Interim Moratorium Under Section 96 of IBC Does Not Shield Personal Guarantors from Consumer Protection Penalties
- REEDLAW
- Mar 7
- 3 min read
The Supreme Court held that the interim moratorium under Section 96 of the IBC did not shield personal guarantors from penalties imposed under consumer protection laws.
On 04-03-2025, the Supreme Court Bench comprising Justice Vikram Nath and Justice Prasanna B. Varale reviewed an appeal and held that the interim moratorium under Section 96 of the IBC does not extend to penalties imposed under Section 27 of the Consumer Protection Act, as such penalties are regulatory and enforcement-driven rather than financial liabilities. The Court emphasized that allowing insolvency proceedings to shield errant developers from consumer penalties would undermine the purpose of consumer protection laws.
The Supreme Court, in its judgment, addressed the critical question of whether execution proceedings under Section 27 of the Consumer Protection Act, 1986 (CP Act) could be stayed under the interim moratorium imposed by Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC). The case arose from an appeal against the order of the National Consumer Disputes Redressal Commission (NCDRC), which had imposed penalties on the appellant for failing to deliver possession of residential units to homebuyers within the agreed timeline. The appellant sought a stay on the penalty proceedings, arguing that insolvency proceedings under Section 95 of the IBC had triggered an interim moratorium under Section 96, thereby barring any further legal action, including the execution of penalties.
The Supreme Court distinguished between civil and criminal proceedings within the framework of the IBC moratorium, clarifying that while Section 96 stayed debt-related proceedings, it did not extend to penalties imposed for regulatory non-compliance. Relying on Section 79(15) of the IBC, which excludes fines and penalties from the definition of "debt," the Court held that consumer penalties under Section 27 of the CP Act were regulatory and enforcement-driven rather than financial liabilities. The Court also referred to State Bank of India v. V. Ramakrishnan and Another, REEDLAW 2018 SC 08560 and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Limited, REEDLAW 2023 SC 03569, reaffirming that personal guarantors were not automatically shielded from all legal proceedings under insolvency moratoriums.
The appellant had relied on P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526, to argue that the principles applicable to Section 138 proceedings under the Negotiable Instruments Act should apply to consumer penalties. However, the Supreme Court rejected this argument, emphasizing that penalties under Section 27 of the CP Act were remedial in nature and did not involve the recovery of financial debts. The Court further observed that allowing the appellant’s plea would set a dangerous precedent where errant developers could exploit insolvency proceedings to evade consumer obligations, thereby frustrating the objectives of consumer protection laws.
In dismissing the appeal, the Supreme Court upheld the NCDRC’s ruling that execution of consumer penalties did not fall within the scope of the interim moratorium under the IBC. The judgment reinforces the principle that insolvency protections cannot be misused to escape consumer accountability, ensuring that homebuyers’ rights remain safeguarded despite pending insolvency proceedings.
Mr. K. Parmeshwar, Senior Advocate, represented the Appellant.
Mr. Shashwat Parihar, Advocate, appeared for Respondent No. 1 & Respondent No. 2.
Subscribers can access the Case, including Case Analysis, Ratio Decidendi, Headnotes, Briefs, Case Research, Cited Case Laws, Case Law Cross-references, and the latest updates on Statutes, Notifications, Circulars, Guidelines, Press Releases and more.
Click on the following Citation/Link to access these resources:
Comments