ARTICLE
21 May 2025

Legal Update: Supreme Court Prioritises Investor Claims Over Secured Creditors

MH
Mansukhlal Hiralal & Co.

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The Supreme Court, in a recent judgement of National Spot Exchange Limited vs Union of India, has held that the provisions of the Maharashtra Protection of Interest of Depositors Act, 1999 ("MPID Act")...
India Litigation, Mediation & Arbitration

Background:

The Supreme Court, in a recent judgement of National Spot Exchange Limited vs Union of India, has held that the provisions of the Maharashtra Protection of Interest of Depositors Act, 1999 (“MPID Act”) will have primacy over the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (“SARFAESI Act”), the Recovery of Debts and Bankruptcy Act, 1993, (“RDB Act”), and the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Supreme Court further upheld the validity of the a committee constituted by the Supreme Court vide its order dated 4 May 2022 (“Supreme Court Committee”) by it using its plenary powers under Article 142 of the Constitution of India for the speedy recovery of dues payable to the aggrieved investors.

Issues for consideration:

The Supreme Court in the present case was considering the validity of the orders dated 10 August 2023 and 8 January 2024, passed by the Supreme Court Committee, following which it framed the following two questions to be decided on a priority basis while hearing the various applications pending before it:

  • whether the Secured creditors would have priority of interest over the assets attached under the Provisions of Prevention of Money Laundering Act, 2002, (PMLA) and Maharashtra Protection of Investors and Depositors Act, 1999 (MPID Act), by virtue of the Provisions of SARFAESI Act, 2002 and RDB Act, 1993;
  • whether the properties of the Judgment Debtors and Garnishees attached under the provisions of the MPID Act, 1999 would be available for the execution of the decrees against Judgments Debtors in view of the provisions of the Moratorium under Section 14 of the IBC, 2016

Held:

The Supreme Court at the outset upheld the validity of the Supreme Court Committee formed by it vide its order dated 4 May 2022 using its powers under Article 142 of the Constitution of India.

The Supreme Court, while adjudicating the first issue, categorically held that secured creditors acting under the aegis of the SARFAESI Act and RDB Act, cannot claim primacy or precedence over asset attachments lawfully effected under the MPID Act. The Supreme Court affirmed that the State of Maharashtra was acting within its legislative competence in enacting the MPID Act, the subject matter of which, in its pith and substance, falls squarely within Entries 1, 30, and 32 of List II (State List) of the Seventh Schedule to the Constitution of India. The Supreme Court further observed that although the SARFAESI and RDB Acts are legislations enacted by Parliament in respect of subjects falling under List I (Union List), the existence of such Central enactments cannot be construed so as to override or render nugatory a law that the State is constitutionally empowered to make.

Any such interpretation, the Supreme Court cautioned, would effectively denude the States of their constitutionally conferred legislative competence and would be in direct contravention of the principles governing India's federal structure, as enshrined under Article 246 of the Constitution. The Court reiterated that the federal structure is a part of the basic structure doctrine, and any attempt to disturb the legislative equilibrium between the Centre and the States must be viewed with circumspection.

With respect to the second question (i.e. attachment under IBC), the Supreme Court held that any property of a Corporate Debtor which already stood attached under Section 4 of the MPID Act, prior to the coming into force of the moratorium under Section 14 of the IBC would not be considered as property of the Corporate Debtor for the purpose of the Resolution Plan. The Court clarified that upon the issuance of an attachment notification under Section 4 of the MPID Act, the affected property stands statutorily vested in the Competent Authority appointed by the State Government, pending adjudication and further orders of the Designated Court. As a result, such attached properties cease to form part of the Corporate Debtor's asset pool and are thereby excluded from the scope and operation of the moratorium under the IBC.

MHCO Comments:

The judgement highlights a significant policy consideration regarding the conflict between statutory recovery mechanisms for secured creditors versus public interest claims under MPID Act. The Supreme Court Committee's interpretation that assets attached under MPID Act cannot be subjected to secured creditors claims prioritizes the recovery of defrauded investors over financial institutions. The decision further effectively subordinates the rights of secured creditors in favour of claims under MPID Act even when security interests were created prior to attachment. This outcome could deter financial institutions from extending credit against assets susceptible to attachment under these statutes. This article was released on 19 May 2025

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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