DIMAPUR, Dec 19: The Supreme Court has dismissed an appeal by the North Eastern Development Finance Corporation Ltd. (NEDFI), holding that the SARFAESI Act, 2002 could not be invoked in Nagaland for recovery proceedings initiated before the Act was extended to the State in December 2021.

A Bench of Justice Dipankar Datta and Justice Aravind Kumar ruled that NEDFI’s issuance of a demand notice under Section 13(2) of the SARFAESI Act in 2011 was without jurisdiction, as the legislation became applicable to Nagaland only through a Governor’s notification under Article 371A(1)(a)(iv) of the Constitution in 2021.

The case stemmed 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. Due to constitutional restrictions on transfer of tribal land under Article 371A, a tripartite arrangement was adopted wherein the borrower mortgaged its property to the 5th Model Village Council, which in turn executed a Deed of Guarantee in favour of NEDFI.

Following default, NEDFI initiated SARFAESI proceedings in 2011 and took physical possession of the assets in 2019. The borrower challenged these actions before the Gauhati High Court, which ruled against NEDFI, holding that no valid security interest had been created. NEDFI then approached the Supreme Court.

While noting the 2021 notification extending SARFAESI to Nagaland, the apex court clarified that its decision was not based solely on territorial applicability. It held that 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 SARFAESI. Since the mortgaged property was not in favour of NEDFI, the financial institution could not be treated as a “secured creditor.”

Reiterating that creation of a valid mortgage or security interest is mandatory under SARFAESI, the Court held the proceedings to be erroneous and without jurisdiction, and ruled that the borrower could not be relegated to the Debts Recovery Tribunal under Section 17.

However, the Court noted that NEDFI was not without remedy and could have pursued recovery under the Recovery of Debts and Bankruptcy Act, 1993. Finding no infirmity in the Gauhati High Court’s judgment, the Supreme Court dismissed the appeal.