Consumer Protection Act (68 of 1986) , S.27— Insolvency and Bankruptcy Code (31 of 2016) , S.96— Penalty orders passed by NCDRC – Execution of – Interim moratorium under IBC – Applicability – Penalties imposed by NCDRC are regulatory in nature and do not constitute “debt” under IBC – Moratorium u/s 96 of IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws
In the instant case , penalties were imposed on appellant for failing to deliver possession of residential units to homebuyers as per agreed timeline. Appellant sought stay on penalty proceedings on the ground that an application under Section 95 of the Insolvency and Bankruptcy Code, 20162 was filed against them, triggering an interim moratorium under Section 96 of the IBC.
Held, penalties imposed by NCDRC are regulatory in nature and do not constitute “debt” under IBC . Moratorium u/s 96 of IBC does not extend to regulatory penalties imposed for non-compliance with consumer protection laws.
Statutory scheme of the IBC indicates that penalties arising from regulatory infractions are not covered under the ambit of “debt” as envisioned under the Code.
Section 27 of the CP Act empowers consumer fora to impose penalties to ensure adherence to consumer protection norms. These penalties do not arise from any “debt” owed to a creditor but rather from the failure to comply with the remedial mechanisms established under consumer law.
Damages awarded by the NCDRC arose from a consumer dispute, where the appellant was held liable for deficiency in service. Such damages are not in the nature of ordinary contractual debts but rather serve to compensate the consumers for loss suffered and to deter unethical business practices. Courts and tribunals, including the NCDRC, exercise their statutory jurisdiction to award such damages, and these are distinct from purely financial debts that may be subject to restructuring under the IBC. Since such damages are covered under “excluded debts” as per Section 79(15) of the IBC, they do not get the benefit of the moratorium under Section 96 of the IBC, and their enforcement remains unaffected by the initiation of insolvency proceedings.
Permitting a stay on regulatory penalties under the guise of insolvency proceedings would undermine the very purpose of the CP Act and embolden errant developers to escape liability through insolvency proceedings.
The objective of the IBC is to provide a mechanism for resolving financial distress, not to nullify obligations arising under regulatory statutes.
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