Interim Moratorium under Section 96 of the IBC Does Not Bar Penalties under the Consumer Protection Act

Introduction

The Supreme Court of India’s decision in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth (2025 INSC 314) provides crucial clarity on the interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Consumer Protection Act, 1986 (CP Act). At the crux of the dispute was whether an interim moratorium under Section 96 of the IBC could halt or “stay” the execution of penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) on a real estate developer for non-compliance with consumer protection orders.

The key players include:

Appellant: Ms. Saranga Anilkumar Aggarwal, a real estate developer responsible for handing over possession of residential units.
Respondents: Homebuyers (led by Bhavesh Dhirajlal Sheth) who sought to enforce NCDRC penalty orders due to delayed possession and deficiency in service.

The tension revolved around whether the broad scope of the interim moratorium — intended to protect debtors undergoing insolvency resolution — could also halt regulatory or penal actions taken by consumer forums. Ultimately, the Supreme Court ruled that NCDRC penalties arising from consumer protection violations do not constitute “debts” under the IBC and hence are not stayed by the interim moratorium.

Summary of the Judgment

In this appeal, the developer sought to stay execution proceedings for 27 penalties imposed by the NCDRC. The main argument advanced before the Court was that an interim moratorium had been triggered under Section 96 of the IBC once an application under Section 95 was filed against the appellant as a personal guarantor. Consequently, the appellant contended that all legal proceedings “in respect of any debt” must be stayed.

The Supreme Court dismissed this argument, clarifying that:

The scope of an individual interim moratorium under Section 96 of the IBC, though broad, extends only to “debts” as defined under the Code.
Regulatory or penal measures such as the consumer penalties imposed by the NCDRC do not qualify as “debts” covered by the interim moratorium.
Consequently, Section 27 proceedings under the CP Act, which penalize non-compliance with consumer court orders, remain unaffected by the IBC moratorium and may continue.

The Court reasoned that these penalties are part of ensuring consumer justice and are thus not mere recovery actions. Having found no ground to stay them, the Supreme Court dismissed the appeal and directed that the appellant must comply with the penalty orders within eight weeks.

Analysis

A. Precedents Cited

The Court’s reasoning was significantly shaped by various precedents, as well as by the framework provided under the IBC. Key cases cited include:

State Bank Of India v. V. Ramakrishnan & Anr. (2018) 17 SCC 394:
This case underscored that Sections 96 and 101 of the IBC introduce a distinct moratorium covering personal guarantors, different in scope from the corporate moratorium under Section 14. The NCDRC relied on Ramakrishnan to highlight that a personal guarantor does not receive an all-encompassing immunity from every form of legal action.
AJAY KUMAR RADHEYSHYAM GOENKA v. TOURISM FINANCE CORPORATION OF INDIA LTD. (2023) 10 SCC 545:
The Court in this precedent reiterated that criminal proceedings cannot be halted merely because the corporate debtor (or those associated with it) has entered insolvency. This helped confirm that punitive action does not come to a standstill during insolvency proceedings.
P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) 6 SCC 258:
Here, the Supreme Court held that Section 138 Negotiable Instruments Act proceedings might be stayed under the Section 14 (corporate) moratorium. However, in the present judgment, the Court reasoned that NCDRC penalty actions are not identical to the Section 138 NI Act scenarios because consumer penalties fall outside the concept of “debt”—they are penal/regulatory, rather than a direct financial liability being recovered.
Sheetal Gupta v. National Spot Exchange Limited & Ors. 2023 SCC OnLine Bom 309:
The Bombay High Court decision in Sheetal Gupta stayed certain criminal proceedings against members of a corporate debtor. However, the Court here treated that ruling as per incuriam on account of its summary nature and the subsequent binding ratio of Ajay Kumar Radheyshyam Goenka.

