Supreme Court upholds Gauhati High Court ruling, holding SARFAESI Act inapplicable in Nagaland before 2021, dismissing NEDFi appeal.
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DIMAPUR — The Supreme Court on December 16 upheld a Gauhati High Court judgement quashing recovery proceedings initiated by the North Eastern Development Finance Corporation Ltd. (NEDFi) against L Doulo Builders and Suppliers Pvt. Ltd., ruling that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was not applicable in Nagaland at the relevant time.
Dismissing NEDFi’s appeal, a bench comprising Justices Dipankar Datta and Aravind Kumar held that the corporation had no authority to invoke SARFAESI provisions in the state prior to December 10, 2021, when the Act was formally notified for implementation in Nagaland in view of Article 371A of the Constitution.
The case arose from a loan granted by NEDFi in 2001 to the respondent company for setting up a cold storage unit in Dimapur. Due to restrictions on transfer of land in Nagaland, the Model Village Council had stood as guarantor for the loan, with properties mortgaged in favour of the council and not directly to NEDFi.
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Following alleged defaults, NEDFi initiated recovery proceedings under the SARFAESI Act and took possession of the company’s assets in 2019. This action was challenged before the Gauhati High Court, which in March 2020 set aside the recovery notices and possession orders, holding them to be without jurisdiction.
Upholding the High Court’s decision, the Supreme Court observed that no “security interest” had been created in favour of NEDFi as required under the SARFAESI Act, and therefore the corporation could not be treated as a “secured creditor.”
The apex court further noted that the SARFAESI Act itself was made applicable to Nagaland only in December 2021, long after the loan agreement was executed.
The bench held that Article 371A, which protects Naga customary law and restricts ownership and transfer of land, could not be overridden by the SARFAESI Act. Consequently, the recovery action initiated by NEDFi under the Act was found to be legally untenable.
While dismissing the appeal, the court clarified that NEDFi was not barred from pursuing recovery of its dues through other legal remedies available under law, including proceedings before the Debts Recovery Tribunal or against the village council as guarantor.