In a significant relief for homebuyers, the Supreme Court held that insolvency proceedings against a real estate company do not automatically halt legal action against its promoters and directors, setting aside an order of the National Consumer Disputes Redressal Commission (NCDRC) that had stayed proceedings against them.
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A bench of Justices Vikram Nath and Sandeep Mehta allowed an appeal filed by homebuyers and revived consumer proceedings against the promoters and directors of Bengaluru-based Mantri Technology Constellation Pvt Ltd, holding that the NCDRC had wrongly extended the protection of the moratorium beyond the corporate debtor.
The dispute centred on Section 14 of the Insolvency and Bankruptcy Code, which provides that once a corporate insolvency resolution process (CIRP) begins and a moratorium is declared, all pending suits and proceedings against the corporate debtor are automatically stayed. The objective is to preserve the company’s assets during the resolution process and facilitate an orderly insolvency proceeding.
Explaining the scope of the provision, the bench said the moratorium cannot be interpreted to cover individuals unless the law specifically provides for it.
“It was not open either to the adjudicating authority or the court to enlarge its ambit beyond what the statute contemplated,” the court said, adding that “a plain reading of the provision made it clear that the moratorium operated against the corporate debtor alone.””No other category, whether it be any subsidiary company, any managers/directors, personal guarantors etc, can be added to it unless specifically provided,” the bench observed.
The homebuyers, represented by advocate Chandrachur Bhattacharya, had argued that while insolvency proceedings had been initiated against the company, its promoters and directors could not claim immunity from consumer proceedings under the moratorium.
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Accepting the contention, the Supreme Court underscored that the insolvency framework should not be used to deprive consumers of remedies available under other laws.
“The protective sweep of a moratorium must remain within the four walls as carved out by the statute. It ought not be expanded in a manner that stultifies remedies envisaged under the Consumer Protection Act, unless expressly provided. Code is to facilitate the resolution process and not to eclipse the statutory remedies,” the bench said.
The court noted that only the company was undergoing the corporate insolvency resolution process and that no independent protection was available to its promoters or directors.
“In the present case, respondent no. 1 (company) alone is the corporate debtor against whom the CIRP has been initiated. No independent moratorium or independent protection operates in favour of respondent nos. 2 to 7 (promoters and directors). In the absence of any legal bar against continuation of proceedings qua the said respondents, NCDRC was not justified in rejecting appellants’ prayer to proceed with the complaint against the rest of the respondents,” the bench said.
The ruling is expected to have wider implications for homebuyers pursuing delayed possession and other consumer claims against real estate developers, as it makes clear that promoters and directors cannot rely on insolvency proceedings against their companies to avoid legal scrutiny.