SARFAESI Act Inapplicable In Nagaland Before Its Adoption In 2021 : Supreme Court Dismisses Secured Creditor's Plea

The Supreme Court on Tuesday (December 16) dismissed a secured creditor's plea to initiate recovery proceedings under the SARFAESI Act against a borrower in Nagaland, holding that such action was impermissible at a time when the Central legislation was not operational within the State.

Noting that the Appellant–secured creditor had initiated recovery proceedings in 2011 by issuing a demand notice under Section 13(2) of the Act, while the SARFAESI Act was formally adopted in Nagaland only in 2021 after the Governor notified its applicability, a bench comprising Justices Dipankar Datta and Aravind Kumar held that the proceedings commenced prior to such adoption were invalid.

The dispute arose from a loan sanctioned in 2001 by the Appellant to the Respondent (Nagaland-based entity) for establishing a cold storage unit in Dimapur. Due to restrictions on the transfer of tribal land under Article 371A of the Constitution, the parties adopted a tripartite arrangement. While the borrower mortgaged its assets to the Village Council, the Council, in turn, executed a Deed of Guarantee in favour of the Appellant to secure repayment.

Following default, the Appellant issued a demand notice under SARFAESI in 2011 and subsequently took physical possession of the assets in 2019. These actions were challenged before the Gauhati High Court, which ruled against the Appellant, holding that SARFAESI was inapplicable as no security interest had been created in favour of the Appellant, prompting the Appellant to move to the Supreme Court.

The Court took note of the notification issued on 10th December, 2021 by the Governor of Nagaland, under Article 371A (1) (a) (iv) of the Constitution of India, notifying the implementation of the SARFAESI Act within Nagaland with effect from the date of the notification.

However, the Court did not rest its decision solely on this point. It stressed that even without the Article 371A query, NEDFI's invocation of the SARFAESI Act lacked jurisdiction because no security interest had been validly created within the meaning of the statute.

Refusing to interfere with the impugned decision, the judgment authored by Justice Datta emphasized the security interest created in the Appellants by the Village Council has no value, as it was a mere promise to pay the debt and not the creation of a security interest as per SARFAESI Act. No such security interest was created in favour of NEDFI through the agreements on record. The deed of guarantee by the Model Village Council did not, in law, amount to a security agreement that would make NEDFI a “secured creditor” capable of invoking the SARFAESI Act

“We reiterate, no security interest in respect of any property (secured asset) was created in favour of the (Appellant) Corporation within the meaning of the SARFAESI Act and, therefore, the Corporation is not a secured creditor.”, the court said.

“there is no security agreement by which security interest has been created in favour of a secured creditor. Once we have held that the SARFAESI Act was erroneously invoked by the Corporation and that such invocation was without jurisdiction, there is no question of relegating the Company to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act.”, the court added, pointing out that for creation of a security interest mortgage of a property is a must under the SARFAESI Act, which is not the case here, as the property was mortgaged to the Village Council, which in turn executed a Deed of Guarantee in the Appellant's favour, having no persuasive value in the eyes of law because of the inapplicability of the SARFAESI Act at the time of initiation of the proceedings.

Secured Creditor Could Have Availed Remedy Under Recovery of Debts and Bankruptcy Act, 1993

The Court suggested that, instead of relying on the SARFAESI Act, the Appellant could have invoked the remedy available under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), where the application can be filed for both secured as well as unsecured loans.

“For invocation of the provisions of the SARFAESI Act, mortgage is a must which, however, is not so for filing an original application under the Recovery of Debts and Bankruptcy Act, 199312. An original application under the RDB Act can be filed for recovery of both RDB Act, hereafter secured as well as unsecured loans. Under the SARFAESI Act, however, security interest can be enforced without intervention of Court while the procedure under the RDB Act is for execution of the decree passed by the jurisdictional Debts Recovery Tribunal upon reaching a satisfaction of there being outstanding dues of the lender which need to be recovered from the borrower.”, the court said.

Resultantly, the appeal failed and was dismissed.

Cause Title: NORTH EASTERN DEVELOPMENT FINANCE CORPORATION LTD. (NEDFI) VS. M/S L. DOULO BUILDERS AND SUPPLIERS CO. PVT. LTD.

Citation : 2025 LiveLaw (SC) 1216

Click here to download judgment

Appearances:

For Appellant(s) : Dr. Manish Singhvi, Sr. Adv. Mr. Rituraj Biswas, Adv. Mr. Mayan Prasad, Adv. Mr. Chandan Kumar, AOR Ms. Sujaya Bardhan, Adv. Mr. Aayush Garg, Adv. Mr. Sami Ahmed, Adv.

For Respondent(s) :Mr. Kaushik Choudhury, AOR Mr. Madhurjya Choudhury, Adv. Mr. Saksham Garg, Adv. Mr. Jyotirmoy Chatterjee, Adv.