Delineation between Consumer Protection Act and IBC

The Supreme Court in Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth and Others (2025 INSC 314) clarified that penalties imposed under the Consumer Protection Act, 1986 (CP Act) do not constitute a “financial debt” under the Insolvency and Bankruptcy Code, 2016 (IBC). Consequently, such penalties are not covered by the interim moratorium under Section 96 of the IBC, which applies to individual insolvency proceedings.

Factual Background
The case arose when Saranga Anilkumar Aggarwal, a real estate developer, was penalized by the National Consumer Disputes Redressal Commission (NCDRC) under Section 27 of the CP Act for failure to deliver residential units. Upon initiation of insolvency proceedings under Section 95 of the IBC, he argued that the NCDRC’s penalty proceedings should be stayed due to the interim moratorium under Section 96. The Supreme Court was thus tasked with determining whether such penalties were “financial debts” capable of being suspended by the moratorium.

Legal Issue
The primary issue before the Court was whether regulatory penalties under Section 27 of the CP Act constitute “debt” within the meaning of Section 3(11) of the IBC and thereby attract the moratorium provision under Section 96. The question required the Court to delineate the boundary between insolvency protection (which addresses financial distress) and statutory compliance (which enforces regulatory and punitive obligations).

Arguments Advanced
The appellant contended that since the penalties imposed by the NCDRC arose from a consumer dispute involving delays in contractual obligations, they were financial in nature and therefore amounted to a “debt.” He argued that all recovery and enforcement actions, including penalties, should be suspended once an insolvency moratorium begins.

The respondents countered that penalties under Section 27 of the CP Act are punitive, not compensatory; they do not create a debtor–creditor relationship but aim to deter non-compliance with consumer protection laws. Therefore, they cannot constitute a financial or operational debt under the IBC.

Supreme Court’s Analysis
The Court drew a clear distinction between “financial debt,” which reflects a liability arising from a creditor–borrower relationship, and “regulatory penalties,” which serve public and deterrent purposes. It reasoned that allowing the interim moratorium to cover such penalties would undermine the enforcement of consumer welfare laws and embolden violators to evade statutory liabilities through insolvency mechanisms.

Referring to Section 79(15) of the IBC, which excludes fines and penalties imposed by regulatory bodies from the definition of “debt,” the Court held that NCDRC-imposed sanctions fall squarely outside the protective ambit of the moratorium. The judgment emphasized that insolvency law is designed to resolve financial distress, not to nullify or suspend regulatory obligations. The Court reaffirmed that “a debtor cannot invoke insolvency as a shield to evade statutory liabilities”.

Legal Position as on Date
The decision cements the principle that penalties under the CP Act are not “financial debts” or “operational debts” within the meaning of the IBC. They are regulatory obligations aimed at ensuring compliance, not repayment. Thus, interim moratoria under Sections 96 (for individuals) or 14 (for corporations) of the IBC do not stay proceedings or enforcement of such penalties. This interpretation reinforces the balance between insolvency resolution and consumer protection by ensuring that insolvency proceedings do not become mechanisms for avoiding consumer accountability.

Implications
This ruling establishes a precedent confirming that:

1. Penalties imposed under consumer laws are outside the protective scope of insolvency moratoria.
2. Insolvency protection cannot be used as a legal stratagem to avoid penal or regulatory obligations.
3. The distinction between debt resolution and statutory compliance is fundamental to upholding regulatory schemes such as the CP Act.

In essence, the Saranga Anilkumar Aggarwal judgment safeguards consumer interests while delineating the boundaries of insolvency protection, reinforcing that the objectives of insolvency law and consumer protection law operate in distinct legal domains.

Penned by Dariksha Parveen, Associate with the reported judgment available at following link: https://api.sci.gov.in/supremecourt/2024/10447/10447_2024_5_1501_60011_Judgement_04-Mar-2025.pdf