Highlights
- The Supreme Court ruled that the interim moratorium under Section 96 of the Insolvency & Bankruptcy Code, 2016, does not protect corporate debtors from penalties under the Consumer Protection Act, 1986, emphasizing the importance of consumer protection regulations during insolvency proceedings.
- Legal experts clarified that the moratorium applicable to corporate debtors under Section 14 of the Insolvency & Bankruptcy Code is broader than that under Section 96, and while it provides some protections, it does not exempt corporate debtors from complying with regulatory obligations.
- The moratorium does not prevent regulatory actions from being enforced against corporate debtors, including proceedings before regulatory bodies such as the Securities and Exchange Board of India, National Company Law Tribunal, and Competition Commission of India, except for the execution of monetary claims.
The Supreme Court has clarified that an interim moratorium under Section 96 of the Insolvency & Bankruptcy Code, 2016 (IBC) does not shield corporate debtors from penalties imposed under the Consumer Protection Act, 1986.
The decision reinforces the distinction between debt recovery proceedings and regulatory actions, ensuring that consumer protection mechanisms remain effective even during insolvency proceedings as the penalties imposed by Consumer Redressal Forums are regulatory in nature and not “debts” under the IBC.
There is a distinction between the moratorium applicable to a corporate debtor under Section 14 of the IBC and the interim moratorium applicable to individuals and personal guarantors under Section 96 of the IBC. “Moratorium applicable to a corporate debtor (company) under Section 14 of the IBC is different in scope to that of moratorium imposed under Section 96 of IBC. Moratorium under Section 14 of IBC is wider in scope and applies to all proceedings (including in the nature of execution and enforcement) in relation to a corporate debtor (company). Section 96 protects debts and not the debtor,” said Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas.
From a perusal of Section 79(15) of IBC, it is abundantly clear that it classifies such debts/obligations as excluded based on the nature of such debts/obligations. By nature, they are statutory, penal or personal and are not in relation to any debt.Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas
Even during an interim moratorium, a corporate debtor remains obligated to comply with regulatory actions taken in the public interest, such as penalties for legal violations. These obligations, distinct from financial disputes, are excluded from the moratorium’s scope.
He adds that individuals/partnership firms cannot escape proceedings under the Negotiable Instruments Act, 1881 or the SARFAESI Act, 2002 because they assume the existence of a ‘financial’ debt and initiation of recovery thereafter. “Actions defined under Section 79(15) of IBC would amount to non-adherence with a statutory redressal mechanism, which would by its nature would not be connected to a debt of individual/partnership firm. It will be interesting to see further developments in this regard,” he added.
“A corporate debtor must navigate the distinction between the moratorium and regulatory actions. While the moratorium provides protection from debt recovery, regulatory actions, by their nature, are exceptions and remain enforceable. This distinction hinges on the fundamental difference between fines and debts.”
“In essence, a moratorium is a legally mandated hiatus in debt collection from creditors. It does not prohibit proceedings which are not a ‘debt recovery action’ but are beneficial to the financial position of the Corporate Debtor, as held in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd,” said Shiv Sapra, Partner, Kochhar & Co.
He highlights that the proceedings under Articles 32, 136,and 226 of the Constitution would not be impacted by the imposition of a moratorium.
Licenses, permits, registrations, quotas, concessions, clearances or similar grants/ rights given by the Central Government, State Government, local authority, etc, are not impacted or suspended owing to a moratorium and must be complied with as being regulatory in nature.Shiv Sapra, Partner, Kochhar & Co.
Keyur Gandhi, Managing Partner, Gandhi Law Associates highlights that even during the interim moratorium under section 14, a corporate debtor must comply with certain other regulatory obligations. “The moratorium does not shield a corporate debtor from penalties under consumer protection laws, as these are considered regulatory and not “debt” under IBC,” he adds.
A legal interpretation of Section 14(3)(a), in conjunction with Section 14(2A) and IBBI Regulations, reveals that the moratorium does not bar criminal proceedings against directors or key management and the corporate debtor must maintain essential services and pay statutory dues in case of liability.
“While IBC provides relief from debt enforcement, it does not exempt a corporate debtor from statutory obligations, regulatory penalties, or criminal liability,” he added.
Section 14(1) stays civil suits and debt recovery actions, it does not halt adjudicatory proceedings before regulatory bodies like SEBI, NCLT, CCI, and environmental authorities, except for the execution of monetary claims.Keyur Gandhi, Managing Partner, Gandhi Law Associates
