NORTH EASTERN DEVELOPMENT FINANCE CORPORATION LTD. v. M/S. L DOULO BUILDERS AND SUPPLIERS CO. PVT. LTD.
SARFAESI Act Inapplicable: No Security Interest Created and Article 371A Prevails in Nagaland - Supreme Court Upholds High Court Decision.
Court: Supreme Court of India
Citation: 2025 INSC 1446
Decision Date: 16-12-2025
List of Laws
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act); Article 371A of the Constitution of India; Article 226 of the Constitution of India; The Recovery of Debts and Bankruptcy Act, 1993; Nagaland Village and Area Councils Act 1978
- Facts: The North Eastern Development Finance Corporation Ltd. (NEDFI) provided financial assistance to M/S L. Doulo Builders and Suppliers Co. Pvt. Ltd. to set up a cold storage unit in Nagaland in 2001. To secure the loan, agreements were executed, including a loan agreement, an agreement with the 5th Model Village Council (guarantor), and a deed of guarantee. The company defaulted, and NEDFI initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
- Procedural Posture: The company challenged the SARFAESI action in the Gauhati High Court under Article 226 of the Constitution of India. The High Court allowed the writ petition, setting aside the notices and orders issued under the SARFAESI Act, holding them illegal and without jurisdiction. NEDFI appealed to the Supreme Court.
- Issue: Whether the provisions of the SARFAESI Act could be invoked by NEDFI against the company, considering the loan agreement was executed before the SARFAESI Act came into force and the special provisions of Article 371A of the Constitution of India regarding land transfer in Nagaland?
- Holding: The Supreme Court upheld the High Court's decision, dismissing the appeal. The Court held that NEDFI could not invoke the SARFAESI Act against the company because no valid security interest was created in favor of NEDFI, and Article 371A of the Constitution contains special provisions for the State of Nagaland.
- Reasoning: The Court reasoned that for the SARFAESI Act to apply, a security interest must be created. In this case, the High Court found, and the Supreme Court agreed, that the deed of guarantee did not create any right, title, or interest in favor of NEDFI over the company's immovable properties. The Court emphasized that Section 35 of the SARFAESI Act, which gives overriding effect to its provisions, cannot override the provisions of the Constitution, specifically Article 371A, which protects Naga customary law and land ownership. The Court also noted that the SARFAESI Act came into force after the loan agreement was executed, and its applicability to prior agreements requires caution. The Court observed that the arrangement resulted in the Company mortgaging its property to the Council, and the Council had powers under the Nagaland Village and Area Councils Act 1978 to seize and dispose of the mortgaged property in case of default.
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