Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors. Civil Appeal No. 4048 of 2024
Background & Issues:
The present appeal arises out of an order passed by the National Consumer Disputes Redressal Commission (NCDRC), wherein the appellant, Saranga Anilkumar Aggarwal, was subjected to multiple penalties (27 in total) for failing to deliver possession of residential units to homebuyers within the stipulated timeline. The penalties were imposed under Section 27 of the Consumer Protection Act, 1986, in execution of earlier orders passed by the NCDRC.
The appellant, a real estate developer, sought a stay on the execution of these penalties, contending that an insolvency application had been filed against them under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC), thereby triggering an interim moratorium under Section 96. The appellant argued that the moratorium should bar any legal action or proceedings in respect of the penalties imposed.
The key legal issue before the Supreme Court was:
- Whether execution proceedings initiated under Section 27 of the Consumer Protection Act, 1986, can be stayed during the interim moratorium imposed under Section 96 of the IBC.
The appellant contended that the penalties imposed by the NCDRC should be treated as “debts”, thereby falling within the scope of the moratorium under Section 96 of the IBC. The respondents, on the other hand, argued that these penalties were regulatory and punitive in nature and were meant to ensure compliance with consumer protection laws, rather than constituting recoverable debts under the IBC.
The Supreme Court was thus called upon to adjudicate whether regulatory penalties could be shielded under the insolvency moratorium provisions of the IBC.
Factual Matrix & Procedural History
1. Consumer Complaints & NCDRC Orders:
- The appellant, Saranga Anilkumar Aggarwal, is a real estate developer and the proprietor of East & West Builders (RNA Corp. Group Co.).
- Multiple homebuyers filed consumer complaints before the National Consumer Disputes Redressal Commission (NCDRC), citing delays in possession, deficiency in service, and breach of contractual obligations.
- In its final judgment dated August 10, 2018, in CC/1362/2017 along with connected matters, the NCDRC:
- Allowed the complaints,
- Directed the appellant to complete construction,
- Obtain an occupancy certificate, and
- Handover possession to the homebuyers.
- The NCDRC further imposed 27 penalties on the appellant due to failure to deliver possession within a reasonable time.
2. Execution Proceedings Before NCDRC:
- Following non-compliance with the consumer forum’s directions, respondents Bhavesh Dhirajlal Sheth & Ors. (homebuyers) filed execution applications before the NCDRC, seeking enforcement of the penalty orders.
- The appellant failed to comply with the orders, prompting non-bailable warrants to be issued against them in 2021 for continued non-compliance.
3. Insolvency Proceedings & Interim Moratorium Claim:
- The appellant was facing insolvency proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, initiated under Section 7 of the IBC by State Bank of India (SBI) against A.A. Estates Pvt. Ltd., for which the appellant was a personal guarantor.
- SBI separately initiated proceedings under Section 95 of the IBC against the appellant, which triggered an interim moratorium under Section 96 of the IBC on January 20, 2022.
- The appellant filed an application before the NCDRC, seeking a stay on execution proceedings, arguing that:
- The interim moratorium barred all legal proceedings, including execution of the penalties imposed by the NCDRC.
- They had already entered into settlement agreements with several homebuyers and had made substantial payments totaling ₹11,57,34,925/- in execution proceedings.
- Of 20 execution petitions, 7 had been fully satisfied, leaving only 13 pending.
- Delays in payment of certain installments were beyond their control, citing adverse market conditions in the real estate sector.
4. NCDRC’s Decision & Rejection of Stay Application:
- By its impugned order dated February 7, 2024, the NCDRC rejected the appellant’s application, holding that:
- Consumer claims and penalties do not fall within the moratorium under the IBC.
- The moratorium under Section 96 applies only to debts, not to penalties imposed under consumer protection laws.
- Execution of penalties under Section 27 of the Consumer Protection Act, 1986, serves a regulatory and deterrent purpose, distinct from debt recovery.
- The IBC does not shield individuals from compliance with consumer protection mandates through insolvency proceedings.
- By its impugned order dated February 7, 2024, the NCDRC rejected the appellant’s application, holding that:
5. Appeal Before the Supreme Court:
- The appellant, aggrieved by the NCDRC’s refusal to stay execution of penalties, filed the present appeal before the Supreme Court of India.
- The primary contention was that the penalties constituted “debt”, and all proceedings relating to debt must be stayed under Section 96 of the IBC.
- The respondents (homebuyers) countered that these penalties were not debts but regulatory measures, aimed at ensuring consumer protection and compliance.
