Supreme Court Clarifies: Regulatory Penalties Not ‘Debt’ under Section 96 of the IBC

Introduction

The judgment delivered by the Supreme Court in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth[i], marks a significant clarification on the scope and application of the interim moratorium under s.96 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), particularly in relation to penalties imposed by consumer fora under the Consumer Protection Act, 1986 (‘CP Act’). The Court was called upon to decide whether penalty proceedings initiated under s.27 of the CP Act could be stayed on account of an interim moratorium triggered by insolvency proceedings against an individual under s.95 of the IBC. The ruling draws a fine but essential distinction between recovery actions in respect of ‘debt’ and regulatory penalties arising out of statutory infractions, ultimately holding that regulatory penalties are excluded from the ambit of moratorium under s.96.

Facts

• A real estate developer and proprietor of East & West Builders (RNA Corp. Group) ('Appellant') was subject to multiple consumer complaints filed before the National Consumer Disputes Redressal Commission (‘NCDRC’) for failure to deliver possession of residential units in a timely manner. On 10.08.2018, the NCDRC allowed the complaints and imposed penalties in 27 cases for deficiency in service and breach of contractual obligations. The Commission directed the appellant to complete construction, obtain occupancy certificates, and hand over possession to homebuyers.

• Execution proceedings were initiated by the decree holders (respondents) upon non-compliance by the appellant. During the pendency of these proceedings, the State Bank of India initiated insolvency proceedings under s.95 of the IBC against the appellant (in his capacity as a personal guarantor to loans extended to A.A. Estates Pvt. Ltd.). With the filing of the s.95 application on 20.01.2022, the appellant contended that an interim moratorium under s.96 had commenced, thereby barring all proceedings, including those before the NCDRC.

• Relying on s.96(1)(b)(i) of the IBC, which states all ‘legal actions or proceedings in respect of any debt’, the appellant argued that the penalty execution proceedings, being of a financial nature, were caught within the moratorium. However, the NCDRC rejected this contention on 07.02.2024, ruling that the penalties were regulatory in nature and not recoveries in respect of a ‘debt’. The appellant approached the Supreme Court in appeal.

Held

The Supreme Court upheld the decision of the NCDRC and, while dismissing the appeal, held as follows:

• Penalties imposed under s.27 of the CP Act are regulatory and punitive in nature, aimed at ensuring compliance with consumer protection laws, and are distinct from debt recovery proceedings.

• The moratorium under s.96 of the IBC is limited in scope, applying only to legal actions or proceedings ‘in respect of any debt,’ as defined in s.3(11) of the IBC. Unlike the more expansive moratorium under s.14 applicable to corporate debtors, the interim moratorium for individuals and personal guarantors does not extend to regulatory penalties or other ‘excluded debts’ under s.79(15) of the IBC.

• Penalties arising from consumer protection violations are excluded debts under s.79(15), which includes fines imposed by courts or tribunals, damages for negligence or breach of obligation, and other liabilities of a statutory or penal nature. Hence, they fall outside the scope of the moratorium.

• The Court further clarified that proceedings under s.27 of the CP Act cannot be analogised with recovery actions or quasi-criminal proceedings under s.138 of the Negotiable Instruments Act, 1881 (NI Act), as the nature, origin, and objective of such penalties are different. The proceedings under s.27 of the CP Act are not intended to recover money per se, but to compel enforcement of consumer rights.

• The legislative intent behind both the IBC and the CP Act was considered. The Court observed that allowing the moratorium to cover regulatory penalties would defeat the object of consumer protection laws, which are aimed at protecting vulnerable buyers, especially in the housing sector.

• The Court reaffirmed public policy considerations, holding that statutory liabilities cannot be nullified or deferred by the initiation of insolvency proceedings. To allow otherwise would provide a perverse incentive to errant developers to frustrate consumer remedies by invoking the insolvency shield.

• It concluded that the penalties imposed by the NCDRC do not constitute ‘debts’ under the IBC and are thus not eligible for the interim moratorium protection under s.96. Accordingly, the NCDRC was right in continuing the execution proceedings.

Our Analysis

This judgment is a landmark clarification on the interplay between individual insolvency under the IBC and the enforcement of consumer protection rights. It decisively affirms that not all liabilities attract the moratorium, especially those that are statutory, regulatory, or penal in character.

The Supreme Court rightly drew a clear doctrinal boundary between ‘debt’ and ‘excluded debt’, aligning with s.79(15) of the IBC. The term ‘debt’ in the IBC is restricted to financial obligations owed to creditors and cannot be stretched to include penalties imposed for breaches of public law obligations. Thus, the decision ensures that IBC is not misused as a tool to evade public accountability.

Equally important is the Court’s distinction between civil and regulatory proceedings, which, while superficially similar in that both may involve monetary liabilities, differ fundamentally in purpose and character. Whereas debt-related actions are aimed at redressing a private claim, regulatory penalties aim to enforce public interest and compliance with statutory mandates.

In its broader impact, this ruling will fortify homebuyer protections by ensuring that developers cannot rely on insolvency proceedings as a shield against the enforcement of consumer court penalties. It is a significant reaffirmation of the CP Act’s purpose in ensuring timely delivery, accountability, and deterrence against unfair trade practices in real estate and other sectors.

Finally, the Court’s insistence on preserving the legislative architecture of the IBC and CP Act without unnecessary overlap or erosion sets an important precedent. The judgment aligns well with the emerging jurisprudence on statutory harmonisation, whereby each enactment is interpreted in its domain without permitting unintentional cross-statutory immunities.

End Note

[i] 2025 SCC OnLine SC 493 dated 04.03.2025.

Authored by the Metalegal Editorial Board, the views expressed are personal and do not constitute legal advice or opinion.