Property Attachments under the MPID Act are not barred by the IBC Moratorium

The Supreme Court in the matter of National Spot Exchange Ltd. v. Union of India and Ors.¹  ruled that the moratorium under IBC² does not prohibit attachment of properties under the MPID Act³. The bench of Justices Bela M Trivedi and Satish Chandra Sharma was addressing a case stemming from the 2013 NSEL⁴ scam. In this, commodity exchange platform NSEL defaulted on ₹5,600 crores in payments to approximately 13,000 traders. This resulted in numerous legal proceedings facing challenges in enforcing decrees across multiple jurisdictions, prompting NSEL to file a writ petition in 2019 seeking the consolidation of these proceedings.

Exercising its extraordinary powers under Article 142 of the Constitution, the Court established a Supreme Court Committee (SCC) led by a retired judge. This committee was tasked with executing all decrees and awards against defaulters, selling attached properties – those subject to attachment under PMLA⁵ or MPID Act, repaying investors, and ensuring equitable distribution of the proceeds among depositors. Subsequently, the corporate debtor challenged SCC’s recommendations, arguing that an ongoing moratorium under the IBC should stop attachment proceedings under MPID Act. However, the Supreme Court reaffirmed the SCC’s valid constitution under Article 142.

The Court rejected the contention that the moratorium imposed under IBC bars attachment of properties under MPID Act. It held that the primary purpose of MPID Act is to facilitate recovery for victims of financial fraud through the attachment of assets. Consequently, once a property vests with the State Competent Authority under MPID Act, such vesting cannot be impeded by invoking the IBC moratorium. The Court categorically held that secured creditors acting under the aegis of the SARFAESI⁶ Act and RDB Act⁷ cannot claim primacy or precedence over asset attachments lawfully effected under the MPID Act. The Supreme Court affirmed that the State of Maharashtra was acting within its legislative competence in enacting the MPID Act, the subject matter of which, in its pith and substance, falls squarely within Entries 1, 30, and 32 of List II (State List) of the Seventh Schedule to the Constitution of India. The Supreme Court further observed that although the SARFAESI and RDB Acts are legislations enacted by Parliament in respect of subjects falling under List I (Union List), the existence of such Central enactments cannot be construed to override or render nugatory a law that the State is constitutionally empowered to make. Any such interpretation, the Supreme Court cautioned, would effectively divest the States of their constitutionally conferred legislative competence and would be in direct contravention of the principles governing India’s federal structure, as enshrined under Article 246 of the Constitution. 

With respect to question of whether the properties of the Judgment Debtors and Garnishees attached under the provisions of the MPID Act, 1999 would be available for the execution of the decrees against Judgments Debtors in view of the provisions of the Moratorium under Section 14 of the IBC, the learned counsel appearing for NSEL and State of Maharashtra contented that any property of a Corporate Debtor which already stood attached under Section 4 of the MPID Act, prior to the coming into force of the moratorium under Section 14 of IBC would not be considered as property of the Corporate Debtor for the purpose of the Resolution Plan. 

The Court clarified that upon the publication of order of attachment of properties by the State Government to protect the interest of the depositors, such properties and assets of the Financial Establishment (in this case ‘NSEL’) would vest in the Competent Authority appointed by the Government under the MPID Act, pending further orders from the Designated Court. The Designated Court will issue a notice to concerned persons to show cause as to why the order of attachment should not be made absolute. If no cause is shown, the Designate Court can pass the order making the order of attachment absolute and issue such directions for realisation of the assets attached and equitable distribution among the depositors of the money realised from out of the properties attached. Thus, the properties attached under MPID Act before the moratorium date are vested with the Competent Authority and aren’t part of insolvency proceedings. These properties can be used for realisation as per the order of the Supreme Court.

Further, the Court dismissed the argument of inconsistency or overlapping between the provisions contained under MPID Act and IBC to give primacy to central law – IBC under Article 254 of the Constitution, stating that both the Acts operate within their field drawing legislative support from their respective lists under Schedule VII of the Constitution. The Court added that MPID Act was enacted by the Maharashtra Government under the State List, therefore, moratorium declared under IBC would not preclude State Competent Authority from attaching the defaulter’s property to facilitate recovery for victims of financial fraud.

Thus, IBC moratorium cannot obstruct the enforcement of statutory attachments that were made in the public interest prior to the commencement of insolvency proceedings. The Court emphasised that the IBC and the MPID Act operate in distinct and non-conflicting domains, and there is no inconsistency between them that would trigger Article 254 of the Constitution to grant overriding effect to the IBC for barring such attachments during the moratorium period.

Citations

1. Writ Petition (Civil) No.995 of 2019
2. IBC – Insolvency and Bankruptcy Code, 2016
3. MPID Act – Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999
4. NSEL – National Spot Exchange Limited
5. PMLA – Prevention of Money Laundering Act, 2002
6. SARFAESI – Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
7. RDB Act – The Recovery Of Debts And Bankruptcy Act, 1993

Expositor(s): Adv. Khushboo Saraf