Banks can't jump the queue on MPID-attached property: what the Supreme Court ruled

Rules as of 13 October 2026.

When a financial fraud collapses, two sets of people line up for the same assets: the ordinary investors or depositors who handed over money, and the banks that hold a mortgage on the property. For Maharashtra, the Supreme Court gave a clear answer on 15 May 2025 about who cannot jump the queue when the State has attached property under the MPID Act. This explainer sets out what was decided, what it did not decide, and where the Bombay High Court has already drawn a line in 2026.

What the MPID Act does

The Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 lets the State Government attach property of a "financial establishment" that has failed to repay deposits or is acting to defraud depositors. Under section 4, the attached property "shall forthwith vest" in a Competent Authority (an officer of at least Deputy Collector rank, section 5). The Authority must apply to a Designated Court within thirty days. If the court makes the attachment absolute, section 7 allows realisation of the property and "equitable distribution among the depositors" of the money. A "deposit" is defined broadly as receipt of money by a financial establishment, with listed exclusions.

What the Supreme Court decided

The case is National Spot Exchange Ltd v. Union of India, Writ Petition (Civil) No. 995 of 2019, 2025 INSC 694, decided on 15 May 2025 by a bench led by Justice Bela M. Trivedi. It arose from the NSEL payment default, reported at about ₹5,600 crore owed to roughly 13,000 traders. Two questions were before the Court: whether secured creditors such as banks have priority over property attached under the MPID Act, and whether the insolvency moratorium under section 14 of the Insolvency and Bankruptcy Code stops such property being used.

In the judgment text I read, the Court held that Maharashtra was within its legislative competence to enact the MPID Act (paragraph 34), and that central laws such as SARFAESI and the RDB Act "could not be permitted to override" it (paragraph 38). The Supreme Court-appointed committee's view, recorded in the judgment, was that "no priority of interest can be claimed by the Secured Creditors" over such attached property. The Bombay High Court has since quoted the same line from the judgment (paragraph 66) as the Supreme Court's holding. Law reports add that depositors' money in a fraud is not a "debt" for SARFAESI's section 26E, which gives secured creditors priority over "debts"; I could not read the closing paragraphs myself, so treat that point as reported.

A simple worked example (illustrative)

Assume the State attaches a set of flats and offices of a defaulting establishment, and the Designated Court sells them for ₹10 crore. A bank claims ₹6 crore as a secured creditor. A hundred depositors are owed ₹16 crore in all. Before the 2025 ruling, the bank would argue it takes its ₹6 crore first, leaving ₹4 crore for depositors, or 25 paise per rupee. On the Supreme Court's reasoning, the bank cannot claim that priority over the attached property, so the ₹10 crore goes towards the depositors' claims. If the court shares it pro rata (one common approach; the Designated Court decides), each depositor recovers 62.5 paise per rupee. A depositor owed ₹20 lakh would receive about ₹12.5 lakh rather than ₹5 lakh. The numbers are assumed; the point is the order of payment.

Scenario	Bank gets	Depositors get	Recovery per ₹1 owed
Bank first (old argument)	₹6 crore	₹4 crore	25 paise
No priority over attached property	Nothing from this pool	₹10 crore	62.5 paise

Limits you should know

• Earlier bank action can win. In ASREC (India) Ltd v. State of Maharashtra (Bombay High Court, Criminal Appeal No. 210 of 2026, decided 18 March 2026), Justice R. M. Joshi held that where the bank had already taken possession under section 13 of SARFAESI and that order had not been challenged, a later MPID attachment could not override it. The court read the Supreme Court judgment as not covering rights that had already vested before attachment, and set aside the attachment as to those properties.
• The ruling is being tested. The Karnataka High Court, on 10 April 2026, followed the Supreme Court judgment for a similar Karnataka law and noted that a review petition was pending. I have not checked its current status.
• Not every collection is a "deposit". Whether money paid to a builder or a scheme operator is a "deposit" and the firm a "financial establishment" depends on the facts and the Act's exclusions. That is for the Designated Court.
• Attachment is not payment. Property must be notified, the court must make the attachment absolute, assets must be realised, and distribution follows. That takes time.

Why home buyers should care

If a builder or a scheme that took money from many people defaults and the State invokes the MPID Act, the order of recovery can decide whether you get cents or rupees on the rupee. Buyers of an under-construction flat also have separate routes under RERA, which this article does not cover.

Checklist

• Keep every receipt, cheque record and agreement; claims are filed against what you can prove.
• Watch the Gazette and the Competent Authority's notices for any attachment order and its deadline to file a claim.
• Do not assume a bank's mortgage always loses; the 2026 High Court ruling shows timing matters.
• Ask an advocate whether your payment fits the Act's definition of "deposit".

This is information, not legal advice. A lawyer should read the orders that apply to your case.