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

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37. As held by the Constitution Bench in Union of India and Another vs. Delhi High Court Bar Association and Others11, 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.

38. 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.

39. In this regard, a very pertinent observation made by the majority in the Constitution Bench of five Judges in ITC Limited vs. Agricultural Produce Market Committee and Others12 deserve to be referred to. In the said case, the contention put forth by the Union of India was that ‘tobacco’ was covered solely by a later Special Central Legislation that is the Tobacco Boards Act, 1975 (List I- Entry 52 – Industries) denuding the State legislation to levy market fee on such Tobacco under the earlier enacted Bihar Agricultural Produce Markets Act, 1960 (List II – Entry 24 – Markets). In the said case, the majority held the view that while maintaining Parliamentary Supremacy, one cannot give a go-by to the Federalism which has been held to be basic feature of the Constitution of India, and thereby whittling the powers of the State Legislature. The precise observations made by Sabharwal J., in this regard are reproduced: - “58. True, the parliamentary legislation has supremacy as provided under Articles 246(1) and (2). This is of relevance

11 (2002) 4 SCC 275 12 (2002) 9 SCC 232

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when the field of legislation is on the Concurrent List. While maintaining parliamentary supremacy, one cannot give a go-by to the federalism which has been held to be a basic feature of the Constitution (see S.R. Bommai v. Union of India [(1994) 3 SCC 1]).

40. In view of the above position of law settled by the Constitution Bench, it is held that considering the pith and substance of the State and the Central Legislations in question, the Central Legislations

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i.e., SARFAESI Act or RDB Act cannot be permitted to prevail over the State Legislation i.e., MPID Act, merely because the Central Legislations are enacted by the Parliament. Since all these Acts have separate field of operations, provisions of SARFAESI Act or RDB Act cannot be permitted to override the provisions of MPID Act, which is a validly enacted State Legislation, otherwise it would tantamount to violation of federal structure doctrine envisaged in the Constitution. The respective legislative powers of the Union and the States are traceable to Articles 245 to 254 of the Constitution. The State qua the Constitution is Federal in structure, and independent in its exercise of legislative and executive power. Therefore, if provisions of SARFAESI Act or RDB Act are permitted to override the provisions of MPID Act, then the legislative powers of the State Legislature would be denuded which would tantamount to subverting the law enacted by the State Legislature.

41. It is true that sometimes the overlapping of legislations enacted with regard to the matters relatable to different Entries in List-I and List-II in Seventh Schedule may occur, however in that case also as held by the Constitution Bench in State of West Bengal vs. Kesoram Industries Limited and Others13, though, the List-I has priority over List-III and List-II, and List-III has priority over List-II, the predominance of Union List would not prevent the State Legislature from dealing with any matter within List-II, even if it may incidentally affect any item in List-I. In the case at hand, the SARFAESI Act and RDB Act having been enacted by the Parliament for the subject matter falling in List-I and the MPID Act having been enacted by the State Legislature for the subject matter falling in List-II in the Seventh Schedule, the latter would prevail in the State of Maharashtra in respect of the specific subject matter for which the said Act was enacted, in view of Clause (3) of Article 246.

42. It was next sought to be submitted by learned counsels appearing for the Secured Creditors that in view of Section 26E of the SARFAESI Act, the debts due to the Secured Creditor have to be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local

13 2004 (10) SCC 201

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authority, and therefore, the security interest of the Secured Creditors in respect of the properties attached under MPID Act should be given priority. We do not find any merit in the said submission. Apart from the fact that Section 26E has come into force with effect from 1st September, 2016, it gives right to the Secured Creditor, after the registration of security interest, to be paid in priority over all other debts and revenues, taxes etc. payable to the Central Government or State Government or local authority.

43. 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.

44. In that view of the matter, it is held that no priority of interest can be claimed by the Secured Creditors against the properties attached under the MPID Act and that the provisions of MPID Act would override any claim for priority of interest by the Secured Creditors in respect of the properties which have been attached under the MPID Act.

QUESTION (ii): -

45. This takes us to the Second question as to “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?”

46. The bone of contention raised by the learned counsel appearing for the NSEL and the State of Maharashtra is that the properties of the

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Judgement debtor/Garnishees having already stood attached under the provisions contained in Section 4 of the MPID Act, much prior to coming into force of the IBC, 2016 and there being no retrospective operation of Section 14 pertaining to Moratorium, such attached properties under the MPID Act would no longer be available as the properties of the Corporate Debtor to be considered for the purpose of Resolution Plan under the IBC. According to them, on the issuance of Notification under Section 4 of the MPID Act, the attached the properties would vest in the Competent Authority appointed by the State Government, and therefore such properties would no longer be the properties of the judgment debtor or of the Garnishee, and therefore would be outside the scope of operation and application of IBC. Per contra the learned counsel for the Judgment Debtor/Garnishees have contended that the IBC being a complete and exhaustive Code in itself would override the provisions of the MPID Act.

47. As stated earlier, 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. (supra) and in State of Maharashtra vs. 63 Moons Technologies Ltd. (supra). As discussed while answering the first question, it was held that the MPID Act has been validly enacted by the Government of Maharashtra for the matters falling in List-II- State List, and therefore it would prevail in the State of Maharashtra. On the other hand, IBC has been enacted to consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders. The subject matter of IBC being “Bankruptcy and Insolvency”, is relatable to the Entry 9 of List III-Concurrent List. The MPID Act having been enacted for the matters relatable to the Entries-1, 30 and 32 in List-II-State List, and the IBC having been enacted for the matters relatable to the Entry-9 in List-III- Concurrent List, the provisions of Article 254 would not be attracted. As per the settled legal position discussed earlier, the issue of repugnancy or conflict as contemplated in Article 254 would arise only when the State Legislation and the Central

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Legislation, both, are relatable to the Entries contained in List-III- Concurrent List of Seventh Schedule. A beneficial reference of the decision in case of Innoventive Industries Ltd. vs. ICICI Bank and Another14 be made in this regard.

48. 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.

49. However, so far as the attachment of properties under Section 4 of the MPID Act is concerned, it is beyond the realm of the Debtor- Creditor relationship as contemplated in the IBC. On the publication of the Order of Attachment of Properties by the Government to protect the interest of the Depositors of the Financial Establishment, such properties and assets of the Financial Establishment and the persons mentioned in sub-section (1) of Section 4, would forthwith vest in the Competent Authority appointed by the Government, pending further orders from the Designated Court. The procedure and powers required to be followed by the Designated Court after the receipt of the application from the Competent Authority under Section 5, have been prescribed in Section 7 of the MPID Act. As per the said procedure contained in Section 7, the Designated Court is required to issue a notice calling upon the Financial Establishments or to any other person whose property is attached and vested in the Competent Authority, to show cause as to why the Order of Attachment should not be made absolute. If no cause is shown or no objections have been raised before the Designated Court, the Designated Court can pass the order making the Order of Attachment absolute and issue such direction as may be necessary for realisation of the assets attached and for the equitable distribution among the depositors of the money realised from out of the properties attached.

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50. Thus, 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.

51. 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.

52. 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.

53. For the reasons stated above, the Question No. (i) is answered in the negative and the Question No.(ii) is answered in the affirmative. As a consequence, thereof, both the Orders passed by the Supreme Court Committee on 10.08.2023 and 08.01.2024 stand vindicated and upheld.

54. Let the IAs challenging the orders dated 10.08.2023 and 08.01.2024 passed by the S.C. Committee, be dealt with and decided, in the light of the findings recorded in this judgment.

Result of the case: Questions answered.