NSEL Scam: Supreme Court upholds priority of MPID Act over RDB Act, SARFAESI and IBC

The Supreme Court on Thursday held that the Maharashtra Protection of Interest of Depositors (MPID) Act overrides the provisions of Central financial recovery statutes, including the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), the Recovery of Debts and Bankruptcy Act (RDB Act) and the Insolvency and Bankruptcy Code (IBC). .The Court also upheld the validity and functioning of a special execution committee constituted under Article 142 of the Constitution to enable speedy and coordinated recovery of dues payable to over 13,000 investors..The judgment, delivered by a Bench of Justices Bela Trivedi and Satish Chandra Sharma, rejected arguments made by secured creditors including banks and financial institutions. The Court stated:“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 Court further held that the MPID Act, being a state legislation, occupies a distinct legislative field and cannot be overridden by parliamentary enactments relating to banking and financial recovery. It emphasised that both sets of laws operate independently within their constitutional domains and the doctrine of repugnancy under Article 254 does not apply..The dispute arose from the ₹5,600 crore default at the National Spot Exchange (NSEL), a commodity exchange promoted by 63 Moons Technologies. NSEL offered one-day forward contracts which were exempted from the Forward Contracts (Regulation) Act under a 2007 notification. However, in July 2013, it suspended operations following regulatory intervention and admitted that 24 trading members had failed to honour payment obligations, leaving over 13,000 investors exposed to massive losses.In response, multiple enforcement proceedings were initiated. A First Information Report (FIR) was filed by the Mumbai Police and the criminal investigation was later taken over by the Economic Offences Wing (EOW). Simultaneously, the Enforcement Directorate (ED) attached properties worth ₹1,740 crore under the Prevention of Money Laundering Act (PMLA), while the Maharashtra government attached assets worth ₹8,548 crore under the MPID Act.NSEL also pursued civil remedies, obtaining decrees and arbitral awards worth ₹3,365 crore against the 24 defaulter trading members. One representative suit is pending before the Bombay High Court. NSEL issued third-party notices against the defaulters in that suit. Several other civil suits and execution petitions were pending across different courts in the country..To streamline recovery, the Supreme Court invoked Article 142 of the Constitution, and by its order dated May 4, 2022, constituted a high-powered committee chaired by Pradeep Nandrajog, former Chief Justice of the Bombay High Court. This committee was vested with the powers of a civil court to execute all decrees, orders and arbitral awards obtained by NSEL.The committee was also authorised to sell properties attached under PMLA and MPID Act, to the extent necessary to satisfy the decrees obtained by NSEL. It was also directed to coordinate with the competent authority under the MPID Act and oversee distribution to verified claimants..However, several secured creditors - including banks that had lent money to NSEL defaulters - filed applications before the committee and later the Supreme Court, arguing that they had priority rights over attached properties under Section 26E of the SARFAESI Act and Section 31B of the RDB Act. They also cited the moratorium under Section 14 of the IBC and Section 96 (applicable to personal guarantors) as barriers to any ongoing execution against debtor assets..The Supreme Court rejected all objections raised by the secured creditors and upheld the conclusions of the committee. On the issue of priority of claims, the Court ruled:“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.”It reasoned that the SARFAESI Act and RDB Act fall under Entry 45 (Banking) of List I (Union List), while the MPID Act is enacted under Entries 1 (Public Order), 30 (Money-lending and moneylenders), and 32 (Incorporation, regulation of societies) of List II (State List). Since both laws occupy distinct legislative fields, the Court held:“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.”.On the applicability of the moratorium under the IBC, the Court held that it does not affect properties already attached under the MPID Act. These assets, having vested in the competent authority under Section 4(2) of the MPID Act, do not form part of the debtor’s estate for insolvency purposes, it added.“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 IBC.”The Court ordered that if the assets are not yet attached, or if they are sought to be attached after the insolvency proceedings have begun, then recovery must proceed under the IBC as per statutory priorities..Addressing the objections to the constitution of the execution committee under Article 142, the Court held that the mechanism was valid as a means to achieve “complete justice” in the peculiar facts of the case. However, the Court reiterated limits on its curative powers.It noted that while the 2022 order was passed without contemplating the potential conflict between SARFAESI, IBC, and MPID, the subsequent functioning of the Committee and its enforcement actions did not violate any substantive statutory right, especially since the goal was to expedite recovery for genuine investors.It said “It is true that while passing the said order on 04.05.2022 under Article 142(1) of the Constitution of India, this Court probably would not have contemplated the possibility of the legal issues, with regard to the conflict of the provisions contained in the SARFAESI Act, RDB Act, PMLA and MPID Act, which were subsequently raised before the S.C. Committee..... We do, therefore, find substance in the submissions made by the learned counsel appearing for the applicants-Secured Creditors that while exercising the powers under Article 142, the express provisions in the other relevant Statutes should not be ignored, particularly when the exercise of powers under Article 142, would directly be in conflict with what has been express provisions in such Statutes.".The matter will now continue before the committee for further execution of decrees and liquidation of attached assets..NSEL was represented by Senior Advocate Atul Nanda with Advocates Diksha Rai and Rameeza Hakeem..The respondents were represented by Senior Advocate Amit Sibal and Advocates Aditya Verma, Suryanarayana, Vijay Kumar Singh, Shivani Tandon, Prem Prakash and others. .[Read Judgment]