The Supreme Court on Tuesday ruled that developers cannot evade monetary penalties imposed for consumer rights violations under the guise of insolvency proceedings, underlining that allowing such a practice would erode consumer trust and worsen the already vulnerable position of homebuyers due to possession delays and contract breaches.
A bench of justices Vikram Nath and PB Varale emphasised that penalties imposed by consumer courts serve a regulatory function and do not constitute “debt” under the Insolvency and Bankruptcy Code (IBC). Permitting a stay on regulatory penalties under the guise of insolvency proceedings, it said, would undermine the very purpose of the Consumer Protection Act (CPA) and embolden errant developers to escape liability through insolvency proceedings.
“Homebuyers, many of whom invest their life savings in purchasing residential units, are already in a precarious position due to delays in possession and breaches of contractual obligations. Staying penalties that serve as deterrence against such unfair practices would render consumer protection mechanisms ineffective and erode trust in the regulatory framework,” the bench held.
The verdict is expected to have far-reaching implications for real estate developers and businesses attempting to use insolvency proceedings as a means to evade penalties imposed by consumer courts.
The ruling came while the court dismissed an appeal filed by Saranga Anilkumar Aggarwal, proprietor of East & West Builders (RNA Corp Group Co), who had sought relief from penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC). The NCDRC had in 2018 imposed 27 penalties on Aggarwal for failing to deliver possession of residential units within the agreed timeline, causing distress to homebuyers.
Aggarwal contended that an application under Section 95 of the IBC had been filed against her, triggering an interim moratorium under Section 96 of the Code, which she argued barred further legal proceedings, including the execution of penalties imposed by consumer courts.
Rejecting this argument, the Supreme Court ruled that the penalties imposed by NCDRC are “regulatory in nature” and do not constitute “debt” under IBC. The court distinguished between financial debts and statutory penalties, holding: “The IBC is not a tool for escaping liability arising from statutory obligations. The penalties imposed by the NCDRC are meant to ensure compliance with consumer laws and cannot be equated with a recoverable financial debt.”
The court also drew a distinction between moratorium provisions under IBC applicable to corporations and those applicable to individuals and personal guarantors. It pointed out that Section 14 of the IBC imposes a comprehensive moratorium on corporate debtors but Section 96, which applies to individuals, only stays legal actions in respect of a “debt” as defined under IBC. “Penalties arising from regulatory infractions do not qualify as debt and are, therefore, not covered by the moratorium,” it ruled.
The judgment also highlighted the broader policy rationale behind excluding regulatory penalties from the IBC moratorium. “If damages arising from legal violations, consumer protection claims, or penalties imposed by courts and tribunals were to be shielded under the moratorium, it would create an unfair advantage for errant entities and individuals, allowing them to evade their legal obligations under the guise of insolvency. The IBC, being a special law meant to balance the interests of all stakeholders, does not intend to provide relief to those who have been held liable for statutory breaches or misconduct,” it noted.
The apex court further underscored the importance of consumer rights, asserting that the legislative intent behind consumer protection laws is to safeguard the interests of consumers and ensure accountability from service providers.
“If the appellant’s argument is accepted, homebuyers, who have already suffered immense delays and financial hardship, would be further deprived of relief… The present case does not involve a mere financial dispute but concerns the enforcement of consumer rights through regulatory penalties. Given that the legislative intent behind the CP Act is to ensure compliance with consumer welfare measures, staying such penalties would be contrary to public policy,” it declared.