The Supreme Court has dismissed an appeal filed by the North Eastern Development Finance Corporation Ltd. (NEDFI), ruling that the Corporation could not invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) against a borrower in Nagaland as no valid “security interest” was created in its favour.
A Bench comprising Justice Dipankar Datta and Justice Aravind Kumar upheld the decision of the Gauhati High Court, which had declared the recovery actions initiated by the Corporation as “wholly illegal and without jurisdiction.” The Apex Court clarified that a mere deed of guarantee provided by a Village Council, without a direct mortgage or hypothecation in favour of the lender, does not confer the status of a “secured creditor” under the SARFAESI Act.
Background of the Dispute
The case traces back to December 2000, when the respondent, M/S L. Doulo Builders and Suppliers Co. Pvt. Ltd., approached the appellant-Corporation for financial assistance to set up a cold storage unit in Dimapur, Nagaland.
Due to land laws in the State of Nagaland—specifically the restrictions under Article 371A of the Constitution prohibiting the transfer of land by a tribal to a non-tribal—a unique security arrangement was devised. Three agreements were executed on May 11, 2001:
- A Loan Agreement between the Corporation and the Company.
- An Agreement between the 5th Model Village Council and the Company’s Director, whereby the Company mortgaged its assets to the Council.
- A Deed of Guarantee by the Council in favour of the Corporation, guaranteeing repayment of the loan.
Following the disbursement of funds, the Company defaulted on repayment. Consequently, the Corporation issued a loan recall notice in 2010 and subsequently a demand notice under Section 13(2) of the SARFAESI Act on June 30, 2011, claiming outstanding dues of over Rs. 3.85 crore.
Years later, on March 23, 2019, utilizing an order from the Deputy Commissioner, Dimapur, the Corporation took physical possession of the Company’s assets. The Company challenged this action before the Gauhati High Court, which allowed the writ petition on March 6, 2020, setting aside the possession notices and directing the restoration of the property to the Company. The High Court held that the Corporation was not a “secured creditor” as no security interest had been created in its favour.
The Legal Issue
The primary question before the Supreme Court was whether the Corporation could invoke the provisions of the SARFAESI Act to recover dues when the mortgage was created in favour of a third-party guarantor (the Village Council) and not directly in favour of the lender, owing to the statutory restrictions in Nagaland.
Observations and Analysis of the Court
The Supreme Court conducted a detailed analysis of the applicability of the SARFAESI Act in Nagaland and the definition of “security interest.”
1. Applicability of SARFAESI Act in Nagaland The Court noted that while Section 35 of the SARFAESI Act gives it overriding effect, it cannot override the Constitution. Article 371A of the Constitution contains special provisions for Nagaland, specifically regarding the ownership and transfer of land.
The Court referred to a notification dated December 10, 2021, issued by the Government of Nagaland, which notified the implementation of the SARFAESI Act in the state only from that date. The Court observed:
“Bare perusal of the aforesaid notification leads one to the conclusion that provisions of the SARFAESI Act could be implemented in the State of Nagaland with effect from 10th December, 2021, i.e., more than two decades after the Company availed loan granted by the Corporation.”
2. Absence of “Security Interest” The Bench emphasized that to invoke the SARFAESI Act, the lender must be a “secured creditor” holding a “security interest” as defined under Section 2(1)(zf) of the Act.
The Court observed that under the specific arrangement in this case, the mortgage was created in favour of the Village Council, not the Corporation. The Council, in turn, only provided a guarantee to the Corporation.
“In the present case, no security interest was created by any security agreement in favour of the Corporation.”
The Court further held:
“It is also evident from the deed of guarantee dated 11th May, 2001 that the Council did guarantee that in case the Company failed or neglected to repay the loan… the Council shall repay to the Corporation such amounts as they may be called upon to pay. In view of such deed of guarantee, the Corporation lacked the authority to invoke the SARFAESI Act against the Company.”
3. Distinguishing Precedents The Corporation relied on previous judgments, including M.D. Frozen Foods Exports Private Limited v. Hero Fincorp (2017) and UCO Bank v. Deepak Debbarma (2017). The Court distinguished these cases, noting that in M.D. Frozen Foods, the issue was about the retrospective application of the Act to an existing “security interest,” whereas in the present case, no security interest existed at all.
Regarding the precedent in United Bank of India v. Satyawati Tondon (2010), which discourages High Courts from entertaining writ petitions when statutory remedies exist, the Court ruled:
“The aforesaid observation would have no application in a case of the present nature where 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 Decision
The Supreme Court concluded that the Division Bench of the High Court was correct in interdicting the actions of the Corporation.
“We reiterate, no security interest in respect of any property (secured asset) was created in favour of the Corporation within the meaning of the SARFAESI Act and, therefore, the Corporation is not a secured creditor.”
The appeal was dismissed. However, the Court granted liberty to the Corporation to pursue remedies against the Company or the Council in accordance with law, such as under the Recovery of Debts and Bankruptcy Act, 1993, or by proceeding against the Council based on the deed of guarantee.
Case Details:
- Case Title: North Eastern Development Finance Corporation Ltd. (NEDFI) v. M/S L. Doulo Builders and Suppliers Co. Pvt. Ltd.
- Appeal Number: Civil Appeal No. 6492 of 2024
- Citation: 2025 INSC 1446
- Coram: Justice Dipankar Datta and Justice Aravind Kumar
- Statutes Involved: SARFAESI Act, 2002; Constitution of India (Article 371A); Nagaland Village and Area Councils Act, 1978.
