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.
Difference between Section 14 and Section 96 Moratoriums
Pratyush Miglani, Managing Partner, MVAC Advocates & Consultants said, “Section 14 of the IBC enjoys a wider scope of applicability as it governs corporate debtors and imposes a moratorium, staying all legal proceedings, including enforcement actions.” He highlights, “In contrast, Section 96 provides for an interim moratorium and applies to individuals and personal guarantors, staying only legal actions related to “debt” as defined 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.
Section 14, which applies to the Corporate Debtors is much wider and broader section with respect to moratorium, whereas, Section 96, speaks about interim moratorium only limited to ‘debts’ of individuals and not beyond. Further, punitive actions in the regulatory sphere are not covered under the ambit of interim moratorium.Adv. Amir Bavani, Founder, AB Legal, Hyderabad
Moratorium u/s 96 not barring actions u/s 27 of the Consumer Protection Act
Ankur Pastor, Managing Partner, Innovis Law Partners LLP highlights that the Section 238 of the IBC gives the IBC provisions an overriding effect over conflicting laws. “However, the interim moratorium under Section 96 applies only to legal actions related to “debts” as defined in the IBC,” he adds.The penalties imposed as a result of a regulatory action are considered regulatory and punitive, not debt, which can neither trigger insolvency nor be protected against through a moratorium.”Penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) under Section 27 of the Consumer Protection Act are considered regulatory and punitive, not debts,” he adds.
These penalties aim to ensure compliance with consumer protection laws and serve a public interest function. Therefore, they fall outside the scope of the moratorium under Section 96 of the IBC.Ankur Pastor, Managing Partner, Innovis Law Partners LLP
Shashank Agarwal, Advocate, Delhi High Court highlights that the distinction meant that debt owed to a person/creditor and would not include such penalties which are imposed as a penal action, whether under criminal laws or under regulatory laws on account of non-compliance of that particular law.
