Consumer Law | Insolvency Proceedings Cannot Be Used to Evade Consumer Protection Penalties: Supreme Court

Regulatory Fines Are Not ‘Debt’ Under IBC; Developers Must Comply with Consumer Court Orders - Supreme Court of India in a significant ruling held that insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) cannot be used as a shield to escape penalties imposed by consumer courts. The Court dismissed an appeal filed by real estate developer Saranga Anilkumar Aggarwal, rejecting his plea to stay the execution of penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) for failing to hand over possession of residential units to homebuyers.

"Insolvency laws are meant to restructure financial distress, not to protect errant developers from their statutory obligations under consumer protection laws. A moratorium under the IBC does not extend to penalties imposed for non-compliance with consumer welfare statutes," the Supreme Court observed, refusing to allow the appellant to stall the execution of penalties under the guise of financial distress.

The appellant, Saranga Anilkumar Aggarwal, a real estate developer and proprietor of East & West Builders (RNA Corp. Group Co.), faced multiple consumer complaints before the NCDRC for failing to deliver possession of flats to homebuyers despite repeated assurances.

The NCDRC, in a 2018 judgment, ruled in favor of the homebuyers, directing the appellant to complete construction, obtain the necessary occupancy certificate, and hand over possession of the flats. Since the appellant failed to comply with these orders, the NCDRC imposed 27 penalties for deficiency in service.

However, instead of complying, the appellant filed an application before the NCDRC seeking a stay on execution proceedings, arguing that he was facing insolvency proceedings under Section 95 of the IBC, which triggered an interim moratorium under Section 96.

The appellant contended that all legal proceedings related to debt recovery were automatically stayed due to the moratorium, and therefore, the penalties imposed by the NCDRC should also be halted. He further argued that since he had already entered into settlements with some homebuyers and made partial payments, the remaining penalties should be put on hold.

On February 7, 2024, the NCDRC rejected the appellant’s application, holding that consumer protection penalties do not fall within the scope of the IBC moratorium.

The NCDRC relied on previous Supreme Court rulings, including State Bank of India v. V. Ramakrishnan and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., which clarified that insolvency moratoriums do not provide blanket protection against all legal proceedings, particularly those enforcing consumer rights.

"Regulatory fines imposed by consumer courts for failure to comply with their orders do not fall within the category of ‘debt recovery proceedings.’ The interim moratorium under Section 96 of the IBC does not bar the execution of such penalties," the NCDRC ruled, allowing execution proceedings to continue.

Aggrieved by this order, the appellant approached the Supreme Court, seeking a complete stay on penalties imposed by the consumer court.

Supreme Court’s Ruling: “Developers Cannot Hide Behind Insolvency to Escape Consumer Liability”

The Supreme Court dismissed the appeal, upholding the NCDRC’s ruling that consumer protection penalties are regulatory in nature and do not fall under the definition of ‘debt’ in the IBC.

The Court made several critical observations regarding the misuse of insolvency proceedings by real estate developers to evade consumer obligations:

Consumer Court Penalties Are Not ‘Debt’ Under the IBC

The Supreme Court made it clear that only financial liabilities that can be restructured under insolvency proceedings qualify as ‘debt’ under the IBC.

"Penalties imposed for failure to comply with consumer protection laws do not arise from a debt owed to a financial creditor. They are regulatory in nature and meant to deter unfair trade practices," the Court ruled.

Moratorium Under IBC Does Not Protect Developers from Consumer Liabilities

Rejecting the appellant’s argument that the IBC moratorium protects him from penalties imposed by the consumer court, the Supreme Court ruled that the IBC cannot be used to escape obligations imposed by other statutory bodies.

"A moratorium under the IBC is designed to protect a debtor’s assets from individual recovery actions but does not extend to regulatory fines imposed for failure to comply with legal obligations," the Court held.

Allowing Stay on Consumer Penalties Would Lead to Legal Misuse

The Court cautioned that if developers were allowed to invoke insolvency proceedings to avoid consumer penalties, it would set a dangerous precedent.

"If regulatory penalties could be stayed by merely invoking insolvency, unscrupulous developers could exploit the system to indefinitely delay justice to homebuyers who have already suffered due to construction delays," the Court observed.

Consumer Protection Laws Cannot Be Undermined by Insolvency Proceedings

Emphasizing that consumer rights are fundamental and cannot be diluted through insolvency claims, the Court upheld the validity of the NCDRC’s execution proceedings.

"The very purpose of consumer protection laws is to ensure that homebuyers are not left stranded due to developers’ defaults. If penalties imposed to enforce these laws are stayed under the IBC, it would completely defeat the objective of consumer protection," the Supreme Court ruled.

Dismissing the appeal, the Supreme Court directed the appellant to comply with the penalties imposed by the NCDRC within eight weeks.

"The penalties must be paid within eight weeks. Insolvency cannot be used as an excuse to evade consumer protection obligations," the Court concluded.

With this ruling, the Supreme Court has reinforced the supremacy of consumer protection laws over insolvency proceedings, ensuring that homebuyers and consumers cannot be left without recourse due to legal technicalities.

This judgment reaffirms the principle that insolvency proceedings cannot be used to sidestep consumer rights. By refusing to stay execution proceedings under the guise of the IBC, the Supreme Court has ensured accountability for real estate developers and upheld the enforcement of consumer protection laws.

The ruling sets a precedent that real estate companies undergoing insolvency proceedings cannot indefinitely delay their obligations to homebuyers and that regulatory penalties imposed by consumer courts remain enforceable despite financial distress claims.

Date of Decision: March 4, 2025