Supreme Court Says Depositors First, Banks Later in NSEL Scam Case: MPID Act Overrides SARFAESI

National Spot Exchange Limited vs. Union of India & Ors.

The Supreme Court ruled that the Maharashtra Protection of Investors and Depositors (MPID) Act 1999 prevails over the SARFAESI Act, 2002 and Recovery of Debts Act 1993, denying secured creditors priority over assets attached under MPID. It also held that properties attached under MPID remain outside IBC moratorium, ensuring depositor claims take precedence over insolvency proceedings. The judgment reaffirms state legislative competence under List-II (State List) and upholds federalism by preventing central laws from overriding state-enacted investor protection measures.

Facts Of The Case:

The case arose from the 2013 National Spot Exchange Limited (NSEL) scam, where around 13,000 investors lost approximately ₹5,600 crores due to payment defaults by trading members. NSEL, a commodity exchange platform, faced allegations of fraud, leading to FIRs under PMLA and MPID Act. The Enforcement Directorate (ED) and Maharashtra government attached properties of defaulters under these laws. Meanwhile, secured creditors (banks and financial institutions) claimed priority over these assets under SARFAESI Act and Recovery of Debts Act.

NSEL filed a writ petition in the Supreme Court seeking consolidation of recovery proceedings. The Court appointed a Supreme Court Committee to oversee execution of decrees. The Committee ruled that:

  1. Secured creditors cannot claim priority over assets attached under PMLA and MPID Act.

  2. Properties attached under MPID Act before insolvency remain outside IBC moratorium.

Challenging these orders, secured creditors and defaulters argued that central laws (SARFAESI, IBC) should prevail over state laws (MPID Act). However, the Supreme Court upheld the Committee’s decision, emphasizing MPID Act’s validity as a state law protecting depositors. It clarified that IBC moratorium does not apply to properties already attached under MPID Act, ensuring investor repayments take precedence over insolvency claims. The judgment reinforced federalism by recognizing state legislative power in investor protection matters.

Procedural History:

The procedural history of the case began with the 2013 NSEL scam, leading to multiple legal actions, including FIRs under PMLA and MPID Act for money laundering and investor fraud. The Maharashtra government and Enforcement Directorate (ED) attached properties of defaulters under these laws. Meanwhile, NSEL filed a writ petition (Civil No. 995 of 2019) in the Supreme Court, seeking consolidation of recovery proceedings for efficient execution of decrees.

In May 2022, the Supreme Court exercised its powers under Article 142 and constituted a High-Powered Committee (HPC) under retired Justice Pradeep Nandrajog to oversee execution. The HPC passed two key orders:

  1. August 2023: Held that secured creditors (banks) cannot claim priority over assets attached under PMLA/MPID Act.

  2. January 2024: Ruled that properties attached under MPID Act before insolvency remain unaffected by IBC moratorium.

Aggrieved parties challenged these orders before the Supreme Court through SLPs (later converted into IAs). The final judgment in May 2025 upheld the HPC’s decisions, reinforcing the primacy of MPID Act over SARFAESI, RDB Act, and IBC in protecting depositors’ interests. The ruling settled critical conflicts between state and central laws while prioritizing investor repayments.

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Court Observation:

The Supreme Court made several key observations while upholding the primacy of the Maharashtra Protection of Investors and Depositors (MPID) Act, 1999 over central laws. It ruled that secured creditors cannot claim priority over properties attached under PMLA and MPID Act, as these laws serve distinct purposes – investor protection versus debt recovery. The Court emphasized that MPID Act, being a valid state legislation under List-II (State List), operates in a different domain than SARFAESI Act and RDB Act (List-I – Union List), and thus no repugnancy exists under Article 254 of the Constitution.

Regarding the IBC moratorium, the Court held that properties already attached under MPID Act before insolvency proceedings remain outside the scope of Section 14 of IBC, as they vest with the Competent Authority under state law. It clarified that IBC (List-III – Concurrent List) cannot override MPID Act’s specific investor protection mechanism. The judgment reinforced federalism principles, stating that state legislatures have exclusive power to enact laws on subjects under their domain, and such laws cannot be subverted by central legislations dealing with different matters. The Court also noted that Article 142 powers were rightly exercised to ensure complete justice for defrauded investors, balancing competing claims through a structured recovery process.

Final Decision & Judgement:

In its final judgment delivered in May 2025, the Supreme Court conclusively ruled in favor of protecting investor interests over secured creditors’ claims. The Court upheld the validity and supremacy of the Maharashtra Protection of Investors and Depositors (MPID) Act, 1999, determining that properties attached under this state legislation could not be claimed by secured creditors under either the SARFAESI Act or the Recovery of Debts Act. The bench further clarified that such attached properties would remain unaffected by moratorium provisions under the Insolvency and Bankruptcy Code (IBC), as they had already vested with the Competent Authority under MPID prior to any insolvency proceedings. The judgment reinforced the principle of federalism by recognizing the state’s legislative competence in investor protection matters under List II of the Seventh Schedule, while simultaneously establishing that these provisions did not conflict with central laws operating in different domains. The Court’s decision effectively prioritized the recovery of defrauded investors’ funds over other financial claims, while providing clear judicial guidance on the interplay between state investor protection laws and central financial legislation. This landmark ruling set an important precedent for similar cases involving competing claims between investor compensation and debt recovery mechanisms.

Case Details:

Case Title: National Spot Exchange Limited vs. Union of India & Ors.
Citation: 2025 INSC 694
Case Number: Writ Petition (Civil) No. 995 of 2019
Date of Judgment: May 15, 2025
Bench: Justice Bela M. Trivedi & Justice Satish Chandra Sharma
Download The Judgement Here

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