Depositor Protection Laws vs SARFAESI & RDB Act After NSEL Ruling by SC

A Mortgage, an Attachment and an Auction — Depositor Protection Laws against SARFAESI and the RDB Act after the Supreme Court’s NSEL Ruling.

Summary: The article examines conflicts where property is simultaneously subject to depositor-protection attachment and secured-creditor recovery, principally under the Gujarat Protection of Interest of Depositors (in Financial Establishments) Act, 2003 (GPID Act), the Recovery of Debts and Bankruptcy Act, 1993 and the SARFAESI Act, 2002. It analyses the Supreme Court’s decision in National Spot Exchange Limited Vs Union of India & Ors., 2025 INSC 694, which held that secured creditors could not claim priority over properties attached under the Maharashtra Protection of Investors and Depositors Act, 1999. The article examines the GPID Act’s attachment machinery, claims and objections by secured creditors, valuation of security and jurisdiction of the Designated Court, alongside Section 31B of the RDB Act and Section 26E of the SARFAESI Act. It considers whether the NSEL ruling necessarily determines disputes involving an earlier registered mortgage and subsequent depositor-protection attachment, particularly given differences between the Gujarat and Maharashtra statutes. The article also discusses relevant Bombay High Court decisions and outlines practical remedies for secured creditors, Recovery Officers, borrowers, third parties and auction purchasers, including timely claims and objections, verification of security-interest registration, disclosure of attachments and appropriate due diligence.

Brief

A single property can today be claimed by two different arms of the law at the same time. The State Government, acting to protect small depositors, may attach it under the Gujarat Protection of Interest of Depositors (in Financial Establishments) Act, 2003. A bank, acting to recover its loan, may auction the same property through a Debts Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993, or directly under the SARFAESI Act, 2002. Both laws say, in almost identical words, that they will prevail over every other law. Both are valid. Both are pointed at the same building.

This article explains, in plain terms, what each law does, where the clash arises, what the courts have said so far — including the Supreme Court’s ruling of 15 May 2025 in the National Spot Exchange case — and, most importantly, what a bank, a borrower, a Recovery Officer and an auction purchaser should actually do when they find both laws operating on the same asset. The short answer is that the Supreme Court has tilted the balance towards depositors, but the tilt is narrower than it looks, the Gujarat statute reads differently from the Maharashtra one on several points that matter, and a secured creditor who uses the machinery inside the depositor law is in a far better position than one who ignores it.

Introduction

Picture an ordinary morning at a Debts Recovery Tribunal. A Recovery Officer has issued a proclamation of sale in Form No. 22. Six commercial units are going under the hammer. Two valuation reports have been obtained, the notice has appeared in two newspapers including a vernacular one, bids have come in on the portal, and a successful bidder has been declared. Everything has been done correctly.

Sitting quietly in the same file, however, is a notification published in the Government Gazette some years earlier. By that notification the State Government attached the money, property and assets of a financial establishment, and those assets vested in a Competent Authority who is a Deputy Collector. Nobody in the auction hall has read it. The question of who is entitled to the money realised at that auction — the bank that lent against a registered mortgage, or the depositors on whose behalf the State attached — surfaces only when the auction purchaser applies for his sale certificate and someone finally asks whether the seller had anything left to sell.

This is not an unusual situation in Gujarat. Wherever a credit society or a scheme-floating company has both borrowed from a bank and collected money from the public, the two systems eventually meet over the same asset. The purpose of this article is to set out what happens when they do.

The Law

1. The depositor protection law: the GPID Act, 2003

The Gujarat Protection of Interest of Depositors (in Financial Establishments) Act, 2003 was passed for a simple reason. When a small finance company or a credit society collects money from ordinary people on a promise of high returns and then stops paying, the depositor has no realistic remedy. A civil suit takes years, the promoters shift their assets, and by the time a decree arrives there is nothing left. The Act was designed to freeze the assets first and distribute them later.

The Act works on two definitions. A “deposit” under Section 2(c) is any receipt of money or valuable commodity by a financial establishment, to be returned after a period or otherwise, with or without interest or profit. A “Financial Establishment” under Section 2(d) is any person or group of individuals accepting deposits under any scheme or arrangement or in any other manner, excluding a Government-owned or controlled corporation and a banking company. If a receipt of money does not answer the first definition, the recipient does not answer the second, and the Act simply does not apply.

