Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-006492-006492 – 2024 |
| Diary Number | 9829/2020 |
| Judge Name | HON’BLE MR. JUSTICE DIPANKAR DATTA |
| Bench | HON’BLE MR. JUSTICE DIPANKAR DATTA and HON’BLE MR. JUSTICE AUGUSTINE GEORGE MASIH |
| Precedent Value | Binding authority |
| Overrules / Affirms | Affirms the Gauhati High Court order |
| Type of Law | Banking/recovery of debts; constitutional law; civil appellate |
| Questions of Law | Whether the SARFAESI Act could be invoked against the borrower when no security interest as defined under Section 2(1)(zf) was created and before Article 371A notification in Nagaland. |
| Ratio Decidendi |
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| Judgments Relied Upon |
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| Logic / Jurisprudence / Authorities Relied Upon |
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| Facts as Summarised by the Court |
The respondent company borrowed ₹2 crore in May 2001 under a loan agreement, a village-council guarantee agreement and a deed of guarantee. The borrower defaulted; NEDFI issued recall and Section 13(2) notices in 2010–11 and seized assets under Section 14 in March 2019. The company’s writ under Art 226 succeeded in HC. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts dealing with SARFAESI/Article 371A conflicts |
| Persuasive For | Other High Courts and benches of the Supreme Court in banking and constitutional cases |
| Follows | M.D. Frozen Foods Exports Private Ltd. v. Hero Fincorp (2017) 16 SCC 741 |
| Distinguishes | UCO Bank v. Deepak Debbarma (2017) 2 SCC 585; United Bank of India v. Satyawati Tondon (2010) 8 SCC 110 |
What’s New / What Lawyers Should Note
- SARFAESI Section 13(2) cannot be invoked without a security interest created under a security agreement as defined by Section 2(1)(zf).
- Article 371A bars application of SARFAESI to Nagaland until the State Assembly resolution/notification (issued 10 December 2021).
- A deed of guarantee under a local statute does not confer “security interest” for SARFAESI enforcement; remedies lie under the guaranteeing statute.
- Lenders must ensure mortgage or hypothecation in favour of the financial institution, along with deposit of title deeds, before pursuing SARFAESI.
- Borrowers and guarantors in Nagaland can challenge SARFAESI steps taken prior to the constitutional notification.
Summary of Legal Reasoning
- Statutory prerequisites: Section 2(1)(zf) defines “security interest” as mortgage, charge, hypothecation, etc., which must exist before SARFAESI enforcement.
- Constitutional override: Article 371A(1)(a)(iv) prohibits transfer-of-land statutes in Nagaland unless the State Assembly so resolves.
- Temporal applicability: SARFAESI Act notified 21 June 2002; Nagaland notification only on 10 December 2021—long after the 2001 loan agreement.
- Absence of mortgage: No document created any enforceable mortgage or deposit of title deeds in favour of NEDFI; only the Village Council guaranteed repayment.
- Alternative remedy: The Nagaland Village and Area Councils Act, 1978 provided the Council power to forfeit and sell security; SARFAESI was not available against the borrower.
- Precedents: Decisions in M.D. Frozen Foods, UCO Bank and Satyawati Tondon were distinguished on facts—no security interest existed here.
- Conclusion: SARFAESI steps were ultra vires and quashed; NEDFI may pursue recovery against the Council under appropriate law.
Arguments by the Parties
Appellant (NEDFI):
- Relied on precedents allowing SARFAESI for debts alive when Act became applicable.
- Contended collective agreements constituted security interest.
- Argued HC erred in denying SARFAESI jurisdiction.
Respondent (Company):
- No mortgage or hypothecation created in favour of NEDFI as required by Section 2(1)(zf).
- Article 371A barred application of SARFAESI in Nagaland until state notification.
- The deed of guarantee under local council statute did not create a security interest against the borrower.
Factual Background
In December 2000 the respondent company sought a ₹2 crore term loan from NEDFI and executed on 11 May 2001 a loan agreement, a Model Village Council guarantee arrangement and a deed of guarantee. The company defaulted and NEDFI issued a recall notice in August 2010 and a Section 13(2) SARFAESI notice in June 2011, later taking possession under Section 14 in March 2019. The company filed a writ under Article 226 in the Gauhati High Court in 2019, which quashed the SARFAESI notices and possession order for lack of security interest and breach of Article 371A.
Statutory Analysis
- SARFAESI Act, 2002: Section 2(1)(zf) (definition of security interest); Section 13(2) (demand notice); Section 14 (possession); Section 35 (overriding effect).
- Constitution of India: Article 371A(1)(a)(iv) prohibiting application of land-transfer statutes in Nagaland without Assembly resolution.
- Nagaland Notification (10 Dec 2021): Implements SARFAESI Act in Nagaland, subject to indigenous-inhabitant sale restrictions.
- Nagaland Village and Area Councils Act, 1978: Section 2(6) (power to guarantee); Section 2(8) (power to forfeit and sell security).
Dissenting / Concurring Opinion Summary
No dissenting or separate opinion was recorded.
Alert Indicators
- ✔ Precedent Followed – Affirms requirement of security interest under Section 2(1)(zf).
- 🔄 Conflicting Decisions – Distinguishes UCO Bank v. Deepak Debbarma and United Bank of India v. Satyawati Tondon.