The Supreme Court dismissed an appeal filed by a secured creditor seeking to initiate recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) against a borrower in the State of Nagaland on the ground that the Act was not in force in the State at the time the creditor attempted to invoke its provisions. The dispute stemmed from a loan transaction entered into in 2001 between the appellant and a borrower based in Dimapur for the establishment of a cold storage facility. Following default on repayment obligations, the creditor had issued a demand notice under the SARFAESI Act in 2011 and later purported to take physical possession of secured assets in 2019. These actions were challenged by the borrower before the Gauhati High Court, which held that the SARFAESI Act did not apply because it had not been adopted in Nagaland when the proceedings were initiated.
Nagaland formally adopted the SARFAESI Act only in 2021 through a notification issued by the Governor under the special provisions of Article 371A of the Constitution, which requires state adoption for central legislation to apply in the State. As a result, the Supreme Court affirmed that recovery proceedings commenced under the SARFAESI Act in 2011 were invalid since the statutory regime was not in force in Nagaland at that time. The Court noted that the temporal applicability of the Act is a threshold jurisdictional condition, and without valid adoption, any actions taken under its provisions would lack legal foundation.
The Supreme Court also considered whether the appellant had established its status as a secured creditor capable of invoking the SARFAESI Act. It observed that no valid security interest had been created in the appellant’s favour within the meaning of the Act. The loan was secured through a tripartite arrangement involving the borrower, the Village Council, and the appellant, wherein the borrower mortgaged assets to the Village Council, and the Council executed a deed of guarantee in favour of the appellant. The Court held that this arrangement did not amount to the creation of a security interest for the purposes of the SARFAESI Act, which requires a mortgage or other statutory form of security to confer secured creditor status. Consequently, the creditor was not a secured creditor under the relevant legal framework.
In addition to dismissing the appeal on the basis of the inapplicability of the SARFAESI Act prior to its adoption in Nagaland, the Supreme Court affirmed that even if the Act had been in force, the absence of a valid security interest in favour of the appellant would have precluded invocation of its provisions. The Court emphasised that the deed of guarantee executed by the Village Council did not create enforceable rights in the appellant sufficient to qualify it as a secured creditor under the statute. As a result, the creditor’s reliance on the SARFAESI Act for recovery was legally impermissible.
The Supreme Court’s decision also clarified that the creditor could have pursued alternative statutory remedies available under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), which permits recovery actions for both secured and unsecured debts through applications before the Debts Recovery Tribunal. Unlike the SARFAESI Act, the RDB Act does not require the existence of a security interest and provides a mechanism for creditors to seek judicial enforcement of outstanding dues.
By dismissing the creditor’s appeal, the Supreme Court affirmed the fundamental principle that central legislation like the SARFAESI Act applies in a State only after formal adoption under constitutional provisions where such a condition exists. It reinforced the requirement that creditors must ensure the applicable statutory regime is in force and that they possess a valid security interest before invoking specialised recovery mechanisms. The ruling underscores the necessity for strict compliance with constitutional, statutory, and procedural prerequisites when seeking to enforce recovery of debts against borrowers in jurisdictions with unique constitutional arrangements.
0 Comments
Thank you for your response. It will help us to improve in the future.