrast, the moratorium under Section 96 of the IBC stays only ‘legal actions or proceedings in respect of any debt’ excludes liabilities such as fines imposed by a court or tribunal, as stipulated under Section 79(15) of the Code. The judgment thereby ensures that insolvency proceedings are aligned towards its object and purpose, i.e. timely resolution of companies as well as personal guarantors in financial stress. The judgment protects and preserves consumer rights under the Consumer Protection Act and balances the applicability of the same even in cases involving insolvency proceedings, which otherwise have an overriding effect.