15 May 2025 Prevention Of Money Laundering Act >> Criminal Law  

In a significant ruling on May 15, 2025, the Supreme Court of India addressed critical legal questions arising from the National Spot Exchange Limited (NSEL) scam, a financial default aggregating approximately Rs. 5,600 Crores involving thousands of traders. The Court's judgment in Writ Petition (Civil) No. 995 of 2019 delves into the intricate interplay of various statutes governing financial recovery and insolvency, alongside the expansive powers of the Supreme Court under Article 142 of the Constitution of India.

Background of the NSEL Scam: 

The National Spot Exchange Limited (NSEL), established in 2008, provided an electronic platform for commodity trading. In 2007, it received an exemption from the Forward Contracts (Regulation) Act, 1952 (FCRA) for one-day duration forward contracts. The trading mechanism involved members placing orders for buying and selling, with settlements ranging from T+0 to T+36 days.

In 2012, the Department of Consumer Affairs issued a show-cause notice to NSEL concerning alleged violations of its exemption. Subsequently, in July 2013, NSEL was directed to suspend new contracts and settle existing ones, leading to the suspension of its exchange operations on July 31, 2013. This resulted in approximately 13,000 traders being allegedly duped by around 24 defaulting trading members for a total of Rs. 5,600 Crores.

Legal actions ensued, including an FIR and numerous suits. The Enforcement Directorate (ED) attached assets worth approximately Rs. 1740.59 Crores under the Prevention of Money Laundering Act (PMLA), 2002. The Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act), was also invoked, leading to the attachment of movable and immovable properties worth about Rs. 8,548 Crores by the State of Maharashtra.

The Supreme Court Committee and Key Legal Questions: 

To facilitate the speedy recovery of investor funds, the Supreme Court, exercising its powers under Article 142 of the Constitution, constituted a high-powered Supreme Court Committee on May 4, 2022, headed by Justice (Retd.) Pradeep Nandrajog. This committee was tasked with the execution of all decrees, orders, and arbitral awards related to the NSEL default.

The judgment specifically addressed two critical legal questions:

1. Priority of Secured Creditors: Whether secured creditors hold priority over assets attached under the PMLA, 2002, and the MPID Act, by virtue of 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).
2. Availability of MPID-Attached Properties During Moratorium: Whether properties attached under the MPID Act are available for execution of decrees against judgment debtors, considering the commencement of a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Court's Findings:

On Priority of Secured Creditors: The Supreme Court Committee, in its order dated August 10, 2023, concluded that secured creditors could not claim priority over properties attached under the PMLA if these properties were proceeds of crime. Similarly, for properties attached under the MPID Act, the provisions of the MPID Act would override any priority claims by secured creditors. This reaffirms the special nature and purpose of laws designed to protect depositors and recover proceeds of crime.

The Court emphasized that while SARFAESI and RDB Acts pertain to "Banking" under the Union List, they cannot automatically override the MPID Act, which is a valid State enactment addressing matters in the State List. Such an interpretation would undermine the federal structure of the Constitution.

On Availability of MPID-Attached Properties During Moratorium: 

The Supreme Court Committee, in its order dated January 8, 2024, held that properties attached under Section 4 of the MPID Act prior to the imposition of a moratorium under Section 14 or Section 96 of the IBC would not be part of insolvency proceedings. This is because such properties are vested in the Competent Authority appointed by the State of Maharashtra under the MPID Act. Therefore, these properties remain available to the Supreme Court Committee for realization as per the Supreme Court's order.

The Court clarified that there is no inconsistency or overlap between the IBC and the MPID Act. The IBC addresses debtor-creditor relationships and moratoriums arising from adjudicating authority orders, while the MPID Act's attachment provisions operate beyond this realm.

Scope of Article 142: 

The judgment also robustly defended the Supreme Court's use of Article 142, which allows it to pass orders "as is necessary for doing complete justice in any cause or matter pending before it." The Court reiterated that these plenary powers are inherent and complementary to statutory powers, existing independently to prevent injustice and ensure complete justice between parties. While these powers are not to "supplant" substantive law or build new legal frameworks where none exist, they can be used to "iron out the creases" between conflicting claims and uphold due process. The Court emphasized that Article 142 powers are curative in nature and cannot be used to disregard substantive rights or conflict with express statutory provisions.

This judgment provides crucial clarity on the hierarchy and application of various laws in complex financial fraud cases, particularly emphasizing the distinct roles of state-specific investor protection acts and central insolvency laws, while also highlighting the Supreme Court's extraordinary power to ensure complete justice.

PREVENTION OF MONEY LAUNDERING ACT, 2002  

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  

INSOLVENCY AND BANKRUPTCY CODE, 2016