Brief Overview:
No. In this case, it was about recovery of penalties. It was held that penalties arising from regulatory infractions are excluded from the ambit of ‘debt’ under IBC (in personal insolvencies). Hence, such recovery would not be stayed due to interim moratorium imposed under IBC.
[Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth & Ors. (Civil Appeal No. 4048 of 2024; decided on 4th March 2025)]
Technical Details:
1) Penalties imposed on the appellant (proprietor of the real estate company) by the National Consumer Disputes Redressal Commission for failure to deliver possession of residential units to homebuyers. Appeal filed before the Supreme Court (“SC”). A stay sought on the recovery of penalties as interim moratorium (on initiation of insolvency proceedings) was imposed under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
2) Rejecting the submissions of the appellant, the SC analysed the scope and applicability of Section 96 of IBC. It observed that:
(a) Unlike the broad scope of the moratorium imposed in cases of insolvency of corporate entities under Section 14 of IBC, the interim moratorium under Section 96 does not apply to regulatory penalties imposed for non-compliance with consumer protection laws.
(b) Section 94(3) of IBC explicitly limits its scope by carving out exceptions for certain categories of debts and Section 79(15) of IBC defines ‘excluded debts’ to include liabilities arising from fines imposed by courts or tribunals, damages for negligence or breach of obligation, maintenance liabilities, student loans, and other prescribed debts.
(c) Punitive actions in the regulatory sphere (as in the present case) are meant to ensure compliance with the law and to act as a deterrent against future violations and do not fall within the ambit of any ‘debt’ owed to a creditor.
3) The SC held that the interim moratorium under IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws. Allowing a blanket stay on the same will enable errant entities and individuals to evade their legal obligations under the guise of insolvency, and accordingly, a distinction between ‘debt recovery’ proceedings and punitive actions is needed.
JC Takeaway:
This decision does not apply as regards moratorium imposed during insolvency process of corporate entities.
As regards personal insolvencies, it would be interesting to see as to what other regulatory penalties and punitive actions would be outside the purview of interim moratorium. In the interim, this decision will serve as a guiding principle for courts and tribunals while dealing with challenges to recoveries during the pendency of interim moratorium.
For further details, please see:
https://api.sci.gov.in/supremecourt/2024/10447/10447_2024_5_1501_60011_Judgement_04-Mar-2025.pdf
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