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Dec  18- 2025

SUPREME COURT REAFFIRMS LIMITS OF SARFAESI ACT, 2002 IN NAGALAND

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

Introduction

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 Inapplicable in Nagaland Prior To 2021 Adoption: Supreme Court Dismisses Secured Creditor’s Appeal.

In a significant ruling on Tuesday, December 16th – clarifying the territorial applicability of central financial recovery legislation and the essential requirements for enforcement of security interests, the Supreme Court of India held that proceedings initiated under the “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” (“SARFAESI Act”) in Nagaland prior to its formal adoption in 2021 were without jurisdiction.

The judgement also reinforces a foundational principle of the SARFAESI framework that only a validly created security interest can be enforced under the Act, and a mere guarantee or promise to repay does not qualify as such.

A Bench comprising Justice Dipankar Datta and Justice Aravind Kumar dismissed the appeal filed by ‘North Eastern Development Finance Corporation Ltd. (NEDFI)’, upholding the decision of the Guwahati High Court.

Factual Background of the Dispute

The dispute arose from a loan sanctioned in 2001 by NEDFI to the respondent company, a Nagaland-based entity, for establishing a cold storage unit in Dimapur.

Given the constitutional protection accorded to tribal land in Nagaland under Article 371A of the Constitution of India, restrictions existed on the transfer or mortgage of land to non-tribal entities. To navigate these restrictions, the parties adopted a tripartite arrangement, under which:

  • The borrower mortgaged its assets in favour of the Model Village Council.
  • The Village Council, in turn, executed a Deed of Guarantee in favour of NEDFI to secure repayment of the loan.

Upon default by the borrower, NEDFI initiated recovery proceedings by issuing a demand notice under Section 13(2) of the SARFAESI Act, 2002 in 2011, followed by taking physical possession of the assets in 2019.

Proceedings Before the High Court

The borrower challenged these actions before the Guwahati High Court, contending that:

  1. The SARFAESI Act, 2002 was not applicable in Nagaland at the time of initiation of proceedings.
  2. No security interest had been created in favour of NEDFI within the meaning of the SARFAESI Act, 2002.

Accepting these submissions, the High Court ruled against NEDFI, prompting the secured creditor to approach the Supreme Court.

Applicability of SARFAESI Act, 2002 in Nagaland

Before the Supreme Court, it was undisputed that the SARFAESI Act, 2002 was formally made applicable in Nagaland only on 10 December 2021, when the Governor of Nagaland issued a notification under Article 371A(1)(a)(iv) of the Constitution of India.

The Supreme Court categorically held that recovery proceedings initiated in 2011, i.e., a decade prior to such notification, were legally untenable. Any invocation of SARFAESI Act, 2002 before its formal adoption in the State was therefore without jurisdiction

Absence of a Valid Security Interest

Importantly, the Court did not rest its conclusion solely on the issue of territorial applicability. It proceeded to examine whether NEDFI qualified as a “secured creditor” under the SARFAESI Act, 2002 at all.

The Court held that the Deed of Guarantee executed by the Village Council did not amount to a security agreement as contemplated under the Act. Emphasising the statutory requirement of creation of a security interest in favour of the creditor, the Court observed:

“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, 2002 and, therefore, the Corporation is not a secured creditor.”

The Court further clarified that the guarantee executed by the Village Council was merely a promise to pay and not a mortgage or charge over property in favour of NEDFI. Consequently, it lacked legal efficacy under the SARFAESI regime.

Justice Datta, authoring the judgement, noted:

“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, 2002.”

No Question of Relegation to Debts Recovery Tribunal

Since the invocation of SARFAESI itself was held to be without jurisdiction, the Court rejected the argument that the borrower should be relegated to the remedy under Section 17 of the SARFAESI Act, 2002 before the Debts Recovery Tribunal (DRT).

The Court observed:

“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, 2002 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, 2002.”

Alternative Remedy Under the Recovery of Debts and Bankruptcy Act, 1993

While dismissing the appeal, the Supreme Court pointed out that NEDFI was not remediless. It could have invoked proceedings under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), which permits recovery of both secured and unsecured debts.

Drawing a clear distinction between the two statutory regimes, the Court observed:

“For invocation of the provisions of the SARFAESI Act, 2002, mortgage is a must which, however, is not so for filing an original application under the Recovery of Debts and Bankruptcy Act, 1993.”

The Court further explained:

“An original application under the Recovery of Debts and Bankruptcy Act, 1993 can be filed for recovery of both secured as well as unsecured loans. Under the SARFAESI Act, 2002 however, security interest can be enforced without intervention of Court while the procedure under the RDB Act, 1993 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.”

Final Outcome

In light of the above findings, the Supreme Court found no merit in the appeal and declined to interfere with the judgement of the Guwahati High Court. The appeal was accordingly dismissed.

Legal Significance of the Judgement

This ruling carries substantial legal and practical implications:

  • It reaffirms that central financial recovery statutes do not automatically apply to States enjoying special constitutional protections, unless duly notified.
  • It underscores that creation of a valid security interest is a sine qua non for invoking the SARFAESI Act, 2002.
  • It clarifies that guarantees and promises to repay do not substitute statutory security interests.
  • It guides financial institutions operating in special category States to carefully evaluate appropriate recovery mechanisms, particularly under the Recovery of Debts and Bankruptcy Act, 1993 where SARFAESI Act, 2002 is inapplicable.

Conclusion

The Supreme Court’s decision in NEDFI V. L. DOULO BUILDERS serves as a cautionary precedent for lenders, emphasising strict statutory compliance in enforcement actions and reinforcing the constitutional autonomy of States like Nagaland. It also delineates the boundaries between Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 and Recovery of Debts and Bankruptcy Act, 1993 remedies, ensuring that coercive recovery measures are exercised only within the contours of law.