Arguments Advanced By The Parties
1. Appellant’s Submissions (Saranga Anilkumar Aggarwal)
- Interim Moratorium Under Section 96 of IBC Bars Proceedings Against the Appellant
The appellant contended that upon the filing of an application under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC), an interim moratorium commenced on January 20, 2022. As per Section 96 of the IBC, once an interim moratorium is triggered, all legal actions or proceedings in respect of any debt stand stayed. The appellant argued that since the penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) arose out of financial obligations, they constituted “debt” under the IBC, thereby bringing them within the protective scope of the moratorium.
- Execution Proceedings Under Section 27 of the Consumer Protection Act Are Recovery Proceedings
It was submitted that the execution applications filed by the homebuyers before the NCDRC sought to recover monetary penalties, making them recovery actions. The appellant relied on Section 96(1)(b)(i) of the IBC, which states that “any legal action or proceedings, pending in respect of any debt, shall be deemed to have been stayed.” The appellant emphasized that the execution petition specifically sought the enforcement of monetary penalties amounting to ₹1,55,00,000/-, further classifying it as a debt recovery proceeding, which must be stayed under the moratorium.
- Reliance on Precedents to Support the Stay on Proceedings
The appellant placed reliance on the decision in P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, wherein the Supreme Court held that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), are covered under the moratorium under Section 14 of the IBC, despite being quasi-criminal in nature. It was argued that, by analogy, execution proceedings under Section 27 of the Consumer Protection Act should also fall within the ambit of the interim moratorium, as they effectively sought the enforcement of a monetary liability.
Additionally, reliance was placed on State Bank of India v. V. Ramakrishnan (2018) 17 SCC 394, wherein the Court emphasized that the moratorium under the IBC is designed to provide comprehensive protection to debtors from all legal proceedings. It was submitted that the NCDRC erred in not applying the principle laid down in this case.
- Penalties Under the Consumer Protection Act Are in the Nature of Civil Wrong, Not Criminal Prosecution
The appellant further sought to draw a distinction between criminal prosecution and regulatory penalties, contending that penalties imposed by the NCDRC are not criminal proceedings but rather civil wrongs with financial implications.
Reliance was placed on Kaushalya Devi Massand v. Roopkishore Khore (2011) 4 SCC 593, where the Court held that an offense under Section 138 of the NI Act is quasi-criminal but primarily civil in nature. The appellant argued that similarly, penalties imposed under the Consumer Protection Act, 1986, should be treated as civil in nature, thereby falling within the protective ambit of the moratorium under Section 96 of the IBC.
2. Respondent’s Submissions (Bhavesh Dhirajlal Sheth & Ors.)
- NCDRC Penalties Are Regulatory and Not “Debt” Under the IBC
The respondents contended that the penalties imposed by the NCDRC do not qualify as “debt” under the IBC and thus do not fall within the scope of the interim moratorium under Section 96 of the IBC. It was argued that the moratorium is limited to debt recovery proceedings and does not extend to penal actions imposed under regulatory statutes.
The respondents emphasized that Section 27 of the Consumer Protection Act, 1986, provides for punitive measures against individuals who fail to comply with consumer forum orders. The objective of these penalties is not mere monetary recovery, but rather to deter misconduct and uphold consumer rights. Therefore, such penalties serve a public interest function and cannot be stayed under the insolvency moratorium.
- The IBC Does Not Shield Debtors from Regulatory or Penal Consequences
The respondents submitted that the legislative intent behind the IBC was never to provide a blanket shield against all legal liabilities. The IBC was designed primarily for restructuring debts and providing relief to genuine debtors, not to allow individuals to evade statutory penalties through insolvency proceedings.
Reference was made to Section 79(15) of the IBC, which defines “excluded debts” and explicitly excludes liabilities arising from fines imposed by courts or tribunals, damages for negligence, and breach of statutory obligations. Since damages and penalties imposed by the NCDRC arise from a failure to comply with consumer protection laws, they fall within the category of excluded debts, making the interim moratorium under Section 96 inapplicable.
- Execution Proceedings Under Section 27 of the Consumer Protection Act Are Penal, Not Debt Recovery Actions
The respondents argued that the proceedings initiated against the appellant before the NCDRC were not debt recovery actions but rather penal measures for non-compliance. It was pointed out that Section 27 of the Consumer Protection Act allows the consumer forums to impose penalties, including imprisonment, for non-compliance with their orders.
Citing Satyawati v. Rajinder Singh & Anr. (2013) 9 SCC 491 [1], the respondents submitted that execution proceedings must be enforced promptly to ensure that decree-holders receive the relief granted by courts in a timely manner. Allowing the appellant to escape the execution of penalties by invoking insolvency provisions would defeat the very objective of consumer protection laws.
- Distinction Between Debt Recovery and Regulatory Penalties
The respondents emphasized the distinction between civil debt recovery proceedings and regulatory penalties. While the IBC moratorium applies to debt recovery proceedings, it does not extend to regulatory actions, which are imposed for non-compliance with legal obligations.
