The Supreme Court ruled that the cornerstone for invoking the SARFAESI Act is the creation of a “security interest” in favour of a “secured creditor”. Finding that the Borrower/ Defaulter had mortgaged its property to the Council, not to the Corporation, the Court clarified that the Corporation’s only recourse was the deed of guarantee provided by the Council.
As no property was mortgaged by the Defaulter Company in favour of the Corporation, no security interest was created within the meaning of the SARFAESI Act, and therefore, the Court held that the Corporation was not a “secured creditor”.
Since there is no security agreement in the present case by which a security interest has been created in favour of a secured creditor, the Court held that the SARFAESI Act was erroneously invoked by the North Eastern Development Finance Corporation, and hence, there is no question of relegating the Defaulter Company to the Debt Recovery Tribunal under Section 17 of the SARFAESI Act.
A Two-Judge Bench comprising Justice Dipankar Datta and Justice Aravind Kumar observed that Article 371A of the Constitution contains special provisions for Nagaland, stating that no Act of Parliament concerning “ownership and transfer of land and its resources” shall apply to the State unless the Nagaland Legislative Assembly so decides by a resolution.
The Bench went on to observe that the SARFAESI Act was formally implemented in Nagaland only with effect from 10th December 2021, through a notification. Since the recovery actions were initiated long before this date, the invocation of the SARFEASI Act was premature and invalid.
Accordingly, the Bench concluded that the High Court was correct in interdicting the Corporation’s actions as being without jurisdiction. Thus, the appeal was dismissed, leaving the Corporation free to pursue other legal remedies against the Company or the Council in accordance with the law.
Briefly, in December 2000, the respondent company sought financial assistance from the North Eastern Development Finance Corporation (the appellant) to establish a cold storage unit in Dimapur, Nagaland. Due to Nagaland’s laws restricting property transfer from a tribal to a non-tribal entity, a tripartite arrangement was established through (i) a loan agreement between the Corporation and the respondent company, (ii) an agreement where the respondent company transferred its assets to the 5th Model Village Council (the Council), and (iii) a deed of guarantee where the Council stood as a guarantor for the loan disbursed by the Corporation to the respondent company.
The agreement stipulated that the loan would be secured by a first mortgage and charge on the Company’s immovable and movable properties in favour of the lender (the Corporation). Thereafter, the respondent transferred assets worth Rs. 85 lacs to the Council, authorising them to seize and dispose of these assets to realise the loan amount in case of default. On the other hand, the Council irrevocably guaranteed that if the respondent failed to repay the loan, the Council would repay the Corporation such amounts as it may be called upon to pay.
When the respondent defaulted on its repayment obligations, the Corporation initiated recovery actions, which culminated in a demand notice under Section 13(2) of the SARFAESI Act, 2002, for Rs. 3.85 Crores. Later, the Corporation approached the Debt Recovery Tribunal (DRT), seeking recovery of Rs. 7.64 Crores, and after obtaining an order under Section 14 of the SARFAESI Act from the Deputy Commissioner, took physical possession of the respondent company’s assets.
Appearances:
Senior Advocate Manish Singhvi, AOR Chandan Kumar, along with Advocates Rituraj Biswas, Mayan Prasad, Sujaya Bardhan, Aayush Garg, and Sami Ahmed, for the Appellant
AOR Kaushik Choudhury, along with Advocates Madhurjya Choudhury, Saksham Garg, and Jyotirmoy Chatterjee, for the Respondent
