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.
“Regulatory actions, such as penalties imposed for violations of consumer protection laws, are not considered debts because they do not arise from a contractual or financial obligation owed by the debtor to a creditor. Instead, they are sanctions imposed by statutory authorities to enforce compliance with legal and regulatory standards,” said Sandeep Bajaj, Advocate, Supreme Court of India.
These actions aim to uphold public interest and ensure adherence to laws, distinguishing them from debts, which are typically monetary obligations arising from agreements between parties.Sandeep Bajaj, Advocate, Supreme Court of India
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. “In my view, the distinction between Section 14 and Section 96 of the Insolvency and Bankruptcy Code (IBC) highlights the different approaches to corporate and individual insolvency,” said Raheel Patel, Partner, Gandhi Law Associates.
Section 14 provides a broad moratorium for corporate debtors, effectively freezing all legal actions to facilitate resolution. In contrast, Section 96 offers only an interim moratorium for individuals, with a narrower focus on debts rather than all legal proceedings.Raheel Patel, Partner, Gandhi Law Associates
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. “Regulatory penalties or actions by government agencies are not considered ‘debts’ under the IBC. They are meant to enforce legal and regulatory compliance rather than to recover money. This categorization ensures that essential regulatory measures remain enforceable despite the debtor’s financial status,” said Sonal Alagh, Partner, Alagh & Kapoor Law OfficesThe Section 238 of the IBC has an overriding effect. The provision states that the IBC will prevail over any other law if there is a conflict, meaning the IBC’s provisions take precedence.
“There is no dispute in the fact that the IBC is a self-sufficient code, wherein the provisions of IBC shall have an overriding effect in case of conflicts with the provisions of any other statute,” said Palash Taing, Manager, Tatva Legal, Hyderabad.
He highlights that the protection granted under Section 96 of the Act does not extend to “debts” which are specifically excluded under the Code itself i.e., which fall under the category of “excluded debts” under Section 79(15). “The proceedings under Section 27 of the Consumer Protection Act, 1986 are not purely financial debts but are in the nature of the damages which are specifically excluded under Section 79(15). Further, compliance under the Consumer Protection Act is not akin to debt recovery and resolution which is the fundamental foundation of the Code,” he adds.
The moratorium granted by IBC Section 96 is not a broad legal shield; it only stops legal cases directly involving debt. “However, Section 27 of the Consumer Protection Act, 1986 empowers the consumer fora to penalise non-compliance of its orders thereby ensuring the protection of consumer rights,” said Vipul Wadhwa, Partner, Singhania & Co.
Since penalties do not fall within the definition of ‘debt’ as provide under the IBC, the moratorium under Section 96 is not applicable on penalties levied by consumer fora under Section 27 of the Consumer Protection Act, 1986.Vipul Wadhwa, Partner, Singhania & Co.
Ajay Sharma, Advocate, Delhi High Court highlights that debt under IBC means a liability or obligation in respect of a claim which is due from any person, however, the regulatory actions/penalties do not arise from any liability/ obligation owed to a creditor but rather from the failure to comply the directions passed by the regulatory authority/tribunal/forum/court and therefore, regulatory actions are not debt even if there is change in the status of debtor.
