NATIONAL SPOT EXCHANGE LIMITED versus UNION OF INDIA & ORS. (14/05/2025) — Supreme Court headnote

AI-generated headnote. Verify against the judgment before relying on it. Paragraph numbers refer to the judgment.

Summary

In the NSEL payment-default matter, where a Committee appointed under Article 142 was executing decrees against defaulting trading members whose properties stood attached under the PMLA and the Maharashtra Protection of Interest of Depositors Act, 1999, the Court upheld the Committee's orders: secured creditors cannot claim priority under Section 26E of the SARFAESI Act or Section 31B of the RDB Act over properties attached under the MPID Act, a validly enacted State law under List II which the Central banking statutes under List I cannot override without offending the federal structure, and properties attached under Section 4 of the MPID Act remain available for execution despite a moratorium under Section 14 of the IBC, there being no inconsistency between the two Acts.

Issues

Whether, in exercising power under Article 142 by its order dated 04.05.2022 constituting the Supreme Court Committee and empowering it to sell attached properties, the Court could disregard express provisions of the SARFAESI Act, RDB Act, PMLA and IBC.
Whether secured creditors have priority of interest, by virtue of the SARFAESI Act, 2002 and the RDB Act, 1993, over assets attached under the PMLA, 2002 and the MPID Act, 1999.
Whether properties of judgment debtors and garnishees attached under the MPID Act are available for execution of decrees against them notwithstanding the moratorium under Section 14 (or interim moratorium under Section 96) of the IBC, 2016.

Provisions considered

Article 142(1), Constitution of IndiaFollowing Supreme Court Bar Association v. Union of India and Shilpa Sailesh v. Varun Sreenivasan, the power is curative and cannot supplant substantive law or achieve indirectly what cannot be achieved directly; the Court must take note of express substantive statutory provisions and ordinarily not act in direct conflict with them, except to balance equities by ironing out creases. The 04.05.2022 order, passed for speedy recovery for investors, had the potential to conflict with the SARFAESI Act, RDB Act and IBC, but the objection lost significance once the order was implemented; the statutory conflicts were decided on their merits. (¶¶ 9, 10, 11, 12, 13, 14, 18, 19)
Articles 246 and 254, Constitution of IndiaArticle 246 embodies federal supremacy: List I prevails over Lists II and III only in an irreconcilable direct conflict, and a State may legislate on a List II matter even if it incidentally affects List I (Committee for Protection of Democratic Rights; Kesoram; ITC v. APMC; Kartar Singh). Repugnancy under Article 254 arises only where both laws fall under the Concurrent List and are substantially on the same subject (Hoechst; Rajiv Sarin). The MPID Act (List II) therefore prevails in Maharashtra over the SARFAESI and RDB Acts (Entry 45, List I) in its field, and Article 254 is not attracted between the MPID Act and the IBC (Entry 9, List III). (¶¶ 25, 26, 27, 28, 29, 30, 31, 34, 35, 36, 37, 38, 39, 40, 41, 47)
Sections 2(c), 2(d), 3, 4, 5, 7 and 14, Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999NSEL's receipts from traders were 'deposits' under Section 2(c), making it a 'Financial Establishment'. Under Section 4(1) the Government may, notwithstanding any other law, attach property believed to be acquired from deposits and, if insufficient, other property of the establishment or its promoters, directors or members; it vests in the Competent Authority (Section 4(2)) pending orders of the Designated Court under Section 7; Section 14 gives overriding effect. Depositors' monies are not a 'debt' under Section 26E of the SARFAESI Act, so the MPID Act overrides secured creditors' priority claims, and the vesting lies outside the debtor-creditor relationship governed by the IBC. (¶¶ 15, 16, 24, 32, 33, 34, 43, 44, 47, 49, 50)
Sections 26E and 35, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Section 26E (in force from 1 September 2016) gives a secured creditor, after registration of its security interest, priority over all other debts and over revenues, taxes, cesses and rates payable to Government or local authorities; Section 35 gives the Act overriding effect. The Court held Section 26E is not attracted: depositors' monies for whose recovery the MPID Act attaches property are not a 'debt' within the provision, and a Parliamentary enactment on 'Banking' (Entry 45, List I) cannot override a valid State law on a List II subject merely because it is Central. (¶¶ 22, 36, 38, 40, 42, 43, 44)
Sections 31B and 34, Recovery of Debts and Bankruptcy Act, 1993Section 31B gives secured creditors priority in realising secured debts by sale of secured assets over all other debts and Government dues, and Section 34 gives the Act overriding effect. Read together with the SARFAESI Act as banking legislation under Entry 45 of List I, the Court held these provisions cannot be permitted to prevail over the MPID Act in respect of properties attached under that State Act. (¶¶ 21, 36, 37, 38, 40, 41)
Section 71, Prevention of Money Laundering Act, 2002Noted as giving the PMLA (relatable to Entry 13 of List I) overriding effect; the Committee had held that attached property being proceeds of crime, secured creditors could claim no priority over it. The Court's analysis of question (i) proceeded principally on the MPID Act attachments. (¶¶ 5, 23, 35)
Sections 14, 96 and 238, Insolvency and Bankruptcy Code, 2016Section 14 moratorium, declared by the Adjudicating Authority, bars suits, execution and enforcement of security against the corporate debtor; Section 96 gives personal guarantors an interim moratorium; Section 238 gives the Code overriding effect. The moratorium operates within the debtor-creditor relationship, whereas attachment under Section 4 of the MPID Act, vesting property in the Competent Authority subject to the Designated Court, lies outside it. With no inconsistency between the Acts, Section 238 is not attracted, and Article 254 does not apply (IBC: Entry 9, List III; MPID Act: List II). (¶¶ 6, 7, 45, 46, 47, 48, 49, 50, 51, 52)