B. Legal Reasoning

At the core of the Court’s legal reasoning is the distinction between “debts” and “penalties”:

Scope of Section 96 of IBC: The interim moratorium for personal guarantors under Section 96 suspends all legal proceedings “in respect of any debt.” But “debts” refer to financial liabilities, loans, or obligations that can be computed as part of an insolvency estate.
Regulatory/Penal Nature of NCDRC Orders: Section 27 of the CP Act imposes punitive measures for non-compliance with orders. These cannot be equated to civil lawsuits for debt recovery. Instead, they serve a public function and deterrent purpose—namely, ensuring that consumers’ rights are upheld and service providers remain accountable.
Excluded Debts: The judgment references Section 79(15) of the IBC, which excludes certain obligations (such as fines, damages for legal violations, and other statutory obligations) from the insolvency process. The penalties imposed by the NCDRC are akin to damages for breach of obligation—thus falling outside the usual debt rearrangement aims of the IBC.

Consequently, the Court observed that the IBC, while aimed at resolving financial stress, does not shelter individuals from public law or statutory penalties. Accepting an argument to the contrary would allow unscrupulous entities to evade consumer protection orders by filing for insolvency.

C. Impact

The implications of this decision are substantial for both homebuyers and developers—and more broadly for the insolvency and consumer protection regimes:

Consumer Rights Strengthened: The Court’s ruling prevents developers from evading punitive measures under the CP Act by invoking insolvency. Homebuyers gain clarity that penalty orders enforced by consumer courts remain operative, even if insolvency proceedings begin.
Clearer Scope of Interim Moratorium: Future cases will rely on this judgment to recognize that an interim moratorium is narrower in scope compared to the corporate moratorium under Section 14, and statutory penalties do not automatically fall under “debt”.
Balance of Interests: By preserving consumer forum penalties outside the insolvency umbrella, the Court ensures that the IBC operates to protect legitimate debt restructuring while not undermining fundamental consumer protection objectives.

Complex Concepts Simplified

Several complex legal ideas appear in this judgment. Below is a concise explanation:

“Interim Moratorium” (Section 96 IBC): When a personal insolvency application is filed under Sections 94 or 95 of the IBC, an automatic stay on all proceedings in respect of debts commences. This protective measure seeks to prevent piecemeal recoveries and preserve the individual’s financial state until the court decides on the insolvency application.
“Debt”: Under the IBC, “debt” generally means a liability or obligation in respect of a claim. Monetary claims must ordinarily arise out of a contract, credit facility, or an agreement (like mortgages or loans). Purely regulatory or penal claims do not typically get classified as “debt.”
Section 27 of the CP Act: This provision grants consumer courts the power to impose penalties, fines, or imprisonment on any individual or entity that fails to comply with consumer orders. The remedy here goes beyond mere recovery and enters the penal/regulatory sphere.
Excluded Debts (Section 79(15) IBC): Certain categories — e.g., fines, criminal penalties, or specific types of compensations — are expressly carved out from the scope of debts that can be resolved or discharged in insolvency. They remain enforceable notwithstanding the moratorium.

Conclusion

The Supreme Court’s ruling in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth resolutely confirms that the interim moratorium under Section 96 of the IBC cannot be used as a defensive shield against regulatory or penal actions under the Consumer Protection Act. The Court drew a clear distinction between civil debt recovery on one hand and penaltied enforcement for non-compliance with consumer orders on the other. By declaring that these consumer-driven penalties are outside the ambit of “debts”, the Court preserved a vital deterrent against unfair trade practices.

In a broader legal context, the judgment reaffirms that even amidst insolvency proceedings, individuals and entities remain accountable for their statutory and regulatory obligations. Consumer fora, entrusted with protecting vulnerable consumers (including homebuyers), will continue to maintain their authority to penalize errant developers. This decision thus safeguards consumer interests and strengthens public trust in consumer protection mechanisms — ensuring that legitimate insolvency remedies do not inadvertently shield wrongful conduct.