Supreme Court of India. (IANS Photo)
DIMAPUR, DECEMBER 18 (MExN): The Supreme Court has dismissed an appeal filed by the North Eastern Development Finance Corporation Ltd. (NEDFI), holding that the SARFAESI Act, 2002 could not be invoked against a Nagaland-based borrower for recovery proceedings initiated prior to the Act being made applicable in the State.
A Bench comprising Justice Dipankar Datta and Justice Aravind Kumar held that NEDFI’s issuance of a demand notice under Section 13(2) of the SARFAESI Act in 2011 was without jurisdiction, as the legislation was extended to Nagaland only in December 2021 through a notification issued by the Governor under Article 371A(1)(a)(iv) of the Constitution.
The case arose from a loan sanctioned in 2001 to M/s L. Doulo Builders and Suppliers Co. Pvt. Ltd., a Dimapur-based firm, for setting up a cold storage facility. In view of constitutional restrictions on transfer of tribal land under Article 371A, a tripartite arrangement was adopted, under which the borrower mortgaged its property to the 5th Model Village Council. The Village Council, in turn, executed a Deed of Guarantee in favour of NEDFI to secure repayment of the loan.
Following default, NEDFI initiated SARFAESI proceedings in 2011 and later took physical possession of the assets in 2019. These actions were challenged by the borrower before the Gauhati High Court, which ruled against NEDFI, holding that no valid security interest had been created in its favour. Aggrieved by the High Court’s decision, NEDFI approached the Supreme Court.
While taking note of the 2021 notification extending SARFAESI to Nagaland, the apex court clarified that its decision was not based solely on territorial applicability. It held that even otherwise, NEDFI could not invoke SARFAESI as no security interest, as defined under the Act, had been created in its favour.
The Court observed that the Deed of Guarantee executed by the Village Council amounted only to a promise to repay the debt and did not constitute a security agreement under the SARFAESI framework. Since the mortgaged property stood in the name of the Village Council and not in favour of NEDFI, the financial institution could not be treated as a “secured creditor” under the Act.
Reiterating that creation of a valid mortgage or security interest is mandatory under SARFAESI, the Court held that the invocation of the Act was erroneous and without jurisdiction. Consequently, it ruled that there was no question of relegating the borrower to the Debts Recovery Tribunal under Section 17 of the Act.
The Court, however, noted that NEDFI was not left remediless and could have pursued recovery under the Recovery of Debts and Bankruptcy Act, 1993, which allows recovery of both secured and unsecured debts. Finding no infirmity in the Gauhati High Court’s decision, the Supreme Court dismissed the appeal.
