Depositor Protection Prevails: Supreme Court Affirms Primacy of MPID Attachments over Secured Creditors and IBC Moratorium

1. Introduction

In National Spot Exchange Limited v. Union of India & Ors. (2025 INSC 694), the Supreme Court of India rendered a landmark ruling settling two inter-connected contests:

Whether banks and other secured creditors enjoy priority over properties already attached under the Prevention of Money Laundering Act, 2002 (PMLA) and the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act); and
Whether the statutory moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) bars execution of decrees against assets earlier attached under the MPID Act.

The controversy originates from the Rs. 5,600-crore payment default at NSEL, which triggered multiple criminal, civil and recovery proceedings across the country, compelling the Court in 2022 to constitute an Article 142 Committee for “speedy holistic recovery”. When the Committee refused to recognise the priority of secured creditors and held that MPID attachments survive IBC moratoria, aggrieved lenders challenged those orders through Interlocutory Applications in the parent writ petition. The present judgment dismisses those challenges, thereby cementing new conflict-of-laws principles on:

Statutory priority: Depositor-protection attachments under a State Act (MPID) trump secured-creditor claims under federal banking legislations (SARFAESI & RDB).
Inter-statute coexistence: Assets that have vested in the MPID competent authority before commencement of IBC proceedings stand outside the insolvency estate and can still be sold to satisfy depositor claims.

2. Summary of the Judgment

The two questions framed by the Supreme Court were answered thus:

Priority question: Negative. Secured creditors cannot claim priority over assets attached under the MPID Act or PMLA notwithstanding sections 26E of SARFAESI and 31B of the RDB Act. The MPID Act, enacted under the State List, operates in a distinct field aimed at protecting depositors and therefore overrides lenders’ security interests.
Moratorium question: Affirmative. Properties already attached under section 4 of the MPID Act before insolvency commencement do not form part of the “property of the corporate debtor” within section 14, IBC. The Article 142 Committee may execute decrees against such properties despite moratorium.

The Court therefore:

Upheld both impugned orders of the Justice Pradeep Nandrajog Committee dated 10-Aug-2023 and 08-Jan-2024.
Clarified that its 04-May-2022 Article 142 directions, although broad, harmonise with statutory frameworks and cannot be construed as overriding them.

3. Analytical Commentary

3.1 Precedents Cited & Their Influence

Supreme Court Bar Association v. Union of India (1998) and SHILPA SAILESH v. VARUN SREENIVASAN (2023): Reiterated limits of Article 142 powers—complete justice cannot directly contravene substantive statutes.
M/s Hoechst Pharmaceuticals (1983), Kartar Singh (1994) & Rajiv Sarin (2011): Defined constitutional tests for repugnancy and ‘pith and substance’, guiding the Court’s conclusion that MPID (State List) and SARFAESI/RDB (Union List) occupy distinct fields.
K.K. Baskaran (2011), Sonal Joshi (2012) & 63 Moons (2022): Upheld the constitutional validity of MPID and analogous State Acts, emphasising depositor protection as a legitimate State objective.
Mardia Chemicals (2004) and Innoventive Industries (2018): Affirmed central banking and insolvency statutes but acknowledged their boundaries when overlapping with distinct legislation.

3.2 Court’s Legal Reasoning

Federal architecture & legislative competence
• Under Article 246, MPID (Entries 1, 30, 32 – State List) is a valid State law; SARFAESI/RDB (Entry 45 – Union List) and IBC (Entry 9 – Concurrent List) are valid Central laws.
• Applying the pith and substance test, depositor-protection (MPID) and banking security enforcement (SARFAESI/RDB) serve different dominant purposes; any incidental overlap does not create repugnancy.
• Following ITC Ltd. v. APMC (2002), federal supremacy cannot be stretched to emasculate legitimate State legislation; otherwise the basic-structure principle of federalism would be compromised.
Priority of secured creditors defeated
• Sections 26E (SARFAESI) & 31B (RDB) grant priority over “all other debts” and government dues; but the asset class created by MPID section 4 is not a “debt”—it is proceeds of crime/fraudulent deposit statutorily vested in the State competent authority.
• Attachments under MPID precede enforcement of security interest; hence lenders never acquire a legally enforceable charge vis-à-vis the State-vested property.
IBC moratorium inapplicable
• Section 14 prohibits actions “against the property of the corporate debtor”. Once MPID attachment takes effect, ownership stands divested and vests in the competent authority subject to court confirmation; hence such property is not part of the insolvency estate.
• No conflict between IBC section 238 (overriding effect) and MPID section 14 because the two operate in separate fields. The moratorium cannot retrospectively nullify State-ordered vesting.
Article 142 directions validated
• The 2022 order creating the Committee was a procedural mechanism for complete justice, not a substantive re-allocation of property rights. It remains harmonious with the statutory scheme as now clarified.

3.3 Expected Impact

Banking & finance: Secured lenders must now factor the risk that properties already attached under depositor-protection or anti-money-laundering laws may be outside their reach, even with registered security interests.
Insolvency practice: Resolution professionals and creditors’ committees must exclude pre-attachment assets when valuing the insolvency estate; diligence on MPID/PMLA proceedings becomes critical.
State regulator empowerment: The ruling bolsters State legislations analogous to MPID nationwide, providing legal assurance that depositor interests receive top priority.
Litigation strategy: Priority disputes will likely shift to verifying timing of attachment versus creation/registration of security interest, and to challenging the validity of the attachment instead of claiming superiority via SARFAESI.
Federal jurisprudence: Reinforces the doctrine that coexistence, not hierarchy, governs when distinct legislative fields overlap incidentally—a significant restatement supportive of cooperative federalism.

4. Complex Concepts Simplified

Secured Creditor: A lender holding a charge (mortgage, hypothecation, pledge) over specific assets to secure repayment of a loan.
SARFAESI Act: Central law empowering banks to seize and auction secured assets without court intervention when borrowers default.
RDB Act: Creates Debt Recovery Tribunals for expeditious adjudication and recovery of bank debts.
MPID Act: Maharashtra statute allowing attachment and sale of assets of “financial establishments” that fraudulently default on public deposits; proceeds go directly to duped investors.
PMLA: Federal law targeting money-laundering; attached property represents “proceeds of crime”.
IBC Moratorium (s.14): Automatic freeze on suits, enforcement and foreclosures against the corporate debtor’s assets once insolvency is admitted, to facilitate resolution.
Article 142: Constitutional power enabling the Supreme Court to pass any order necessary to do “complete justice”; however, it cannot trump substantive statutory provisions.
Repugnancy (Art. 254): Conflict doctrine used when both Union and State laws fall under the Concurrent List and are irreconcilable; not applicable where laws emanate from different lists.

5. Conclusion

The Supreme Court’s decision carves out a clear hierarchy when depositor-protection and anti-money-laundering attachments collide with banking security enforcement and insolvency processes. In effect, the judgment:

Elevates the public-interest objective of protecting small investors above the private-law claims of banks and financial institutions, where attachment under MPID or PMLA is prior in time.
Affirms that State legislatures retain meaningful space to legislate for depositor protection even in areas tangentially touching banking and insolvency—an emphatic nod to cooperative federalism.
Provides much-needed certainty on the status of attached assets vis-à-vis IBC proceedings, helping insolvency stakeholders delineate the true eState of the debtor.

By harmonising multiple special statutes through constitutional doctrines rather than blunt hierarchical override, the Court underscores a principle that will resonate across future multi-statute disputes: purpose-oriented coexistence trumps mechanical priority.