Author: Swaraj Pandey
To the Point
On 15 May 2025, the Supreme Court changed the contours of banking and insolvency law by determining that property that is attached under section 3 of the Maharashtra Prevention of Insider and Difficulty of Enforcement of Security Interest Act, 2004 (Maharashtra MPID Act) to secure the property of affected depositors, has precedence over the secured interests held by banks under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAES According to the Court, when such attachments are made before the IBC moratorium, such assets are not part of the estate of the debtor and can still be used to settle depositors. As a result of this, state-based deposit protection is considered more robust when compared to the central recovery schemes, effectively shifting the calculus of risk exposure in lenders and cementing the first layer of protection to depositors at the expense of secured creditors in certain insolvency context.
Use of Legal Jargon
In State Bank of India v. The parameters according to which several crucial legal emanations should be now interpreted are set by the state of Maharashtra. A secured creditor is a lender whose debt and responsibility are secured by the collateral, which provides a proprietary interest of the lender in the certain property in case of default on the part of the borrower. In India, such creditors commonly rely on the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), a central statute that empowers creditors to enforce security interests without resorting to protracted litigation.
Complementing SARFAESI is the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), which confers an additional, central mechanism for debt recovery through the Debt Recovery Tribunal (DRT). Nevertheless, the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act) represents a state-level intervention aimed at safeguarding depositors. The legislation empowers the State to place on attachment the properties of financial institutions reasonably believed to be committing fraud on depositors thus taking out of the possession of the person who has raised the cash or company who is in debt.
Once insolvency proceedings commence under the Insolvency and Bankruptcy Code, 2016 (IBC), Section 14 ordinarily imposes a moratorium that freezes all legal proceedings against the debtor’s assets. However, this has recently been clarified by the Supreme Court which stated that moratorium does not have the effect of voiding prior attachments made under the MPID Act before the insolvency process has commenced. In determining whether to settle any such conflict between such state and central, the Court has used both a pith-and-substance test to identify the true nature and subject matter of each measure, evaluates the competence to legislate, and, where needed, employs the doctrine of repugnancy in Article 254 of the Constitution to decide conflicting laws by Parliament and state legislatures on subjects of concurrent jurisdiction.
Summed up, these notions provide the juridical base over the interpretation of the process through which depositor-protection laws can, under certain conditions, override secured-creditor privileges.
The Proof (Legal Provisions)
Section 4 of the Maharashtra Protection of Interest of Depositors (MPID) Act confers upon the State the authority to attach assets of financial establishments for the protection of depositors. When attached in such a manner, the property is vested in a Competent Authority who excludes the debtor s estate and makes the property unavailable to its creditors, claims by other creditors. Conventionally, Sec. 26E of the SARFAESI Act and Sec. 31B of the Recovery of Debts and Bankruptcy Act prioritize the claims of secure creditors over other parallel claims; however, the Supreme Court has ruled that the provisions cannot override attachments that have been made in the MPID Act.
In parallel, Sec. 14 of the Insolvency and Bankruptcy Code (IBC) imposes a moratorium on debt recovery actions once insolvency proceedings commence. But this moratorium is not available to assets attached under the MPID Act before the presentation of an insolvency petition. The MPID Act, under the Constitution, falls under the State List, at Entries 1, 30 and 32, and the SARFAESI and the RDB Acts fall in the Union List devoted to banking. Since the two laws are seeking dissimilar ends, there is no express tension or the like of repugnancy hence protecting the federal balances and allowing the persistence of both state and central structures under different jurisdiction of authority.
Abstract
In May 2025, the Supreme Court gave its ruling in State Bank of India v. State of Maharashtra, a ruling, which significantly rearranges the Tangle between the protection of depositors and the rights of secured creditors. The Court concluded that attachments effected under the Maharashtra Protection of Interest of Depositors (MPID) Act prevail over claims advanced under the SARFAESI Act, the Recovery of Debts and Bankruptcy (RDB) Act, and the Insolvency and Bankruptcy Code (IBC), even though the latter legislations confer priority on secured creditors. Notably, it clarified that assets that have been frozen in line with the MPID Act before insolvency proceedings have been instituted will no longer form part of the assets of the corporate debtor and as such will remain beyond the sphere of those creditors. To find their way to this decision, the Court relied on constitutional principles like the pith-and-substance test to ascertain the legislative competence and the doctrine of repugnancy under Art. 254 to hold that there is no direct clash between the MPID Act and the central Acts. The implications to banking and finance are obvious: the level of uncertainty imposed upon the lender is increased, with state-based depositor-protection laws having the potential to override the priority usually provided to secured creditors. This in its turn can change the terms of loans, collaterals and shape the general curve of debt recovery measures.
