India-Law.org

Secured creditors are generally placed at a higher level, be it the waterfall mechanism under the Insolvency and Bankruptcy Code [IBC] or winding up under the Companies Act, or even common law. Their property rights generally take precedence over rights of unsecured creditors, including crown debt, except in special cases where the legislature specifically recognizes other rights to have priority over them viz. in the pre-GST period, various State sale tax laws usually gave ‘first charge’ priority to dues under those laws.

Secured creditors have thus enjoyed priority under various changing regimes, including Prevention of Money Laundering Act, 2002 (PMLA) if their rights were prior and created in good faith. Thus, the Delhi High Court in Deputy Director, Directorate of Enforcement of Delhi v. Axis Bank & Ors., (2019) SCC Online Del 7854, inter alia directed that,

“(x). The charge or encumbrance of a third party in a property attached under PMLA cannot be treated or declared as “void” unless material is available to show that it was created “to defeat” the said law, such declaration rendering such property available for attachment and confiscation under PMLA, free from such encumbrance.

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(xiii). If it is shown by cogent evidence by the bonafide third party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted property), claiming that it had acquired the same at a time around or after the commission of the proscribed criminal activity, in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken “due diligence” (e.g. taking reasonable precautions and after due inquiry) to ensure that it was not a tainted asset and the transactions indulged in were legitimate at the time of acquisition of such interest.

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(xv). If the bonafide third party claimant (as aforesaid) is a “secured creditor”, pursuing enforcement of “security interest” in the property (secured asset) sought to be attached, it being an alternative attachable property (or deemed tainted property), it having acquired such interest from person(s) accused of (or charged with) the offence of money-laundering (or his abettor), or from any other person through such transaction (or inter-connected transactions) as involve(s) criminal activity relating to a scheduled offence, such third party (secured creditor) having initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the directions of such attachment under PMLA shall be valid and operative subject to satisfaction of the charge or encumbrance of such third party and restricted to such part of the value of the property as is in excess of the claim of the said third party.”.

However, the judgment of the Hon’ble Supreme Court in NSEL v UoI, 2025 (8) SCC 393, has overturned the priority of secured creditors in relation to the PMLA Act as well as the Maharashtra Protection of Interest of Depositors Act (MPID Act). It inter alia held that secured creditors cannot claim priority of interest or repayment against properties attached under the MPID Act or PMLA, overriding provisions in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [SARFAESI Act] and the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act).

The Author is of the view that the Petitioners failed to point out the most relevant past precedent in relation to priority and its relation to MPID Act’s “Section 14. Act to override other laws. – Save as otherwise provided in this Act, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any custom or usage or any instrument having effect by virtue of any such law.” Respectfully this provision does not create any priority in favour of depositors under MPID Act. Regard may be had to the decision in Central Bank of India v State of Kerala, (2009) 4 SCC 94, where it was inter alia held that merely having a non-obstante provision in the RDB Act will not give banks priority over State sale tax enactments which have a specific priority clause as well a non-obstante clause. It was a result of this decision that the Parliament enacted amendments in 2016 w.e.f. from 2020 Section 26-E in the SARFAESI Act and Section 31-B was inserted in the RDB Act w.e.f. 01.09.2016 giving specific priority to secured creditors, which inserted provisions when read with existing non-obstante provisions in Section 34(1) of the RDB Act and Section 35 of the SARFAESI Act over-ride the priority in state tax law. In the absence of these inserted provisions the non-obstante clauses on their own gave no priority to secured creditors. [See, State of Himachal Pradesh & Ors. v. A. J. Infrastructures Pvt. Ltd & Anr., (2023) 18 SCC 110, paras 38 to 40] Since secured creditors already had priority under common law over unsecured debts, these amendments in SARFAESI Act and RDB Act were primarily in relation to the specific priorities under the State tax enactments.

It is clear from these precedents, that the position of the MPID Act or the PMLA Act are vis-à-vis secured creditors, is the same as the pre-amendment RDB Act and SARFAESI Act dealt in Central Bank of India v State of Kerala. Merely having non-obstante clauses creates no priority in favour of depositors or the enforcement directorate since the common law continues to hold field which continues to have priority for secured creditors over unsecured debt, be it private or crown debt. For the judgment in NSEL v UoI, to be correct, it would require the State government to insert a somewhat modified version of Section 12 of the Banning of Unregulated Deposit Schemes Act, 2019 to over-ride the PMLA Act, while modifying the saving clause/phrase ‘Save as otherwise provided in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency and Bankruptcy Code, 2016, ….’ into a non-obstante clause to over-ride any other law, so as to include common law, SARFAESI Act, RDB Act and IBC within its breadth.

The reference to resolving conflicts between State Law and Parliamentary Legislation which may apply in the context of MPID Act though referring to correct precedents, was wholly unnecessary. For this exercise to have been undertaken, the Respondent should have first shown that there are specific provisions granting priority in favour of depositors under MPID Act and not merely a non-obstante clause, of which presently there are none. In absence thereof, neither section 14 of the MPID Act nor state law v central law inconsistency under the constitutional scheme comes into play.

Even if there were a specific provision inserted later on by the State Legislature giving priority it must be noted that both all these statutes would then operate in the same manner i.e. competing money claims. Thus, it is not a case of merely a case of State law and Central law operating in their own spheres. The Court would then have to acknowledge that just as Central Law cannot affect State Law, similarly, a State Law cannot affect Central Law, both being supreme in their own spheres. This only creates an immoveable rock v. unstoppable force scenario where both Central and State laws claim supremacy in their own spheres.

However, we are no longer concerned with both laws operating in their own spheres, rather this is an instance where both laws while supposedly operating in their own spheres, are casting their shadows as competing money claims on the same property. In such cases, respectfully, the issue would have to be determined in favour of the later law; just as how earlier the Hon’ble Supreme Court in a series of judgments held that ‘first charge’ under state tax laws eclipsed secured creditors’s priority under common law and thereafter subsequent amendments in central law giving statutory priority to secured creditor claims eclipsed ‘first charge’ under state tax laws.

The present situation needs to be corrected at the earliest as most of the secured creditors are financial institutions who had lent public deposits. Irrespective of future amendments, the present ruling in NSEL v UoI, clearly deserves to be reconsidered as the most relevant binding precedents were not placed before the Hon’ble Supreme Court by the parties; thereby resulting in incorrect issues being framed and answered, which do not really arise in the present framework of law. The overturning of priority of secured creditors creates uncertainty for banks and financial institutions regarding asset recovery and secured lending and disrupts confidence in established financial frameworks and will only subvert economic growth of the nation.

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– Suraj Surjit Chaudhary, Advocate, Bombay High Court