The Supreme Court in SARANGA ANILKUMAR AGGARWAL Versus BHAVESH DHIRAJLAL SHETH & ORS – CIVIL APPEAL NO(S). 4048 OF 2024- DECIDED ON MARCH 04, 2025 – (2025 INSC 314) held that the moratorium under Section 96 of the IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.

National  Consumer Disputes Redressal Commission (NCDRC) imposed multiple penalties on the appellant ( SARANGA ANILKUMAR AGGARWAL) for failing to deliver possession of residential units to homebuyers as per the agreed timeline.

The appellant moved an application before the NCDRC seeking a stay of execution proceedings  vis-à-vis penalties imposed by NCDRC citing its ongoing insolvency proceedings under Section 95of  IBC. The appellant’s contention was that once application under  Section 95of  IBC is admitted  all debts and all relating to debt proceedings – including execution proceedings under Section 27 of the Consumer Protection Act, 1986 – are automatically stayed under Section 96 of the IBC.

The NCDRC rejected this application, holding that consumer claims and the penalty imposed did not fall within the moratorium under the IBC.

The NCDRC placed reliance on:

• State Bank of India v. V. Ramakrishnan & Anr. (2018) 17 SCC 394 which clarified that Sections 96 and 101 of the IBC provide a distinct moratorium applicable to personal guarantors, separate from the moratorium under Section 14 applicable to corporate debtors. The NCDRC emphasized that the stay under Sections 96 and 101 extends only to proceedings concerning the debt and does not necessarily shield the guarantor from all legal actions.

• Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd (2023) 10 SCC 545 which reaffirmed that criminal proceedings against directors or signatories of a company do not abate merely because the corporate debtor is undergoing insolvency resolution.

So, the appellant filed case before Hon’ble Supreme Court  seeking  a stay on the penalty proceedings before the NCDRC, contending that an application under Section 95 of the Insolvency and Bankruptcy Code, 20162 has been filed against them, triggering an interim moratorium under Section 96 of the IBC.

The question before the supreme court was : whether the execution of penalty orders passed by the NCDRC can be stayed under the interim moratorium provisions of Section 96 of the IBC.

Pursuing the case the supreme court observed: “….there is a fundamental distinction between civil and criminal proceedings concerning a debt moratorium. While civil proceedings are generally stayed under IBC provisions, criminal proceedings, including penalty enforcement, do not automatically fall within its ambit unless explicitly stated by law. The penalties imposed by the NCDRC are regulatory in nature and arise due to noncompliance with consumer protection laws. They are distinct from “debt recovery proceedings” under the IBC.

A moratorium under Section 96 of the IBC is distinct from a corporate moratorium under Section 14 of the IBC. Section 96 of the IBC applies to individuals and personal guarantors and provides that during the interim moratorium period, “any legal action or proceedings relating to any debt shall be deemed to have been stayed.” However, it is pertinent to note that this provision applies only to “debt” as defined under the IBC and not to regulatory penalties imposed for non-compliance with consumer protection laws. A careful reading of the statutory scheme of the IBC suggests that penalties arising from regulatory infractions are not covered under the ambit of “debt” as envisioned under the Code.

It is well settled that there exists a distinction between punitive actions and criminal proceedings. While a criminal proceeding is initiated by the State against an accused to determine guilt and impose penal consequences, punitive actions in the regulatory sphere, such as those imposed by the NCDRC, are meant to ensure compliance with the law and to act as a deterrent against future violations.  Section 27 of the CP Act empowers consumer fora to impose penalties to ensure adherence to consumer protection norms. These penalties do not arise from any “debt” owed to a creditor but rather from the failure to comply with the remedial mechanisms established under consumer law. Unlike a criminal prosecution, which requires the establishment of mens rea, the penalties imposed by NCDRC are regulatory in nature and aim to protect the public interest rather than to punish criminal behaviour.

