The Supreme Court, in its recent judgment titled Saranga Anilkumar Aggarwal vs. Bhavesh Dhirajlal Sheth and Ors. 2025 SCC OnLine SC 493, has held that the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 ("Code") would not be applicable to execution of regulatory penalties imposed by courts or tribunals.
The appellant/ personal guarantor was aggrieved by an order passed by National Consumer Disputes Redressal Commission rejecting his contention that the penalties imposed under section 27 of the Consumer Protection Act, 1986 cannot be executed against the personal guarantor who is undergoing personal insolvency proceedings under section 95 of the Code. The personal guarantor had contended that by virtue of interim moratorium under Section 96 of the Code, the execution proceedings should be stayed.
Arguments of the Personal Guarantor
The personal guarantor argued before the Supreme Court that during the interim moratorium period, "any legal action or proceedings, pending in respect of any debt, shall be deemed to have been stayed" as provided under section 96 of the Code.
The personal guarantor relied upon various judgments including P. Mohanraj and Others v. Shah Brothers Ispat Private Limited where it was held that proceedings under Section 138 of the Negotiable Instrument Act, 1881 ("NI Act") are covered under "any legal action or proceeding pending" even though they are quasi- criminal in nature, thus also staying criminal proceedings against the corporate debtor. The personal guarantor also cited Kaushalya Devi Massand vs. Roopkishore Khore, wherein Supreme Court had held that the gravity of a complaint under the NI Act cannot be equated with an offence under the provisions of the Indian Penal Code, 1860 or other criminal offences and that an offence under Section 138 of the NI Act is almost in the nature of civil wrong which has been given criminal overtones. Based on the above, personal guarantor contended that penal provisions under the Consumer Protection Act, 1986 can also not be equated with those of Indian Penal Code and therefore, the interim moratorium should be applicable for penalties imposed under section 27 of the Consumer Protection Act, 1986.
Arguments of the Respondents
The respondents, on the other hand, argued that Section 27 of the Consumer Protection Act, 1986 provides for punitive action against those who fail to comply with orders of the consumer forum, which is penal in nature and distinct from debt recovery proceedings. As such, such proceedings are not covered under section 96 of the Code. The Respondents also argued that penalties imposed under section 27 of the Consumer Protection Act, 1986 fall within the definition of "excluded debts" under Section 79(15) of the Code and therefore, the moratorium under Section 96 of the Code does not apply.
Decision of the Supreme Court
The Supreme Court carved out a distinction between applicability of moratorium in case of civil proceedings and criminal proceedings stating that criminal proceedings including penalty enforcement, do not automatically fall within the scope of interim moratorium under section 96 of the Code. It was of the view that interim moratorium applies to "debt" as defined under the Code and not to regulatory penalties imposed for non-compliance with consumer protection laws and other such laws.
The Supreme Court agreed with the respondent's contention that the protection under the Section 96 of the Code does not cover liabilities classified as "excluded debts" under Section 79(15) of the Code. It also accepted the respondent's contention that Section 94(3) of the Code, which provides that a personal guarantor can file application for initiating insolvency only with respect to debts which are not "excluded debts", limits the scope of the moratorium.
However, this judgment does not explicitly analyse as to how Section 94(3) is related to moratorium imposed on personal guarantors. The provisions regarding interim moratorium and moratorium are provided under Section 96 and 101 of the Code, respectively. These sections do not provide for any exceptions for "excluded debts" during moratorium. It is also interesting that Section 95 of the Code, which is regarding filing of application by creditor for initiating insolvency against personal guarantor, does not provide for any exclusion for "excluded debts" as provided under Section 94 of the Code. The proceedings against the personal guarantor in the present case were initiated under Section 95 of the Code and therefore, the reliance of the Supreme Court on Section 94(3) of Code is debatable.
The major reasoning provided by Supreme Court while dismissing the appeal was that if the penalties imposed by courts or regulatory authorities are held to be covered under the moratorium then errant individuals may take unfair advantage of such moratorium to avoid legal obligations. It also distinguished the present case from P. Mohanraj by creating a distinction between debt recovery proceedings and punitive actions and stating that all criminal liabilities do not fall within the scope of the moratorium.
This judgment provides clarity regarding applicability of the moratorium on the penalties imposed by courts and tribunals as the Code does not explicitly deal with this issue and therefore, this judgment has tried to fill the gap which was not contemplated by legislature while enacting the Code.
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