Justice Bela M. Trivedi, Justice Satish Chandra Sharma, Supreme Court
Secured Creditors Cannot Claim Priority Of Interest Against Properties Attached Under MPID Act: Supreme Court
|The Supreme Court held that monies or deposits of depositors/investors, who have been allegedly defrauded by the Financial Establishment, and for the recovery of which the MPID Act has been enacted, could not be said to be a ‘debt’ contemplated in Section 26E of the SARFAESI Act.
The Supreme Court held that the Secured Creditors cannot claim priority of interest against the properties attached under the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act).
The Court held thus in a Writ Petition challenging the validity of the Orders passed by the Supreme Court Committee.
The two-Judge Bench comprising Justice Bela M. Trivedi and Justice Satish Chandra Sharma observed, “… it is held that no priority of interest can be claimed by the Secured Creditors against the properties attached under the MPID Act and that the provisions of MPID Act would override any claim for priority of interest by the Secured Creditors in respect of the properties which have been attached under the MPID Act.”
The Bench elucidated that monies or deposits of depositors/investors, who have been allegedly defrauded by the Financial Establishment, and for the recovery of which the MPID Act has been enacted, could not be said to be a ‘debt’ contemplated in Section 26E of the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002).
Senior Advocate Atul Nanda represented the Petitioner while Senior Advocate Amit Sibal represented the Respondents.
Facts of the Case
The genesis of the Writ proceedings, was the scam which took place at the Commodity Exchange Platform of the Petitioner Company – National Spot Exchange Limited (NSEL), a company registered under the Companies Act, 1956, in the year 2005. It is promoted by 63 Moons Technologies Limited (Formerly Financial Technologies India Limited), which holds 99.99% of total share capital of the company and the National Agricultural Cooperative Marketing Federation of India Limited (NAFED) holds 0.01% of total share capital of company. The Exchange Platform of the NSEL committed payment defaults and fraud aggregating to about Rs.5,600 Crores vis-à-vis their trading counterparts numbering about 13,000 traders who traded through its members/ brokers.
The NSEL had filed a Writ Petition seeking directions for the consolidation of the proceedings before the Committee appointed by the Bombay High Court. Thereafter, a Supreme Court Committee was constituted comprising of Justice (Retd.) Pradeep Nandrajog. The said Committee raised an issue as to whether the secured creditors would have priority of interest over assets attached under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA) and MPID Act, by virtue of SARFAESI Act and the Recovery of Debts and Bankruptcy Act, 1993 (RDP Act). As the Orders were not in favour of the Petitioner, it preferred a Writ Petition before the Apex Court.
Reasoning
The Supreme Court in the above regard, said, “… a three-fold distribution of legislative power between the Union and the States made in the three Lists in the Seventh Schedule of the Constitution read with Article 246, exhibits the Principle of Federal supremacy viz. that in case of inevitable conflict between Union and State powers, the Union power as enumerated in List-I shall prevail over the State power as enumerated in Lists-II and III, and in case of overlapping between Lists II and III, the latter shall prevail.”
The Court remarked that there remains no shadow of doubt that the State of Maharashtra was within its legislative competence to enact the MPID Act, the subject matter of which in pith and substance was relatable to Entries 1, 30 and 32 of the State List (List II) of the Seventh Schedule of the Constitution of India.
“However, merely because the SARFAESI Act and RDB Act which are enacted in respect of the subject matter falling in List-I and having been enacted by Parliament, they could not be permitted to override the MPID Act, which is validly enacted for the subject matter falling in List-II – State List. If such an interpretation is permitted to be made, it would amount to denuding the State of its legislative power to enact and enforce legislation, which is within the exclusive domain of the State, and it would offend the very principle of Federal Structure set out in Article 246 of the Constitution of India, held to be a part of the basic structure of Constitution of India”, it added.
Furthermore, the Court held that the Central Legislations i.e., SARFAESI Act or RDB Act cannot be permitted to prevail over the State Legislation i.e., MPID Act, merely because the Central Legislations are enacted by the Parliament.
“Since all these Acts have separate field of operations, provisions of SARFAESI Act or RDB Act cannot be permitted to override the provisions of MPID Act, which is a validly enacted State Legislation, otherwise it would tantamount to violation of federal structure doctrine envisaged in the Constitution”, it noted.
The Court was of the view that if provisions of SARFAESI Act or RDB Act are permitted to override the provisions of MPID Act, then the legislative powers of the State Legislature would be denuded which would tantamount to subverting the law enacted by the State Legislature.
“The MPID Act having been enacted for the matters relatable to the Entries-1, 30 and 32 in List-II-State List, and the IBC having been enacted for the matters relatable to the Entry-9 in List-III- Concurrent List, the provisions of Article 254 would not be attracted. As per the settled legal position discussed earlier, the issue of repugnancy or conflict as contemplated in Article 254 would arise only when the State Legislation and the Central Legislation, both, are relatable to the Entries contained in List-III-Concurrent List of Seventh Schedule”, it further said.
The Court, therefore, concluded that the properties of the Judgment Debtors and Garnishees attached under the provisions of the MPID Act, would be available for the execution of the decrees against the Judgment Debtors by the S.C. Committee, despite the provision of Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).
Accordingly, the Apex Court upheld the Orders of the Supreme Court Committee.
Cause Title- National Spot Exchange Limited v. Union of India & Ors. (Neutral Citation: 2025 INSC 694)
Appearance:
Petitioner: Senior Advocate Atul Nanda, AOR Diksha Rai, and Advocate Rameeza Hakeem.
Respondents: Senior Advocate Amit Sibal, AOR Aditya Verma, and Advocate Y Suryanarayana.