The Supreme Court’s decision in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545 [2] was relied upon to argue that criminal and regulatory proceedings against individuals cannot be stalled simply because of insolvency proceedings against them. The respondents further contended that accepting the appellant’s argument would set a dangerous precedent where developers could indefinitely delay justice by invoking insolvency laws.
- The NCDRC Order Rightly Upheld Consumer Rights and Enforced Accountability
The respondents asserted that the appellant had failed to comply with the NCDRC’s orders for several years, thereby causing undue hardship to homebuyers who had invested their life savings in these real estate projects.
It was highlighted that the appellant had already delayed possession since 2011, and despite the NCDRC’s ruling in 2018, had not complied with its directives. The respondents filed execution petitions only after repeated failures by the appellant to adhere to the consumer forum’s directions. Non-bailable warrants had even been issued in 2021 due to non-compliance.
Thus, it was argued that the NCDRC’s decision to reject the stay application was in complete consonance with established judicial principles, and the Supreme Court should not allow the appellant to misuse the IBC moratorium to escape liability under consumer laws.
Observations and Findings of the Supreme Court
Distinction Between Civil Debt and Regulatory Penalties
The Supreme Court carefully examined whether the penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) could be classified as “debt” under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court noted a fundamental distinction between civil debt recovery proceedings and regulatory penalties. It held that while civil debts fall within the scope of the IBC moratorium, regulatory penalties serve a public interest function and are not intended to be stayed under insolvency provisions.
The penalties imposed by the NCDRC under Section 27 of the Consumer Protection Act, 1986, were found to be statutory obligations designed to ensure compliance with consumer protection laws, rather than financial liabilities owed to a creditor. Relying on Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd. (2023) 10 SCC 545, the Court reinforced that regulatory penalties and criminal liabilities do not automatically fall within the ambit of the IBC moratorium unless specifically included within its provisions.
Scope of Moratorium Under Section 96 of the IBC
Analyzing the legislative intent behind Section 96 of the IBC, the Supreme Court reiterated that the interim moratorium applies only to “debts” as defined under the Code. However, not all liabilities qualify as debt. The Court referred to Section 79(15) of the IBC, which classifies fines, statutory penalties, and liabilities arising from legal breaches as “excluded debts.” Since the NCDRC’s penalties fall within this excluded category, they remain enforceable despite the initiation of insolvency proceedings.
The Court also noted that the purpose of the IBC is to facilitate debt resolution and financial restructuring, not to shield individuals from complying with statutory penalties. It clarified that allowing a blanket moratorium on regulatory penalties would be contrary to the intent of both the IBC and consumer protection laws.
Legislative Intent and Public Policy Considerations
The Supreme Court emphasized that consumer protection laws serve a vital public interest function by ensuring accountability for service providers and preventing unfair trade practices. The Insolvency and Bankruptcy Code, 2016, on the other hand, was enacted to provide financial relief to distressed debtors. The Court warned that if regulatory penalties imposed by consumer forums were allowed to be stayed under the IBC, it would set a dangerous precedent where businesses could evade liability simply by invoking insolvency provisions.
The Court further observed that homebuyers, who had already suffered due to delays in possession, would be further deprived of relief if consumer protection penalties were suspended under the guise of insolvency proceedings. The Court firmly rejected the appellant’s attempt to misuse the IBC as a shield to avoid accountability under consumer protection laws.
Rejection of Appellant’s Reliance on Section 138 of the NI Act
The appellant relied on the decision in P. Mohanraj & Ors. v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258) to argue that proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) had been held to fall within the moratorium under Section 14 of the IBC. However, the Supreme Court distinguished the present case, clarifying that Section 138 proceedings arise from dishonor of cheques, which directly relate to financial debt obligations, whereas penalties imposed under the Consumer Protection Act are regulatory in nature.
The Court stated that equating regulatory penalties with civil debt recovery proceedings was legally untenable. It further noted that the Consumer Protection Act, unlike the NI Act, provides for punitive actions that serve as deterrents against non-compliance, rather than mere financial recovery mechanisms. Therefore, the appellant’s reliance on Section 138 cases was misplaced.
Conclusion and Final Determination
Based on the foregoing analysis, the Supreme Court arrived at the following key determinations:
1. The penalties imposed by the NCDRC are regulatory in nature and do not constitute “debt” under the IBC.
2. The interim moratorium under Section 96 of the IBC does not bar the execution of penalties imposed under consumer protection laws.
3. The NCDRC was correct in rejecting the appellant’s application for a stay on execution proceedings.
The Supreme Court thus dismissed the appeal and directed the appellant to comply with the penalties imposed by the NCDRC within eight weeks from the date of the judgment.
