Introduction
The Insolvency and Bankruptcy Code (IBC), 2016 aims to strike a balance between the interests of debtors and creditors while ensuring the smooth resolution of insolvency cases. A crucial feature of the IBC is the "moratorium," which temporarily halts legal proceedings against a debtor, ensuring the preservation of assets during the insolvency process. However, the scope and application of the moratorium are not without limits, particularly when it comes to regulatory penalties.
The moratorium under Section 141 of the IBC applies to corporate debtors during the Corporate Insolvency Resolution Process (CIRP), while Section 962 and Section 1013 deal with individual insolvency proceedings, specifically for personal guarantors of corporate debtors. At this juncture, it needs to be clarified that a moratorium under Section 96 comes into effect when an application initiating a CIRP has been filed but is yet to be admitted by the adjudicating authority (the National Company Law Tribunal or NCLT). On the other hand, the moratorium under Section 101 becomes applicable after the application for CIRP has been admitted by the concerned NCLT. This article focuses on Section 96 and examines whether penalties imposed for regulatory non-compliance, such as those under the Consumer Protection Act, are subject to the moratorium imposed during individual insolvency proceedings.
Background
The judgement of the Hon'ble Supreme Court in the case of Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth4 brought this issue to the forefront. Saranga Anilkumar, the Appellant, was a personal guarantor for A.A. Estates Pvt. Ltd., a corporate debtor. After the corporate debtor defaulted on its financial obligations, an insolvency application was filed against both the corporate debtor (under Section 75 of the IBC) and against the Appellant (under Section 956, for personal insolvency). The Appellant argued for the stay of all legal proceedings, including those for penalties imposed by the Ld. National Consumer Disputes Redressal Commission (NCDRC) due to non-compliance with consumer protection laws, as the interim moratorium under Section 967 triggered.
In 2018, the Ld. NCDRC had imposed 27 penalties on the Appellant for failing to deliver residential units on time. When execution proceedings were initiated before the Ld. NCDRC, the Appellant argued that these proceedings should be stayed due to the moratorium under Section 96. The Ld. NCDRC, while passing the impugned order, relied upon the judgment passed by the Hon'ble Supreme Court of India in State Bank of India versus V. Ramakrishnan & Anr.,8 wherein it was held that the moratorium under Sections 96 and 101 of IBC 2016 provides a moratorium that is different from the one under Section 14, which is applicable to corporate debtors. The Ld. NCDRC further held that any stay under Section 96 and 101 applies only to debt-related proceedings, and the guarantor is not shielded from every legal action.
The Ld. NCDRC further relied upon Ajay Kumar Radheyshyam Goenka versus Tourism Finance Corporation of India Ltd.9 wherein the Hon'ble Apex Court held that criminal proceedings against directors and signatories of a company aren't stalled only for the reason that the corporate debtor is undergoing insolvency resolution. Accordingly, the Ld. NCDRC, in the impugned order, concluded that the interim moratorium under Section 96 of IBC will not bar the continuation of criminal proceedings under Section 27 of the Consumer Protection Act, 198610.
As a result, the Ld. NCDRC held that the moratorium did not apply to these proceedings, and the Appellant's attempt to have them stayed was rejected. The Appellant then filed Civil Appeal No. 4048 of 2024 before the Hon'ble Supreme Court, challenging the Ld. NCDRC's decision.
Ratio decidendi of the Supreme Court
The Hon'ble Supreme Court, in its judgment, upheld the Ld. NCDRC's ruling clarified the scope of the moratorium under Section 96. The Court reiterated that the moratorium imposed under Section 96 only bars proceedings related to the recovery of "debt," as defined under the IBC. Section 96 applies during the pendency of an individual insolvency application (before the application is admitted) and provides a temporary stay on actions related to debt recovery.
However, the penalties imposed under Section 27 of the Consumer Protection Act were found to be distinct from debt recovery proceedings. The Court observed that these penalties are not imposed for the recovery of money owed to the complainants but rather serve a regulatory function. The purpose of such penalties is to deter entities or individuals from engaging in unfair trade practices, thereby protecting the more significant public interest. These penalties, therefore, are not considered part of the "legal action arising related to debt" under the IBC.
The Court also noted that the term "excluded debts," as defined under Section 79(15) of the IBC11, includes fines or penalties imposed by a court or tribunal. Reading this in consonance with Sections 94, 95 & 96 of IBC, which deals with moratoriums, the Hon'ble Supreme Court held that the term 'debt' will not include such fines and penalties. Therefore, penalties under the Consumer Protection Act are excluded from the moratorium and cannot be stayed under Section 96.
In addressing the broader implications of the moratorium, the Court emphasized that allowing the stay of such regulatory penalties would set a dangerous precedent. It would potentially allow individuals to evade penalties simply by triggering insolvency proceedings, thereby undermining the purpose of consumer protection laws. The Court made it clear that the moratorium under Section 96 does not shield individuals from penalties imposed due to non-compliance with regulatory provisions, particularly those aimed at safeguarding public interest.
Analysis and Conclusion
This judgment highlights two critical points regarding the moratorium under Section 96 of the IBC:
- Scope of Moratorium Under Section 96: While moratorium under Section 96 becomes applicable before admission of CIRP application, moratorium under Section 14 becomes applicable after said application is admitted. However, certain key observations besides these with respect to these two provisions were also made in the present judgement. The moratorium under Section 96 is narrower than that under Section 14, which applies to corporate debtors during the CIRP. While Section 14 imposes a blanket stay on all legal proceedings against the corporate debtor, Section 96 only stays legal actions related to the recovery of "debt" during the pendency of an individual insolvency application (before the application is admitted). The Court's decision in Saranga Anilkumar reinforces this distinction, clarifying that proceedings related to penalties for non-compliance with consumer protection laws do not fall within the scope of "debt" and are, therefore, not covered by the moratorium.
- Regulatory Penalties and Public Interest: The Court also reinforced the principle that individuals cannot evade regulatory penalties by entering into insolvency proceedings. Penalties under laws like the Consumer Protection Act are designed to uphold fair market practices and protect the public interest. Allowing the moratorium to shield individuals from such penalties would effectively undermine the objectives of these laws. The judiciary's consistent stance, as demonstrated in this case, is that individual debtors cannot evade penal liability for regulatory breaches by invoking the IBC.
In conclusion, the Hon'ble Supreme Court's decision in Saranga Anilkumar (supra) clarifies that penalties imposed for non-compliance with regulatory provisions, such as the Consumer Protection Act, are not subject to the moratorium under Section 96 of the IBC. This judgment ensures that the IBC cannot be used as a shield to escape penalties for violating public interest regulations. The ruling aligns with the broader goal of the IBC to provide a structured insolvency resolution process while upholding the integrity of laws meant to protect the public from unfair practices. Furthermore, while the judgment does not explicitly address Section 101 of the IBC, it is reasonable to argue that the same reasoning would apply to cases under Section 101, which similarly addresses personal insolvency and the scope of the moratorium.
Footnotes
1 Insolvency & Bankruptcy Code 2016, Section 14
2 Insolvency & Bankruptcy Code 2016, Section 96
3 Insolvency & Bankruptcy Code 2016, Section 101
4 2025 SCC OnLine SC 493
5 Insolvency & Bankruptcy Code 2016, Section 7
6 Insolvency & Bankruptcy Code 2016, Section 95
7 Insolvency & Bankruptcy Code 2016, Section 96
8 2018) 17 SCC 394
9 2023) 10 SCC 545
10 Consumer Protection Act 1986, Section 27.
11 Insolvency & Bankruptcy Code 2016, Section 79
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