Two exclusions in Section 2(c) are worth remembering, because they are frequently overlooked. The first takes out amounts raised as share capital, or by way of debenture, bond or any other instrument covered by the guidelines and regulations of the Securities and Exchange Board of India. The second, in the Explanation, takes out any credit given by a seller to a buyer on the sale of property, movable or immovable. Between them these two exclusions remove a great deal of what is loosely called a deposit scheme — plot and land schemes sold on instalments with an assured return, and collective investment schemes over which SEBI has asserted jurisdiction.

Once the Act applies, the machinery is quick. Under Section 4, if the State Government is satisfied that a financial establishment has failed to return deposits and is unlikely to do so, it may publish an order in the Official Gazette attaching the money, property and assets belonging to the establishment or acquired out of the deposits, whether held in its own name or in someone else’s. If those assets are not available or not sufficient, it may go on to attach other property of the establishment or of its promoter, director, partner or member. On publication, everything attached vests in a Competent Authority appointed under Section 5, who must apply to a Designated Court within thirty days.

The Designated Court is a court of the level of a District and Sessions Judge, constituted under Section 9. It issues notice under Section 10, hears objections, follows the summary procedure of Order XXXVII of the Code of Civil Procedure, and finally either makes the attachment absolute, varies it, or cancels it. Section 12 lets it reach property transferred in bad faith, Section 13 lets an establishment offer security instead of attachment, and Section 3 creates the offence: fraudulent default by a financial establishment, punishable with imprisonment up to six years and fine up to ten lakh rupees, for which the promoter, director, manager and any person or employee responsible for the management or conducting of the business is made liable along with the establishment itself. Section 18 gives the whole Act overriding effect over other laws.

One feature of the Gujarat Act is central to everything that follows and is almost never discussed. Section 7(2) requires the Competent Authority to invite claims from secured creditors as well as from depositors. Section 7(4) requires every notice to a secured creditor to call upon him to value his security within one month, failing which the Competent Authority will value it himself and that valuation will bind him. A statute that asks a secured creditor to value his security, and makes the valuation binding, is a statute that assumes the security exists and will be respected. There would be nothing to value if the attachment wiped out the charge.

2. The bank recovery laws: the RDB Act, 1993 and SARFAESI, 2002

The two central statutes come at the problem from the opposite direction. The Recovery of Debts and Bankruptcy Act, 1993 set up Debts Recovery Tribunals so that banks would not have to sue in the civil courts. The Tribunal decides the bank’s claim and issues a recovery certificate; a Recovery Officer then executes it by attaching and selling property, following the Second Schedule to the Income-tax Act, 1961, which Section 29 of the RDB Act applies to these proceedings. The SARFAESI Act, 2002 went further and allowed a secured creditor to enforce its security without any court at all, by issuing a notice under Section 13(2), taking possession under Section 13(4), and selling.

In 2016, Parliament added a specific priority to both statutes. Section 31B of the RDB Act and Section 26E of SARFAESI both declare that, notwithstanding any other law, the rights of secured creditors to realise their secured debts by selling the secured assets shall have priority and shall be paid before all other debts and before Government dues, taxes and cesses. Section 34 of the RDB Act and Section 35 of SARFAESI give those Acts overriding effect. Section 26E, it should be noted, is available only after the security interest is registered with the Central Registry, a point settled by the Full Bench of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax.

3. Where the two laws collide

The collision is easy to state. The State attaches under Section 4 of the GPID Act and the property vests in the Competent Authority for the benefit of depositors. The bank has a registered mortgage over the same property, often created years earlier, and proceeds to auction it through the DRT or under SARFAESI. The GPID Act says it overrides all other laws. The RDB Act and SARFAESI say the same about themselves, and add an express priority in favour of secured creditors. Each Act is valid. Each carries an overriding clause. Only one of them can be paid first.

The Present Position

What the Supreme Court decided in the NSEL case

The leading decision is National Spot Exchange Ltd. v. Union of India, 2025 INSC 694, delivered on 15 May 2025 by Justices Bela M. Trivedi and Satish Chandra Sharma. It arose out of the collapse of a commodity exchange platform, where about Rs. 5,600 crores was owed to roughly 13,000 traders, and where the properties of the defaulters had been attached both by the Enforcement Directorate under the money laundering law and by the State of Maharashtra under the MPID Act, the Maharashtra equivalent of our GPID Act. Secured creditors of those defaulters claimed that their charge came first.

