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2025 (5) TMI 1373 - SC - Money LaunderingPriority of interest of Secured creditors 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 - properties of the Judgment Debtors and Garnishees attached under the Provisions of MPID Act 1999 would be available for the execution of the decrees against Judgment Debtors in view of the Provision of Moratorium under Section 14 of the IBC 2016 or not. HELD THAT - There remains no shadow of doubt that the exercise of power under Article 142(1) of the Constitution of India being curative in nature the Supreme Court would not ordinarily pass an order ignoring or disregarding a statutory provisions governing the subject except to balance the equities between conflicting claims of the litigating parties by ironing out creases in a cause or matter before it. Therefore even while exercising the powers under Article 142 the Supreme Court has to take note of the express provisions of any substantive statutory law and accordingly regulate the exercise of its power and discretion to do complete justice between the parties in the pending cause or matter arising out of such statutes. Though the powers of this Court cannot be controlled by any statutory provisions when the exercise of powers under Article 142 comes directly in conflict with what has been expressly provided in a statute ordinarily such power should not be exercised. Article 142 cannot be used to achieve something indirectly what cannot be achieved directly. Since the money collected by NSEL from the investors fell under the definition of deposit as per Section 2(c) of the MPID Act the State of Maharashtra invoking the provisions of Section 4(1)(ii) of MPID Act had attached the properties and monies of the defaulting promoters directors managers and members of the NSEL by issuing various notifications. However the total value of the attached properties was not sufficient for repayment to the depositors due to various reasons such as some of the properties were taken on rent by the members of NSEL from others while some properties were mortgaged with the banks against which proceedings under the SARFAESI Act were going on and against some of the members of NSEL insolvency proceedings were initiated. Whether the Secured Creditors would have priority of interest over the assets attached under the provisions of PMLA and MPID Act by virtue of the provisions of SARFAESI Act and RDB Act? - HELD THAT - As per Article 246(1) of the Constitution notwithstanding anything contained in Clauses (2) and (3) the Parliament has exclusive power to make laws with respect to any of the matters enumerated in the List-I in the Seventh Schedule referred to as the Union List . As per Article 246(2) notwithstanding anything in Clause (3) the Parliament and subject to Clause (1) the State Legislature have power to make laws on any of the matters enumerated in List-III in the Seventh Schedule referred to as the Concurrent List . As per Article 246(3) subject to Clauses (1) and (2) of Article 246 the Legislature of any State has exclusive powers to make laws for such State or any part thereof with respect to any of the matters enumerated in List-II in the Seventh Schedule referred to as the State List . Thus a three-fold distribution of legislative power between the Union and the States made in the three Lists in the Seventh Schedule of the Constitution read with Article 246 exhibits the Principle of Federal supremacy viz. that in case of inevitable conflict between Union and State powers the Union power as enumerated in List-I shall prevail over the State power as enumerated in Lists-II and III and in case of overlapping between Lists II and III the latter shall prevail. In view of such distribution of Legislative powers situations have arisen where two legislative fields have apparently overlapped. In such situations this Court has held that it would be the duty of the courts to ascertain as to what degree and to what extent the authority to deal with the matters falling within these classes of subjects exists in each of such legislatures and to define the limits of their respective powers. It may be noted that the constitutional validity of the MPID Act is no longer res integra in view of the decisions in case of Sonal Hemant Joshi and Ors. vs. State of Maharashtra and Ors. 2011 (5) TMI 1099 - SUPREME COURT and in case of State of Maharashtra vs. 63 Moons Technologies Ltd. 2022 (2) TMI 1348 - SUPREME COURT . This Court in 63 Moons Technologies Ltd. relying upon the earlier decision in case of Sonal Hemant Joshi and Ors. 2011 (5) TMI 1099 - SUPREME COURT after discussing the various provisions of MPID Act particularly with regard to the definitions of Deposit and Financial Establishment held that Having discussed the judgments of this Court on the constitutional validity of the State legislations governing financial establishments offering deposit schemes including the MPID Act there