Builders Can't Escape Penalties Through Insolvency

The Supreme Court has ruled that developers cannot use insolvency proceedings to avoid penalties for violating consumer rights. A bench of justices Vikram Nath and PB Varale emphasised that penalties imposed by consumer courts serve a regulatory purpose and are not considered "debt" under the Insolvency and Bankruptcy Code (IBC). Allowing developers to evade such penalties under insolvency proceedings would undermine consumer protection and erode public trust in the regulatory system, mainly when homebuyers are already vulnerable due to delays in possession and contract breaches.

According to the bench, homebuyers who invest their life savings in purchasing residential units are already in a precarious position due to delays in possession and breaches of contractual obligations. Staying penalties that serve as deterrence against such unfair practices would render consumer protection mechanisms ineffective and erode trust in the regulatory framework.

The ruling came as the court dismissed an appeal by Saranga Anilkumar Aggarwal, owner of East & West Builders (RNA Corp Group Co), who sought to have penalties imposed by the National Consumer Disputes Redressal Commission (NCDRC) waived. The NCDRC had fined Aggarwal for failing to deliver residential units within the agreed timelines, causing distress to homebuyers. Aggarwal argued that an interim moratorium had been triggered under the IBC, preventing the enforcement of penalties.

The Supreme Court disagreed, ruling that penalties for regulatory violations are not a form of financial debt and, thus, not covered by the IBC moratorium. The court clarified that while IBC protections apply to corporate debtors, they do not extend to individuals or personal guarantors in the context of consumer penalties. It highlighted that protecting developers from such penalties would unfairly shield them from accountability and harm consumers further.

This judgment is expected to have significant implications for developers and businesses seeking insolvency proceedings to avoid consumer protection obligations, reinforcing the importance of consumer rights and regulatory compliance in India's real estate sector.