Introduction
The Hon'ble Supreme Court of India in its order dated May 15, 2025, in the matter of National Spot Exchange Limited v. Union of India (Writ Petition (Civil) No. 995 of 2019) has explored the interplay of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") and the Recovery of Debts and Bankruptcy Act, 1993 ("RDBA"), which provide enforcement and debt recovery mechanisms for banks, non-banking financial companies and secured creditors in India, with the Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999 ("MPID Act"), which enables attachment of assets of fraudulent financial establishments for protection of interests of depositors. The above has been deliberated upon concerning the National Spot Exchange Limited ("NSEL") scam which took place in 2013 when the commodities exchange committed financial default of approximately INR 56 billion in settlement of trades of approximately 13,000 traders due to fraud committed by 24 traders on the commodities exchange.
In this judgment, the apex court has, in the aftermath of the NSEL scam, dealt with the status of secured creditors and priority of their interest over assets attached under the MPID Act and the consequences of such attachment, in context of moratorium declared under the Insolvency and Bankruptcy Code, 2016 ("IBC").
The authors in this article endeavour to analyse the findings of the Hon'ble Supreme Court of India, and its impact on the sanctity of the existing legal framework for security interest enforcement, recovery actions and insolvency resolution in India.
Our analysis of key findings of the Supreme Court
The MPID Act provides the Government of Maharashtra as well as courts with wide powers of attachment and execution of decrees against assets/properties of financial establishments who have fraudulently defaulted on repayments of any deposits raised by them. The scope and ambit of 'deposit' and 'financial establishment' under the MPID Act is however very broad. Any receipt of money or commodities in cash or in kind (excluding advances against goods/services, security deposits, bank financing, investment in equity shares and raising of funds through bonds/debentures) is treated as 'deposit' under the MPID Act, and any person accepting such 'deposit' is a 'financial establishment' for the purposes of the MPID Act.
The Hon'ble Supreme Court of India has in this judgment held that priority of interest or repayment cannot be claimed by secured creditors against any properties attached under the MPID Act, in case of fraudulent default being committed by financial establishments after accepting deposits, despite Section 31B and Section 34 of RDBA as well as Section 26E and Section 35 of the SARFAESI Act recognizing such priority, due to the provisions of MPID Act providing powers of attachment to the Government/courts.
The apex court also held that the provisions of MPID Act would supersede the provisions of the SARFAESI Act and RDBA, as otherwise the legislative powers of the State Legislature would stand constrained, and the 'federal structure' under our Constitution would stand defeated. Such a conclusion has been reached despite priority of legislative powers of the Parliament of India over State Legislatures being constitutionally recognized under Article 246 of our Constitution, and previous directions issued by the court in the matter of Government of Andhra Pradesh v. J.B. Educational Society (Writ Petition (Civil) No. 995 of 2019) where it was clarified that in case of unavoidable conflict between a legislation of the Parliament of India and a State legislation, the Parliamentary legislation would prevail, due to the principles or doctrines of repugnancy enshrined under our Constitution.
While deliberating on the consequences of such attachment in context of moratorium declared under IBC, the court proceeded to hold that such assets would be available for execution of decrees, despite such declaration of moratorium under IBC. In its judgment, the court has relied on the fact that attachment under MPID Act had been initiated prior to commencement of moratorium under IBC, and hence, such properties stood vested in the Government of Maharashtra under Section 4 of the MPID Act, pending final attachment order of the designated court under Section 7 of the MPID Act, and hence, would not be within the purview of the moratorium which only came into effect much later.
The judicial approach under the aforesaid judgment marks a significant departure from the approach, findings and directions of the Hon'ble Supreme Court of India in Innoventive Industries Limited v. ICICI Bank Limited (Civil Appeal Nos. 8337-8338 of 2017) where the interplay between a State legislation i.e., the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 and a central legislation i.e., the IBC had been previously explored, and the court had concluded that the IBC being a complete and exhaustive code on insolvency had to prevail over the provisions of the Maharashtra Relief Undertakings (Special Provisions) Act, 1958.
Key implications for secured financing transactions and the debt market in India
The aforesaid judgment has re-introduced uncertainty with respect to priority of interests and repayments of banks, financial institutions and other secured creditors, in case they have financed and/or funded debt in any financial establishments which have accepted any deposits under any arrangement, and such financial establishment commits fraudulent default or becomes subject to attachment action under the provisions of the MPID Act, in which scenario, ability to recover outstanding amounts by such lenders is significantly impacted. Given the wide scope and ambit of 'deposits' and 'financial establishments' under the MPID Act, the observations/directions of the Hon'ble Supreme Court of India in the aforesaid judgment have wide repercussions on secured lending transactions in India going forward.
The Hon'ble Supreme Court of India has therefore in its endeavour to provide a solution to the grievances of traders/depositors in the NSEL scam of 2013, has through the judgment and its wide-reaching implications, given rise to larger issues which impact secured creditors and secured financing in India and the overall debt market.
Predictability and certainty of outcomes are fundamental assumptions for the success of any market-based mechanism, and such huge alterations to core assumptions such as priority of interests or repayments of secured lenders and secured financing, are likely to have significant bearing going forward. Priority of interests and repayments of secured creditors as recognized under the SARFAESI Act and the RDBA in India enables lowering of interest costs and effectively cost of borrowing for borrowers in case of secured financing in comparison to unsecured financing.
Such uncertainty would therefore lead to such risk is accordingly priced into the cost of secured financing which is provided by banks and financial institutions which increases cost of borrowing and has an adversely impact on the Indian economy, thereby defeating the objectives sought to be achieved by economically beneficial legislations such as, the SARFAESI Act, RDBA and the IBC.
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