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 HON’BLE MR. JUSTICE AUGUSTINE GEORGE MASIH |
| Precedent Value | Binding authority on applicability of SARFAESI Act in Nagaland under Article 371A and necessity of a security interest for invocation under Section 13 |
| Overrules / Affirms | Affirms the High Court’s order quashing SARFAESI notices and confirms that the Act could not be invoked in Nagaland before state notification or absent a valid security agreement |
| Type of Law | Banking and financial-debt recovery; Constitutional law (Article 371A); Civil procedure under SARFAESI and RDB Acts |
| Questions of Law |
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| Ratio Decidendi | The SARFAESI Act cannot override Article 371A of the Constitution; until the Nagaland Legislative Assembly resolves and the Governor notifies its application (done only on 10 December 2021), the Act did not apply. Further, enforcement under Section 13 requires a valid security interest—“right, title or interest” in property in favor of the secured creditor under Section 2(1)(zf). Here, no mortgage or hypothecation in favor of the lender was created; the guarantee deed did not transfer any interest. As the Corporation lacked secured-creditor status and the Act was non-operative in Nagaland at the relevant time, its SARFAESI notices were without jurisdiction and rightly quashed. |
| Judgments Relied Upon |
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| Logic / Jurisprudence / Authorities Relied Upon by the Court |
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| Facts as Summarised by the Court |
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Practical Impact
| Category | Impact |
|---|---|
| Binding On | Subordinate courts and Debts Recovery Tribunals on applicability of SARFAESI Act in Article 371A states |
| Persuasive For | High Courts hearing challenges to SARFAESI notices in states with special constitutional provisions |
| Distinguishes | M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp; UCO Bank v. Deepak Debbarma |
| Follows | Division Bench of Gauhati High Court’s approach to jurisdiction under SARFAESI in Nagaland |
What’s New / What Lawyers Should Note
- The SARFAESI Act does not apply in Nagaland prior to state assembly resolution and gazette notification under Article 371A; any SARFAESI notice issued before 10 December 2021 is void.
- Enforcement under Section 13 requires a valid “security agreement” creating a security interest as defined in Section 2(1)(zf); guarantees alone do not suffice.
- Section 35’s overriding effect cannot override constitutional provisions; Article 371A prevails.
- In absence of a mortgage or hypothecation in favor of a secured creditor, the lender lacks locus to invoke SARFAESI—even if the account is a non-performing asset.
- Parties should ensure all security-creation formalities comply with both central statutes and state constitutional safeguards before initiating SARFAESI proceedings.
Summary of Legal Reasoning
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Constitutional Bar under Article 371A
- Article 371A(1)(a)(iv) prevents central enactments on land transfer from applying in Nagaland until state resolution and notification.
- Nagaland Gazette notification dated 10 December 2021 made SARFAESI Act operative only thereafter.
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Requirement of Security Interest
- Section 2(1)(zf) SARFAESI Act defines “security interest” as a right, title or interest (mortgage, hypothecation, charge) in favor of a secured creditor.
- No mortgage or hypothecation was created in favor of the Corporation; the guarantee deed did not transfer title or charge.
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Non-Applicability and Jurisdictional Defect
- SARFAESI’s Section 35 cannot override the Constitution.
- Lender cannot be a secured creditor without a security agreement; hence notices under Section 13 were ultra vires.
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Distinction from RDB Act and Precedents
- RDB Act recovery applications do not require a mortgage; SARFAESI enforcement does.
- M.D. Frozen Foods (2017) clarified applicability of SARFAESI to live debts post-notification but assumes security interest.
- UCO Bank and Satyawati Tondon decisions on enforcement post-creation of security interest are inapposite here.
Arguments by the Parties
Appellant (Financial Institution):
- Claimed the secondary agreements and guarantee deed sufficed to create a security interest.
- Argued precedents allow invoking SARFAESI on debts and mortgage arrangements predating notification.
- Contended it was a secured creditor entitled to Section 13 relief.
Respondent (Corporate Borrower):
- No mortgage or charge document conferred any right, title or interest on the lender.
- Article 371A barred the SARFAESI Act’s application in Nagaland until notified in December 2021.
- Maintained that absence of security agreement rendered Section 13 notices void.
Factual Background
A development‐finance corporation agreed in May 2001 to fund a cold-storage project in Nagaland, documenting the loan via three agreements—including a guarantee by a Village Council—but without creating any mortgage or hypothecation in favor of the lender. On default, SARFAESI notices were issued in June 2011 and assets seized in March 2019. The Gauhati High Court quashed the notices for lack of secured-creditor status and non-applicability of SARFAESI under Article 371A; the Supreme Court affirmed.
Statutory Analysis
- Article 371A, Constitution of India: Requires Nagaland Legislative Assembly resolution and gubernatorial notification for central laws on land transfer to apply.
- Section 2(1)(zf), SARFAESI Act: Defines “security interest” as mortgage, charge, hypothecation, etc., in favor of a secured creditor.
- Section 13(2), SARFAESI Act: Notice requirement to borrower before enforcement.
- Section 35, SARFAESI Act: Overriding effect, subject to constitutional provisions.
- Recovery of Debts and Bankruptcy Act, 1993: Provides debt-recovery remedies (secured and unsecured) via DRT; does not replace mortgage requirement under SARFAESI.
- Nagaland Village and Area Councils Act, 1978: Empowers Village Council to secure and forfeit loans of residents—alternative remedy not pursued.
Alert Indicators
- ✔ Precedent Followed – Confirms requirement of security interest under Section 2(1)(zf).
- 🔄 Conflicting Decisions – Resolves division on retrospective applicability of SARFAESI when no security interest exists; distinguishes M.D. Frozen Foods and UCO Bank.