Further, a distinction must be drawn between the moratorium applicable to a corporate debtor under Section 14 of the IBC and the interim moratorium applicable to individuals and personal guarantors under Section 96 of the IBC. The former is much broader in scope and stays all proceedings against the corporate debtor, including execution and enforcement actions. However, Section 96 of the IBC is more limited in its scope, staying only “legal actions or proceedings in respect of any debt.” Unlike corporate insolvency proceedings, where the goal is a comprehensive resolution of the company’s liabilities, individual insolvency proceedings are designed primarily for restructuring personal debts and providing relief to the debtor. The legislative intent behind limiting the scope of the interim moratorium under Section 96 of the IBC must be respected, and a blanket stay on all regulatory penalties would result in defeating the objectives of consumer protection laws.

 The moratorium under Section 96 of the IBC is intended to provide temporary relief to debtors by preventing certain proceedings against them during the resolution process. However, this protection is not absolute and does not extend to all categories of debts. The legislative intent behind the moratorium is to ensure that the debtor’s assets are preserved for an efficient resolution process and to prevent creditors from taking unilateral actions that may frustrate the objective of insolvency proceedings. However, the statutory scheme of the IBC makes it clear that the protection under the moratorium does not cover all forms of liabilities, particularly those classified as “excluded debts” under Section 79(15) of the IBC.

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In the present case, the damages awarded by the NCDRC arise from a consumer dispute, where the appellant has been held liable for deficiency in service. Such damages are not in the nature of ordinary contractual debts but rather serve to compensate the consumers for loss suffered and to deter unethical business practices. Courts and tribunals, including the NCDRC, exercise their statutory jurisdiction to award such damages, and these are distinct from purely financial debts that may be subject to restructuring under the IBC. Since such damages are covered under “excluded debts” as per Section 79(15) of the IBC, they do not get the benefit of the moratorium under Section 96 of the IBC, and their enforcement remains unaffected by the initiation of insolvency proceedings.

 Furthermore, the rationale behind excluding such liabilities from the moratorium is rooted in public policy considerations. If damages arising from legal violations, consumer protection claims, or penalties imposed by courts and tribunals were to be shielded under the moratorium, it would create an unfair advantage for errant entities and individuals, allowing them to evade their legal obligations under the guise of insolvency. The IBC, being a special law meant to balance the interests of all stakeholders, does not intend to provide relief to those who have been held liable for statutory breaches or misconduct.

 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 distinction between proceedings under Section 138 of the NI Act and those under Section 27 of the CP Act must also be examined. Proceedings under Section 138 of the NI Act pertain to dishonour of cheques and are criminal in nature, where the assumption of debt is inherent in the offence itself. The dishonour of a cheque indicates a failure to honour financial obligations, and the proceedings are initiated for the recovery of the debt in question. In contrast, Section 27 of the CP Act deals with noncompliance with consumer protection orders, which are remedial in nature rather than criminal. The primary focus of proceedings under Section 27 of the CP Act is to enforce consumer rights and ensure that service providers fulfil their obligations. These proceedings do not assume the existence of a financial debt but rather deal with deficiencies in service and the failure to comply with consumer redressal mechanisms. Thus, the analogy drawn by the appellant between the moratorium on Section 138, NI Act proceedings and Section 27, CP Act  proceedings is misconceived and legally untenable.

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 Permitting a stay on regulatory penalties under the guise of insolvency proceedings would undermine the very purpose of the CP Act and embolden errant developers to escape liability through insolvency proceedings.

 In P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) 6 SCC 258this 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 not fall withinthe scope of the moratorium unless explicitly covered  under the IBC. Consequently, penalties imposed by regulatory bodies in the public interest cannot be stayed merely because insolvency proceedings are ongoing.

 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.

 For the foregoing reasons, this Court finds no merit in the appellant’s arguments. The penalties imposed by the NCDRC are regulatory in nature and do not constitute “debt” under the IBC. The moratorium under Section 96 of the IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.

 Accordingly, appeal was dismissed.

Judgment by Justice VIKRAM NATH & Justice PRASANNA B. VARALE