The Court held that it did not. Its reasoning runs along three steps. First, at paragraphs 32 to 34, it recorded that the validity of depositor protection statutes is settled, following K.K. Baskaran v. State, (2011) 3 SCC 793, where the Tamil Nadu Act was held to fall in pith and substance under Entries 1, 30 and 32 of the State List, and State of Maharashtra v. 63 Moons Technologies Ltd., (2022) 9 SCC 457. Second, at paragraphs 38 to 41, it held that SARFAESI and the RDB Act, which fall under Entry 45 of the Union List, cannot be allowed to override a State law validly made on a State List subject merely because Parliament passed them; to hold otherwise would strip the State of a power that belongs to it alone and would damage the federal structure. Because the two sets of laws lie in different Lists, Article 254 and the whole question of repugnancy were held not to arise at all.

Third, and only then, the Court turned to Section 26E at paragraphs 42 to 44. It gave two reasons for rejecting the banks’ argument. One was a date: Section 26E came into force on 1 September 2016. The other, and the more important, was a characterisation: money belonging to depositors who have allegedly been defrauded, for whose recovery the depositor protection law exists, cannot be described as a “debt” of the kind Section 26E was written to rank. The section therefore did not apply at all. The Court also held, at paragraphs 45 to 52, that property attached under the depositor law before an insolvency moratorium begins stays outside the insolvency process.

Why the ruling is narrower than the headline suggests

It is important to read what the Court actually said. It did not hold that a bank’s registered mortgage is inferior to a depositor’s claim. It held that a depositor’s claim is not the sort of competing claim that Section 26E was designed to rank at all. On that reasoning, Section 26E sorts creditors standing in a queue, while the attachment takes the asset out of the queue by vesting it in the Competent Authority.

Three limits follow. The Court was not dealing with a case where the mortgage was created and registered years before the attachment. It was not dealing with a property that was plainly not bought with depositors’ money. And the entire proceeding arose from orders of a Committee that the Supreme Court itself had appointed under Article 142; at paragraph 19 the Court accepted that the secured creditors had substance in their grievance that Article 142 should not have been used to displace their statutory rights, before holding that the grievance had lost significance because the arrangement was already in place. A ruling delivered in that setting is not the same as a ruling on a clean contest between a mortgagee and a Competent Authority.

The High Court line, before and after

The Bombay High Court had earlier built a consistent body of authority the other way, resting on title rather than on priority. In State of Maharashtra v. Aryarup Tourism Club Resorts Pvt. Ltd. (25 August 2022), in Invent Assets Securitisation and Reconstruction Pvt. Ltd. v. State of Maharashtra (29 August 2023), and in Saraswat Co-operative Bank Ltd. v. Purnanandu Shekharmal Jain (8 August 2024), the Court set aside MPID attachments in so far as they touched assets mortgaged to the bank before the attachment, and allowed the bank to proceed under SARFAESI. The logic is simple and, with respect, powerful: the State attaches what the borrower has, and on the date of attachment what the borrower had was only the right to redeem a mortgaged property. An attachment cannot give the State more than the owner owned.

What has happened after NSEL is equally instructive. By a judgment dated 8 May 2026 in Criminal Appeal No. 860 of 2023, the Bombay High Court, dealing once again with the NSEL estate, allowed a secured creditor to proceed against the secured assets under SARFAESI. The Court reasoned that the position of a secured creditor cannot lightly be defeated, that no prejudice would result because the bank had the financial strength to account for and deposit the proceeds if it were ultimately held that the money must go to the depositors, and that there was therefore no reason at that stage to block the bank’s statutory remedy. That is a practical compromise: sell now, account later. It accepts the Supreme Court’s conclusion on who is ultimately entitled while refusing to let the attachment freeze the asset in the meantime, and practitioners in Gujarat should expect the same approach to be attempted here.

Why the Gujarat statute is not the Maharashtra statute

Most commentary reads the two Acts as though they were identical. They are not, and the differences favour the mortgagee.

The definitions differ. Section 2(d) of the MPID Act excludes a corporation or a co-operative society owned or controlled by Government, and a banking company. Section 2(d) of the GPID Act speaks of any person or group of individuals accepting deposits, and excludes only a Government-owned or controlled corporation and a banking company; it says nothing about co-operative societies at all. Whether a registered co-operative credit society, which takes deposits from its own members under the supervision of the Registrar and the audit machinery of the Gujarat Co-operative Societies Act, 1961, is a “person accepting deposits under a scheme or arrangement” within the Gujarat definition is a question that has not been squarely answered here, and it should be asked before anyone concedes that the Act applies.