is no reason for us to reopen the question. This Court has held that the MPID Act is constitutionally valid on the grounds of legislative competence and when tested against the provisions of Part III of the Constitution. The PMLA was enacted to implement the international resolutions and declarations made by the General Assembly of United Nations and prevent money laundering as also to provide for confiscation of properties derived therefrom or involved in money laundering. The subject matter of PMLA therefore is traceable or relatable to the Entry-13 of Union List (List-I) of Seventh Schedule. As held by the Constitution Bench in Union of India and Another vs. Delhi High Court Bar Association and Others 2002 (3) TMI 825 - SUPREME COURT under Entry 45 of List-I it is Parliament alone which can enact a law with regard to the conduct of business by the Banks. Recovery of dues is an essential function of any Banking Institution. In exercise of its legislative power relating to Banking the Parliament can provide the mechanism by which monies due to the Banks and Financial Institutions can be recovered - However merely because the SARFAESI Act and RDB Act which are enacted in respect of the subject matter falling in List-I and having been enacted by Parliament they could not be permitted to override the MPID Act which is validly enacted for the subject matter falling in List-II State List. If such an interpretation is permitted to be made it would amount to denuding the State of its legislative power to enact and enforce legislation which is within the exclusive domain of the State and it would offend the very principle of Federal Structure set out in Article 246 of the Constitution of India held to be a part of the basic structure of Constitution of India. In the instant case the attachment of the properties over which the Secured Creditors is said to have security interest have been attached under Section 4 of the MPID Act. Such properties are believed to have been acquired by the Financial Establishment i.e. NSEL either in its own name or in the name of other persons from out of deposits collected by the Financial Establishment. All such properties and assets of the Financial Establishment and the persons mentioned in the said provision vest in the Competent Authority appointed by the Government pending further orders from the Designated Court. Such monies or deposits of depositors/ investors who have been allegedly defrauded by the Financial Establishment and for the recovery of which the MPID Act has been enacted could not be said to be a debt contemplated in Section 26E of the SARFAESI Act and hence also the provisions of Section 26E could not be said to have been attracted to the facts of the case. Whether the properties of Judgment Debtors and Garnishees attached under the MPID Act would be available for the execution of decrees against the Judgment Debtors in view of the provisions of Moratorium under Section 14 of the IBC 2016? - HELD THAT - The MPID was enacted in the public interest to curb the unscrupulous activities of the Financial Establishments who had defaulted to return the deposits of the public in the State of Maharashtra. The constitutional validity of the said Act has been upheld by this Court in Sonal Hemant Joshi and Ors. and in State of Maharashtra vs. 63 Moons Technologies Ltd. In the instant case there is also no overlap or inconsistency between the provisions contained in the IBC and MPID Act. As such Section 14 of IBC has the connotation which is very much different from Section 4 of MPID Act. The proceedings under the IBC arise out of the Debtor-Creditor relationships of the parties. As per Section 14 of IBC which pertains to the Moratorium a declaration has to be made to an order by the Adjudicating Authority prohibiting the acts mentioned therein. Therefore Section 14 of IBC is consequent upon the order passed by the Adjudicating Authority declaring Moratorium. A conjoint reading of Section 4 5 and 7 of the MPID Act makes it clear that though Section 4(2) states about the attached properties being vested in the Competent Authority appointed by the Government such vesting would be subject to the orders passed by the Designated Court. We therefore see no inconsistency between the provisions contained in the MPID Act and the IBC - In absence of any inconsistency having been brought on record between the provisions contained in the MPID Act and in the IBC Section 238 of IBC which gives overriding effect to the IBC over the other Acts for the time being in force cannot be said to have been attracted. In that view of the matter it is held that 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. Conclusion - i) The secured creditors do not have priority over assets attached under PMLA and MPID Act by virtue of SARFAESI and RDB Acts. ii) Properties attached under MPID Act are available for execution of decrees despite moratorium under Section 14 of IBC. Appeal disposed off.
