In a recent judgment in Saranga Anilkumar Aggarwal v Bhavesh Dhirajlal Sheth & Ors (2024), the Supreme Court of India held that penalty proceedings under section 27 of the Consumer Protection Act, 1986 (CP Act) cannot be stayed during an interim moratorium imposed under section 96 of the Insolvency and Bankruptcy Code, 2016.
Respondents 1 and 2 had filed a consumer complaint against respondent 3 and the appellant for the delay in possession of a flat, deficiency in service and breach of contractual obligations before the National Consumer Disputes Redressal Commission (NCDRC).
The NCDRC allowed the complaint, directing the appellant to complete construction and hand over possession along with all statutory compliances. It also imposed penalties on the appellant for deficiency in service. The respondents duly filed an application before the NCDRC seeking execution of the order.
Subsequently, the State Bank of India initiated insolvency proceedings against the appellant under section 95 of the code and an interim moratorium under section 96 was imposed.
The appellant then filed an application for a stay of the execution proceedings before the NCDRC, which the NCDRC rejected, arguing that consumer claims and penalties imposed did not fall within the interim moratorium imposed under section 96 of the code. Hence the present appeal was filed.
The Supreme Court observed that section 96 applies to individuals and personal guarantors, providing that during the interim moratorium period, any legal action or proceedings relating to any debt shall be deemed to have been stayed. However, this provision applies only to debt as defined under the code, and not regulatory penalties imposed under consumer protection laws.
It was further observed that penalties imposed by the NCDRC are regulatory in nature and not criminal. They are aimed at protecting public interest rather than punishing criminal behaviour.
The Supreme Court also noted that the scope of section 96 is limited, as it stays only legal actions or proceedings in respect of a debt. The legislative intent behind section 96 is to provide temporary relief to debtors by preventing certain proceedings against them during the resolution process.
The judgment held that the purpose of section 27 of the CP Act is to enforce consumer rights and ensure that service providers fulfil their obligations. Permitting a stay on these proceedings would undermine the legislative intent behind the CP Act. The court further held that the objective of the code is to provide a mechanism for resolving financial distress and not to regulatory obligations.
Therefore, the Supreme Court dismissed the appeal. In summary, this judgment marks a key development in consumer protection, addressing the issue of developers/builders using insolvency to frustrate proceedings and avoid compliance with consumer forum orders.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