The attachment provision has a tracing requirement built into it. Section 4(1) allows attachment of property belonging to the establishment or believed to have been acquired by it out of the deposits collected, and it is only if such property is unavailable or insufficient that the State may proceed against other property of the establishment or its promoters. A commercial unit mortgaged to a bank in 2013 and further charged in 2015, bought with the bank’s money and carrying the bank’s charge on the register, is not property acquired out of deposits. An attachment that reaches it does so through the second limb, which requires a recorded satisfaction that the traceable assets are not enough. Whether that satisfaction was ever recorded is a question of fact, and it is very rarely put in issue.

Vesting is also not magic. Section 4(2) vests the attached assets in the Competent Authority, but the Competent Authority takes what the debtor had and no more. The Supreme Court itself recognised the limits of this vesting at paragraph 50 of NSEL, where it read Sections 4, 5 and 7 of the Maharashtra Act together and held that the vesting operates subject to the orders of the Designated Court.

And, as noted earlier, Sections 7(2) and 7(4) of the Gujarat Act expressly bring secured creditors into the scheme and require them to value their security. Section 10(3) allows any person claiming an interest in the attached property to object even if he has received no notice, and Section 10(6) empowers the Designated Court to cancel the attachment or release part of the property after investigating the objection. Section 13 allows security to be furnished in place of attachment. The machinery for a mortgagee to protect himself is already inside the Act. What is missing, in practice, is anyone using it.

A clause nobody reads: Section 9(3)

Section 9(3) of the GPID Act says that any case or proceeding pending before any court or authority in relation to the money, property or assets of a financial establishment covered by a Section 4 order shall stand transferred to the Designated Court and be decided by it under the Act. Read literally, that would transfer an Original Application pending before a Debts Recovery Tribunal, or a Securitisation Application under Section 17 of SARFAESI, to a District Judge sitting as a Designated Court.

That cannot be the law. A Debts Recovery Tribunal is a tribunal created by Parliament under Entry 45 of the Union List, and as the Constitution Bench held in Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275, it is Parliament alone that can legislate on recovery of dues by banks. A State legislature cannot, through a transfer clause, hand the adjudication of a bank’s claim to a District Judge exercising summary powers. The sensible reading is that Section 9(3) transfers proceedings about the attached property itself — that is, competing claims to the asset — and not the adjudication of the underlying debt or the bank’s statutory remedies against its borrower. But the clause is drafted very widely, and a Competent Authority who invokes it against a pending Securitisation Application will cause a good deal of trouble before that reading is accepted.

The constitutional argument that NSEL has closed

There is a serious argument in favour of the central statutes that the NSEL judgment shuts out, and it will certainly be revived. The GPID Act received the President’s assent on 6 January 2004. The RDB Act is of 1993 and SARFAESI of 2002. If the subject fell in the Concurrent List, Article 254(2) would ordinarily let a President-assented State law prevail in Gujarat over those earlier central laws — but the proviso to Article 254(2) preserves Parliament’s power to legislate again on the same matter, and Sections 31B and 26E were inserted in 2016, twelve years after the assent. On that route the later parliamentary provisions would displace the State law to the extent of the inconsistency.

NSEL blocks that route at the entrance, because it holds that the depositor law belongs to the State List and the recovery laws to the Union List, so Article 254 never comes into play and the proviso goes with it. The difficulty, respectfully stated, is that pith and substance is a test of legislative competence. Competence answers whether a law is valid; it does not answer whose overriding clause wins when two valid laws fasten on the same rupee. Federalism explains why the State may legislate for depositors. It does not explain why a Deputy Collector’s vesting order should defeat a charge registered under a central law with the Central Registry. That unfilled gap is exactly why the High Courts keep distinguishing NSEL on questions of title and timing, and why the “sell now, account later” solution is likely to become the working answer.

What Is To Be Done

If you act for the bank or a secured creditor

The contest must be fought inside the Designated Court, not avoided. As soon as a client learns that its borrower’s assets have been notified under Section 4, it should lodge its claim with the Competent Authority under Section 7(2) within the month allowed, and value its own security rather than let the Competent Authority value it, because that valuation will otherwise bind the bank. It should confirm that the security interest is registered with the Central Registry, since Section 26E is unavailable without registration. It should then file an objection under Section 10(3) before the Designated Court asking for release of the mortgaged asset under Section 10(6), on the twin grounds that the property was not acquired out of deposits and that the establishment had nothing more than an equity of redemption to attach on the date of the notification. And it should ask, in the alternative, for the arrangement the Bombay High Court adopted in May 2026: permission to sell, with an undertaking to bring the proceeds into court or to account for them if the depositors are ultimately held entitled. A bank that does none of this and simply proceeds to auction is inviting the very outcome it fears.