1. ISSUES PRESENTED and CONSIDERED
The Court considered two primary legal questions arising from the writ proceedings concerning the recovery of monies lost by investors on the National Spot Exchange Limited (NSEL) platform: (i) Whether secured creditors have priority of interest over assets attached under the Prevention of Money Laundering Act, 2002 (PMLA) and Maharashtra Protection of Investors and Depositors Act, 1999 (MPID Act), by virtue of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and Recovery of Debts and Bankruptcy Act, 1993 (RDB Act); (ii) Whether the properties of judgment debtors and garnishees attached under the MPID Act would be available for execution of decrees against judgment debtors in view of the moratorium provisions under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Priority of Secured Creditors over Assets Attached under PMLA and MPID Act Relevant Legal Framework and Precedents: The Court examined the provisions of the SARFAESI Act and RDB Act, both central legislations enacted to facilitate recovery of debts by secured creditors, with explicit provisions granting priority to secured creditors over other debts and government dues (Sections 31B of RDB Act and 26E of SARFAESI Act). Both Acts contain overriding effect clauses to prevail over inconsistent laws. The PMLA and MPID Act also contain overriding effect provisions (Section 71 of PMLA and Section 14 of MPID Act). The constitutional framework under Articles 246 and 254 concerning legislative competence and repugnancy between Union and State laws was crucial, as SARFAESI, RDB, and PMLA are Union laws, while MPID is a State law enacted by Maharashtra. Precedents include constitutional validity of MPID Act upheld in Sonal Hemant Joshi and State of Maharashtra vs. 63 Moons Technologies Ltd., and principles of federal supremacy and repugnancy elucidated in State of West Bengal vs. Committee for Protection of Democratic Rights, Hoechst Pharmaceuticals Ltd. vs. State of Bihar, Kartar Singh vs. State of Punjab, and ITC Ltd. vs. Agricultural Produce Market Committee. Court's Interpretation and Reasoning: The Court held that the MPID Act is a valid State legislation enacted under Entries 1, 30, and 32 of the State List (List II), while SARFAESI and RDB Acts relate to Entry 45 (Banking) of the Union List (List I). The PMLA relates to Entry 13 of the Union List (List I). The Court emphasized the federal structure and legislative demarcation under the Constitution, holding that the MPID Act cannot be overridden by the SARFAESI or RDB Acts merely because the latter are central laws. The pith and substance of the MPID Act relates to protecting depositors from fraudulent financial establishments, a matter within State legislative competence. The Court rejected the submission that Section 26E of SARFAESI Act confers priority on secured creditors over properties attached under MPID Act, noting that such properties vest in the Competent Authority under MPID Act and do not constitute "debt" under SARFAESI Act. Key Evidence and Findings: The factual matrix showed properties attached under MPID Act were believed to have been acquired from deposits collected by the financial establishment (NSEL), and the total value of attached properties was insufficient for repayment to depositors. Secured creditors had filed applications claiming priority over these attached assets. Application of Law to Facts: Given the overriding effect clauses and the constitutional distribution of powers, the Court found no repugnancy that would invalidate the MPID Act's provisions. The properties attached under MPID Act are not subject to claims of secured creditors under SARFAESI or RDB Acts. The Court thus upheld the priority of the MPID Act over secured creditors' claims in this context. Treatment of Competing Arguments: The Court acknowledged the secured creditors' contention regarding their statutory priority but found it unmerited in respect of properties attached under MPID Act and PMLA, given the nature of the properties as proceeds of crime or deposits under a State Act. The Court also noted that the order constituting the Supreme Court Committee under Article 142 had already been implemented, and the secured creditors' objections had lost significance at this stage. Conclusion: The Court answered the first question negatively, holding that secured creditors do not have priority of interest over assets attached under PMLA and MPID Act by virtue of SARFAESI Act and RDB Act provisions. The MPID Act's provisions override any such claim. Issue (ii): Availability of Properties Attached under MPID Act for Execution Despite Moratorium under IBC Relevant Legal Framework and Precedents: The Court examined Section 14 of the IBC, which imposes a moratorium on proceedings against a corporate debtor once insolvency proceedings commence, and the MPID Act's provisions for attachment and vesting of properties