SC's ruling on interim moratorium to keep errant developers in check

Ruling that such moratorium doesn't shield anyone from paying regulatory dues is a blow to unscrupulous businesses, they say

The recent Supreme Court order saying interim moratorium in the Insolvency and Bankruptcy Code (IBC) does not shield a company or an individual from paying regulatory dues has come as a blow to unscrupulous real estate developers, businesses, and personal guarantors using the Code to evade such payments, say experts.

 

The top court’s order was in connection with the penalties and execution imposed on the proprietor of East and West Builders, which is undergoing insolvency proceedings by the National Consumer Disputes Redressal Commission (NCDRC).

 

“The ruling sets a strong precedent, ensuring that consumer rights and regulatory penalties remain enforceable, even during financial distress,” said Deepika Kumari, partner, King Stubb & Kasiva, Advocates and Attorneys.

 

Legal experts said that many builders facing consumer complaints for delayed possession, substandard construction, or non-compliance with NCDRC or Real Estate Regulatory Authority (Rera) orders have attempted to seek protection under the IBC moratorium.

 

The apex court order makes it clear that regulatory penalties are not "debts" under IBC and, therefore, insolvency proceedings do not provide immunity from fines imposed for violations of consumer protection laws. Builders and businesses, IBC lawyers said, can no longer use financial distress as an excuse to escape their legal obligations toward consumers, investors, and regulatory bodies.

 

“The implications would extend beyond the real estate sector as this judgment makes it clear that other regulatory bodies such as the Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI), Rera, goods and services tax (GST) authorities, Enforcement Directorate (ED), and Competition Commission of India (CCI) can continue imposing penalties on violators despite insolvency proceedings,” said Sonam Chandwani, managing partner, KS Legal and Associates.

 

According to Section 96(1) of the IBC, interim moratorium commences on the date of the application in relation to all the debts, and ceases to have effect on the date of admission of such application.

 

Any legal action or proceeding pending in respect of any debt is stayed and creditors cannot initiate any legal action or proceedings in respect of any debt upon the commencement of interim moratorium.

 

“What is contemplated to be stayed under Section 96 of the IBC is the legal action or proceeding relating to a “debt”, which has been defined under the Code as ‘liability or obligation in respect of a claim which is due from any person’,” said Piyush Agrawal, partner, AQUILAW.

 

Various legal experts said that the IBC does not clearly include regulatory penalties in the definition of “debt”.

 

“Clearly, there is distinction between regulatory penalties and statutory dues, and going forward, before taking the plea of moratorium, the said distinction shall be required to be kept in mind,” said Daizy Chawla, managing partner, S&A Law Offices.

 

Notably, statutory dues are considered as debt and authorities whose statutory dues are due are considered as “Operational Creditors” under the IBC.

 

“The treatment of regulatory dues during interim moratorium of the personal guarantor will remain unchanged as long as it does not fall under excluded debts as defined under Section 79(15) of the IBC,” said Yash Vardhan, associate partner, IndiaLaw LLP.

 

The excluded debts include liability to pay fine imposed by a court or tribunal, damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation, maintenance to any person under any law for the time being in force, and dues in relation to a student loan.

 

“Though the judgement of the Hon’ble Supreme Court was passed to deal with developers who wrongfully use provisions of the IBC to get a stay on proceedings, it reaffirms and settles the position of law by drawing a wider crucial distinction between regulatory and penal dues on one hand and debt recovery proceedings on the other, as contemplated under the IBC,” Agrawal of AQUILAW said. 

Fine Print

 

> The SC had ruled that the interim moratorium under IBC does not protect companies or individuals from paying regulatory dues

> Decision impacts realty developers, businesses, personal guarantors who misuse IBC provisions to evade penalties

> Court clarified that regulatory penalties are not considered debts under the IBC and, therefore, cannot be shielded by the moratorium