If you sit as, or appear before, a Recovery Officer

The lesson is disclosure. Where a State notification covers the property, the proclamation of sale in Form No. 22 should say so. A sale certificate under Rule 65 of the Second Schedule to the Income-tax Act, 1961, which applies to DRT recovery through Section 29 of the RDB Act, conveys only the interest that was attached and sold. It does not cure a competing statutory vesting. An auction purchaser who is not told about the notification is simply a future litigant, and the Tribunal will see him again.

If you act for the borrower or a third party

The notification is a genuine ground of objection to a sale, but it must be pleaded for what it is. It does not make the debt disappear and it does not by itself set aside the recovery certificate. It goes to the seller’s title and to the purchaser’s risk. It is at its strongest when combined with two factual points that the State’s own file will usually answer: whether the Competent Authority applied to the Designated Court within the thirty days that Section 5(3) allows, and whether any order making the attachment absolute has ever been passed under Section 10(4) or 10(6). An ad interim attachment that has lain unconfirmed for six or seven years is a weak instrument, and it should be exposed as one.

If you act for the auction purchaser

Search before bidding. The Gazette notification is a public document, and so is the entry in the Central Registry. A buyer who bids with knowledge can price the risk; a buyer who bids without it will spend more on litigation than he saved at the auction. Where a notification exists, the purchaser should insist that the Recovery Officer record it, and should consider applying to the Designated Court under Section 10(3) in his own right once he has paid, since he is by then a person claiming an interest in the property.

If you act on the criminal side

The same two definitions decide both halves of the litigation. “Deposit” in Section 2(c) and “Financial Establishment” in Section 2(d) are the gateway to the attachment under Section 4 and to the offence under Section 3 alike. If the money was received against instruments covered by SEBI’s regulations, or as credit given by a seller to a buyer on a sale of immovable property, there is no deposit; if there is no deposit there is no financial establishment; and if there is no financial establishment, neither the attachment nor the prosecution has a foundation. A defence that succeeds on the definition succeeds everywhere at once, which is why it should be taken at the stage of discharge and not saved for the trial.

There is a second point. Section 3 begins with the establishment’s fraudulent default and then extends liability to the promoter, director, manager or other person or employee responsible for the management or conducting of its business, while separately making the establishment liable to a fine. In structure it belongs to the same family as Section 141 of the Negotiable Instruments Act, 1881, and the rule in Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661 — that the entity must be arraigned before those made liable through it can be tried — applies to it. The Supreme Court restated that rule as recently as 28 August 2025 in Dr. Anil Khandelwal v. Phoenix India, 2025 INSC 1069, holding at paragraphs 16 to 18 that officers cannot be prosecuted where the company whose act is in question has not been made an accused, and that the officer’s own conduct must in any case be connected to the entity’s liability. Prosecutions under depositor protection laws in which the company or the society has been left out of the array of accused — and there are many — are open to challenge on that ground alone.

Conclusion

None of this is a criticism of the depositor protection laws. A small depositor cheated by a neighbourhood credit society has nowhere else to turn, and the Supreme Court was right in K.K. Baskaran and again in 63 Moons to hold that the States are entitled to legislate for him. The difficulty is one of sequencing rather than of policy.

Two statutes, both valid, both carrying overriding clauses, both reaching for the same building, and no legislative rule about who goes first. Until the legislature addresses this directly — a proviso to Section 26E, or a sub-section in Section 10 of the GPID Act expressly saving a security interest created and registered before the date of the Section 4 notification, would be enough — the answer will keep depending on which court the file reaches first. In the meantime, the practitioner’s task is unglamorous but clear: read the Gazette, lodge the claim, value the security, object in time, and never let a property be auctioned as though the other law did not exist.

The views expressed are personal. This article is intended as general information on the law and is not legal advice on any particular matter. Readers should verify the current position before acting on it.

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 Author Name: Mihirkumar V. Patel is an independent Advocate practicing before the High Court of Gujarat, Debts Recovery Tribunal-1 and 2 at Ahmedabad, Debts Recovery Appellate Tribunal at Mumbai, and the City Civil Court at Ahmedabad. He specializes in Writ Petitions (Article 226), Direct and Indirect Tax Litigation, Commercial Litigation, Land disputes, RERA, Banking, SARFAESI Act, RDB Act, and Recovery Disputes.