Held

The power under Article 142(1) is curative; the Court will not ordinarily pass an order ignoring or disregarding a statutory provision governing the subject except to balance equities by ironing out creases in the cause before it, must take note of express substantive statutory provisions and regulate its discretion accordingly, should ordinarily not exercise the power in direct conflict with what a statute expressly provides, and cannot use Article 142 to achieve indirectly what cannot be achieved directly. The order dated 04.05.2022 constituting the Committee had the potential to conflict with the SARFAESI Act, RDB Act and IBC and to affect secured creditors' rights, but that objection lost significance once the order was implemented and proceedings transferred, the exercise having been for speedy recovery of investors' monies; the statutory conflicts raised were nonetheless decided. (¶¶ 11, 12, 13, 14, 19)
The MPID Act is a validly enacted State law whose pith and substance is relatable to Entries 1, 30 and 32 of List II, its constitutional validity having been upheld in Sonal Hemant Joshi and 63 Moons Technologies following K.K. Baskaran. The SARFAESI Act and RDB Act are banking legislation under Entry 45 of List I and the PMLA is relatable to Entry 13 of List I. Central legislation cannot be permitted to override a valid State law on a List II subject merely because it is enacted by Parliament; the Acts have separate fields of operation, and allowing the SARFAESI or RDB Act to override the MPID Act would denude the State of its legislative power and offend the federal structure embodied in Article 246, part of the basic structure. Federal supremacy applies only to irreconcilable direct conflict, and the predominance of List I does not prevent a State from legislating on a List II matter even if it incidentally affects List I; the MPID Act therefore prevails in Maharashtra in respect of its specific subject matter under Article 246(3). (¶¶ 26, 27, 28, 29, 30, 33, 34, 35, 36, 37, 38, 39, 40, 41)
Section 26E of the SARFAESI Act does not assist the secured creditors: apart from having come into force only on 1 September 2016, it confers priority, after registration of security interest, over other debts and over revenues, taxes, cesses and rates payable to Government or local authorities. Properties attached under Section 4 of the MPID Act are believed to have been acquired from deposits collected by the Financial Establishment and vest in the Competent Authority pending orders of the Designated Court; the monies of defrauded depositors for whose recovery the MPID Act was enacted are not a 'debt' within Section 26E. Hence no priority of interest can be claimed by secured creditors against properties attached under the MPID Act, whose provisions override any such claim. (¶¶ 42, 43, 44)
The question of repugnancy under Article 254 arises only when both the State and Central legislations are relatable to the Concurrent List and are substantially on the same subject; where the State law is traceable to List II and the Central law to List III, Article 254 is not attracted. The MPID Act (List II) and the IBC (Entry 9, List III, 'Bankruptcy and Insolvency') therefore do not raise any question of repugnancy. (¶¶ 30, 47)
There is no overlap or inconsistency between Section 14 of the IBC and Section 4 of the MPID Act. IBC proceedings arise from the debtor-creditor relationship and the moratorium is consequent upon the Adjudicating Authority's order; attachment under Section 4 of the MPID Act, made by the Government to protect depositors, is beyond that relationship and vests the property in the Competent Authority forthwith, subject to the Designated Court's orders under Sections 5 and 7 making the attachment absolute and directing realisation and equitable distribution among depositors. Absent inconsistency, Section 238 of the IBC is not attracted. Properties of judgment debtors and garnishees attached under the MPID Act accordingly remain available to the Supreme Court Committee for execution of decrees against the judgment debtors despite a moratorium under Section 14 of the IBC. (¶¶ 48, 49, 50, 51, 52)

Result

Question (i) answered in the negative and question (ii) in the affirmative; the Supreme Court Committee's orders dated 10.08.2023 and 08.01.2024 upheld; the interlocutory applications challenging those orders to be dealt with and decided in the light of the findings recorded.