in the Competent Authority (Sections 4, 5, and 7). The constitutional provisions on legislative competence were again relevant, as IBC is a concurrent legislation (Entry 9, List III) and MPID is a State legislation (List II). The Court also considered the doctrine of repugnancy under Article 254. Court's Interpretation and Reasoning: The Court held that the MPID Act's attachment of properties prior to the moratorium under IBC means such properties vest with the Competent Authority and are no longer properties of the judgment debtor or garnishees for the purposes of the IBC. Since the moratorium under Section 14 of IBC is prospective and contingent on an order by the Adjudicating Authority, it does not affect properties already attached under MPID Act. The Court found no inconsistency or repugnancy between IBC and MPID Act, and thus Section 238 of IBC (overriding effect) does not apply. Key Evidence and Findings: Evidence showed that properties were attached under MPID Act before insolvency proceedings commenced, and the Competent Authority had been appointed. The procedure under MPID Act involves the Designated Court making orders for realization and distribution of proceeds, which is distinct from insolvency proceedings under IBC. Application of Law to Facts: The Court applied the principles of legislative competence and repugnancy, and the specific procedural provisions of MPID Act, to hold that attached properties are outside the scope of the moratorium and available for execution of decrees by the Supreme Court Committee. Treatment of Competing Arguments: The Court rejected the judgment debtors' and garnishees' contention that IBC moratorium overrides MPID Act attachments, emphasizing the distinct purposes and legislative fields of the two statutes, and the absence of any direct conflict. Conclusion: The Court answered the second question affirmatively, holding that properties attached under MPID Act are available for execution of decrees despite the moratorium under Section 14 of IBC. Scope of Article 142 Powers The Court addressed preliminary objections regarding the exercise of powers under Article 142 of the Constitution to constitute the Supreme Court Committee and issue directions superseding statutory provisions. The Court reiterated settled jurisprudence that Article 142 powers are wide but cannot be exercised in a manner that directly conflicts with express statutory provisions or fundamental principles of public policy. The Court emphasized the curative nature of Article 142 and its use to do complete justice by ironing out creases between conflicting claims, but not to supplant substantive law or build new legal edifice ignoring statutes. Constitution Bench decisions including Supreme Court Bar Association vs. Union of India, Prem Chand Garg vs. Excise Commissioner, and Shilpa Sailesh vs. Varun Sreenivasan were cited to elucidate the limits and scope of Article 142 powers. The Court found that the exercise of Article 142 powers in constituting the Committee was justified to ensure speedy recovery for investors and to do complete justice, but the Committee must respect statutory provisions and not ignore them. 3. SIGNIFICANT HOLDINGS "The plenary powers of this Court under Article 142 of the Constitution are inherent in the Court and are complementary to those powers which are specifically conferred on the Court by various statutes though are not limited by those statutes. These powers also exist independent of the statutes with a view to do complete justice between the parties... Article 142, even with the width of its amplitude, cannot be used to build a new edifice where none existed earlier, by ignoring express statutory provisions dealing with a subject and thereby to achieve something indirectly which cannot be achieved directly." "The MPID Act is a validly enacted State legislation relating to matters in the State List and cannot be overridden by central legislations such as SARFAESI Act or RDB Act merely because they are enacted by Parliament. The properties attached under the MPID Act vest in the Competent Authority and do not constitute 'debt' under SARFAESI Act, hence secured creditors have no priority over such attached properties." "The moratorium under Section 14 of the IBC does not affect properties attached under the MPID Act prior to the commencement of insolvency proceedings, as such properties vest in the Competent Authority and are outside the scope of the moratorium and insolvency resolution process." "The exercise of powers under Article 142 is subject to the express provisions of substantive statutory law and cannot be exercised in direct conflict with such provisions. The Supreme Court Committee constituted under Article 142 must exercise its powers respecting statutory provisions and fundamental principles of public policy." Final determinations:
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