IBC not meant to shield violators of consumer rights from prosecution

The Supreme Court observed that staying the penalties imposed by the National Commission would set a dangerous precedent, allowing developers to delay justice by invoking insolvency proceedings

Saranga Anilkumar Aggarwal, proprietor of East & West Builders, had sold flats to various purchasers but defaulted in handing over possession. Alleging a deficiency in service and breach of contractual obligations, the buyers filed complaints against him before the National Consumer Commission, which directed the builder to complete construction, obtain the requisite occupancy certificate, and hand over possession. As Aggarwal failed to comply with these directions, the flat purchasers filed execution applications and initiated penal proceedings for non-compliance with the orders. 

Aggarwal opposed the penal proceedings, offering various excuses to justify his failure to comply with the orders. His principal contention was that the National Commission could not proceed against him as he had applied for insolvency under Section 95 of the Insolvency and Bankruptcy Code (IBC), 2016, and that the interim moratorium, which was in force, barred proceedings under the Consumer Protection Act. 

The National Commission considered several judgments and concluded that the moratorium under the IBC applies only to debts and does not extend to consumer claims. It therefore overruled Aggarwal’s objections and continued with the proceedings, which ultimately resulted in the imposition of 27 penalties. 

Aggarwal challenged the penalties before the Supreme Court through a civil appeal. The apex court noted that the crux of the dispute was an important question of law: whether a consumer commission could hold a party guilty of disobeying its order and impose a penalty despite a moratorium having been granted by the National Company Law Tribunal (NCLT). 

The Supreme Court noted that Section 94 of the IBC states that a moratorium applies only to debts not classified as “excluded debts” under Section 79(15) of the Code. These include liabilities arising from fines imposed by courts or tribunals, damages for negligence or breach of obligation, maintenance liabilities, student loans, and other prescribed debts. The Court held that the damages awarded by the National Commission constituted “excluded debts” under the IBC, and hence, the moratorium would not be applicable. 

The Supreme Court also observed that the proceedings before the National Commission were initiated by homebuyers and were not monetary claims of debtors. The penalties imposed were intended to deter unfair trade practices and to safeguard the interests of vulnerable consumers affected by delays caused by the developer. 

The Court observed that staying such penalties would set a dangerous precedent where developers could indefinitely delay justice by invoking insolvency proceedings. It further noted that the moratorium under the IBC does not apply to criminal proceedings and pointed out that Section 27 of the Consumer Protection Act provides for imprisonment. These proceedings are regulatory in nature, meant to enforce statutory obligations and protect public interest. Hence, the provision cannot be considered to be meant merely for debt recovery. 

By its order dated March 4, 2025, in the case of Saranga Anilkumar Aggarwal v Bhavesh Dhirajlal Sheth, passed by Justice Vikram Nath for the Bench along with Justice Prasanna Varale, the Supreme Court concluded that the IBC is not designed to shield individuals who violate consumer rights and attempt to escape from criminal prosecution. The appeal was accordingly dismissed. 

The writer is a consumer activist