SARFAESI Act Not Invokable Where No Security Interest Created and Article 371A Applies in Nagaland

A Bench of Justice Dipankar Datta and Justice Aravind Kumar heard the appeal by the North Eastern Development Finance Corporation Ltd. (NEDFI) challenging a Gauhati High Court judgment that set aside notices and possession orders issued under the SARFAESI Act. The principal issue before the Supreme Court was whether the Corporation could invoke the SARFAESI Act against a borrower in Nagaland where no “security interest” was created in its favour, and whether Article 371A’s special provisions for Nagaland affected the applicability of the Act.

The Court upheld the High Court’s decision and dismissed the appeal, holding that the Corporation had no enforceable security interest under the SARFAESI Act and therefore lacked jurisdiction to proceed under Section 13. The Court noted that Article 371A of the Constitution, which provided that “no Act of Parliament in respect of ... ownership and transfer of land and its resources, shall apply to the State of Nagaland unless the Legislative Assembly of Nagaland by a resolution so decides,” operated at the constitutional level and could not be overridden by the SARFAESI Act. The Court, in its reasoning, observed: “It is reasonable to presume that the SARFAESI Act not being in existence on 11th May, 2001, a secured creditor might not have thought of creation of any security interest in the secured asset including creation of mortgage by deposit of title deeds in terms of a security agreement to enforce a secured debt. Indeed, the terms ‘secured creditor’, ‘secured interest’, ‘secured debt’, ‘security agreement’, etc., all together, are to be found only in the SARFAESI Act and not in any previous enactment. The Division Bench has held in no unmistakable terms that no property was mortgaged by the Company in favour of the Corporation. This is an undisputed fact. It is, therefore, abundantly clear that the Division Bench of the High Court was clearly right in interdicting the actions of the Corporation and in allowing the writ petition filed by the Company by returning a finding that the action of the Corporation was without jurisdiction.” The Court left the Corporation free to pursue other remedies against the borrower or the guarantor in accordance with law.

Background The dispute arose out of a term loan arrangement dated 11 May 2001 for a cold storage project in Dimapur, Nagaland, in which the borrower, M/s L. Doulo Builders & Suppliers Co. Pvt. Ltd., obtained finance from NEDFI. Because tribal land transfer to non-tribals was restricted in Nagaland, the Model Village Council executed parallel agreements and a deed of guarantee to stand surety and to hold certain assets described in a schedule. The Corporation alleged default and issued a recall notice in August 2010 and a demand notice under Section 13(2) of the SARFAESI Act on 30 June 2011; following an order under Section 14 by the Deputy Commissioner, Dimapur, the Corporation took physical possession of assets in March 2019.

The borrower filed a writ petition in the Gauhati High Court, which by a Division Bench judgment dated 6 March 2020 set aside the SARFAESI notices and the possession order as illegal and without jurisdiction, finding that no security interest had been created in favour of the lender and that the deed of guarantee did not operate as a “security agreement” under the SARFAESI Act. The High Court observed that the Corporation had not pointed to any instrument conferring right, title or interest over the immovable properties. The High Court also noted that the SARFAESI Act’s operation in Nagaland required specific notification and that a state notification making the Act applicable was issued only on 10 December 2021.

On special leave, the Supreme Court examined whether SARFAESI could be invoked for a loan agreement executed before the Act became operational and whether Article 371A barred application of the Act in Nagaland at the relevant time. The Court reviewed precedents including M.D. Frozen Foods, UCO Bank v. Deepak Debbarma and United Bank v. Satyawati Tondon, distinguished them on the facts and concluded that, because no security interest was created and the SARFAESI Act did not override Article 371A, the High Court’s interference was justified. The final result: the appeal was dismissed; the High Court order stood; the Corporation retained liberty to pursue recovery by lawful means against the Company or the Council. No costs were imposed.

Case Details: Case No.: 2025 INSC 1446 (Civil Appeal No. 6492 of 2024) Case Title: North Eastern Development Finance Corporation Ltd. (NEDFI) v. M/s L. Doulo Builders and Suppliers Co. Pvt. Ltd. Appearances: For the Petitioner(s): Dr. Manish Singhvi, Senior Counsel For the Respondent(s): (Names not specified in the reported judgment)