Case Laws & Legal Provisions
The decision in State Bank of India v. State of Maharashtra is firmly anchored in the landmark judgment rendered in National Spot Exchange Ltd. (NSEL) v. Union of India known commonly as the NSEL Scam case which set a precedent. In that earlier matter, the Court affirmed the primacy of the Maharashtra Protection of Interest of Depositors (MPID) Act over central banking recovery statutes such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, the Recovery of Debts and Bankruptcy (RDB) Act, and even the Insolvency and Bankruptcy Code (IBC).
In addition, the NSEL verdict supported the sequestration of a Committee assembled beneath Article 142 of the Constitution under the supervision of the Supreme Court that was appointed to discharge speedily the verdicts, disposal of the assets that were attached and a fair division of the proceeds of the sale. Coordinating the efforts of the Enforcement Directorate (ED), State authorities, and secured creditors, the Committee was upheld as a legitimate exercise of the Court’s extraordinary powers to achieve complete justice.
Constitutionally, the analysis of the Court under Article 246 and Section 254 confirmed what was already known that the MPID Act and central banking recovery acts were not repugnant since they existed in separate jurisdictions, the State List entry on depositor protection and the Union List entry on the banking conduct. The federal form was retained, which allowed both the structures to co-exist harmoniously.
The judgment also leaned on precedent, citing 63 Moons Technologies Ltd. v. Union of India (2022), which had previously confirmed the constitutional validity of the MPID Act and reinforced the legitimacy of depositor-protection measures. By grounding State Bank of India v. In these guiding decisions, State of Maharashtra, the Court adhered to the doctrinal integrity and indicated by their strength in giving judicial protection to the public depositors at the expense of disturbance of traditional secured-creditor priorities.
Conclusion
P. Mohammad Murza is significant since it is the ruling of the Supreme Court of India in the case of State Bank of India v. State of Maharashtra is a break with the conventional jurisprudence that alters the order of priorities in the Indian regime of financial recovery at its very core. In formulating that the safeguards granted under the MPID Act may overpower the priority rights of secured creditors, even when backed by such core enactments as SARFAESI, RDB Act, or IBC, the Court has created a considerable level of apprehensiveness among lenders. For banks and non-banking financial companies (NBFCs), this paradigm shift translates into heightened risk when extending secured credit. In practice, lenders might react by enacting more rigorous collaterals, changing the interest rates to cover losses, or adding some other protection measures, such as insurance and personal insurance. The judgment also highlights the fact that the state legislation, exercising its jurisdiction on the legislative field, may also exercise jurisdiction in a manner that hugely interferes with central banking and insolvency regimes, which is a vocal assertion of the federal form of Indian government. Whereas this trend can enhance confidence among the depositors and give opportunity to the population to have a strengthened faith in government intervention in cases of financial frauds, it also adds complications in the structuring of the debt and risk evaluation of creditors. Not yet fully decided, the State Bank of India (the State bank of India) submitted a review petition to appeal to the determination of interpretation and effects of the judgment. Nonetheless, the ruling introduces a more comprehensive re-assessment of secured lending practices, insolvency process, and a controversial balance between safeguarding bank depositors and the rights of creditors in the changing financial landscape of India.
FAQs
Q1: Why did SC let MPID attachments override central recovery laws?
A1: The Court used a pith-and-substance test: state MPID law addresses depositor protection, a State List subject. Central laws address creditor recovery, a Union List area. Different functions, so they co-exist, no repugnancy.
Q2: Does that mean secured creditors can’t claim anything now?
A2: Not exactly. If assets were attached under MPID pre-insolvency, those are no longer part of the estate. Secured creditors can’t claim priority over them. But assets not attached can still fall under SARFAESI/IBC.
Q3: What about the IBC moratorium?
A3: The moratorium under Section 14 doesn’t apply to assets attached under MPID before insolvency starts, those properties don’t belong to the debtor anymore. They can still be sold to repay depositors.
Q4: What’s SBI doing now?
A4: SBI filed a review petition, arguing this interpretation undermines secured lending norms and conflicts with central laws like SARFAESI and IBC under Article 246. Review pending.
