1. Loan default — Recovery proceedings under SARFAESI Act — Dispute over creation of security interest and applicability of the Act in Nagaland under Article 371A. (Para 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 )
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2025 Supreme(SC) 2062
SUPREME COURT OF INDIA
Dipankar Datta, Aravind Kumar, JJ.
North Eastern Development Finance Corporation Ltd. (Nedfi) – Appellant
Versus
M/S L. Doulo Builders And Suppliers Co. Pvt. Ltd. – Respondent
Civil Appeal No. 6492 of 2024
Decided On : 16-12-2025
The SARFAESI Act cannot be applied retroactively; without a valid security interest, the Corporation lacked jurisdiction to act against the Borrower under this Act.
Headnote:(A) Constitution of India - Article 371A - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Invocation of provisions of SARFAESI Act questioned regarding validity over immovable properties in Nagaland - The Corporation lacked authority to invoke SARFAESI Act against the Borrower due to absence of a security interest being created. (Paras 20-21, 28-34)
(B) Natural Justice - Invocation of jurisdiction under writ petition by the Borrower was justified given that no valid security interest was established. The High Court's intervention was appropriate. (Paras 12, 27-29)
Facts of the case:
The respondent approached the appellant for a loan to establish a cold storage unit, secured by property agreements involving the Council. Disputes arose over loan disbursement and defaults leading to action under SARFAESI Act, which was contested by the Company.
Findings of Court:
The High Court found the Corporation's actions illegal due to the absence of established security interest, mandating restoration of possession to the Company.
Issues: Whether the SARFAESI Act could be invoked against the Company, and whether the action taken by the Corporation was valid.
Ratio Decidendi: The SARFAESI Act could not be applied retroactively, no security interest was created by the Corporation over the properties, rendering their invocation without jurisdiction.
Result: Appeal dismissed, permitting the Corporation to seek remedies in line with the law.
Judgement Key Points
Based on the provided legal document, the following key points are relevant:
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The SARFAESI Act cannot be applied retroactively; it only applies to security interests created after its enactment. Since the loan agreement was executed prior to the SARFAESI Act becoming operational, the Act's provisions were not applicable at the time of the initial agreement (!) (!) .
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A security interest, such as a mortgage or hypothecation, must be created in favor of the secured creditor for the SARFAESI Act to be invoked. In this case, no such security interest was established by the Corporation over the properties of the Company or the Council, rendering the invocation of the SARFAESI Act without jurisdiction (!) (!) .
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The agreement between the Company and the Corporation included a deed of guarantee by the Model Village Council, which guaranteed repayment but did not create any security interest in the properties. Therefore, the Corporation lacked the authority to proceed under the SARFAESI Act against the Company based solely on this guarantee (!) (!) .
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The special constitutional provisions applicable to Nagaland, specifically Article 371A, restrict the application of certain laws, including the SARFAESI Act, unless explicitly authorized by the State Legislative Assembly. Although the SARFAESI Act was later implemented in Nagaland, this was well after the loan was granted, and the Act's retrospective application is not permissible (!) (!) .
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The notification issued in 2021, which allowed the implementation of the SARFAESI Act in Nagaland, came into effect many years after the loan agreement and the initial disbursement. This indicates that the Act was not applicable at the time of the loan or the subsequent recovery actions (!) .
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The law requires that for the SARFAESI Act to be invoked, there must be a present, actionable debt, and the security interest must be properly created and enforceable. Since these conditions were not met, the actions taken by the Corporation under the SARFAESI Act were deemed invalid (!) (!) .
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The law also emphasizes that in the absence of a security agreement creating a security interest, the Corporation cannot invoke the SARFAESI Act and must pursue remedies through other legal channels, such as recovery proceedings under different statutes or laws (!) (!) .
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The Court upheld the decision of the High Court, which found that the Corporation's actions were without jurisdiction due to the lack of a security interest, and dismissed the appeal accordingly (!) .
In summary, the application of the SARFAESI Act in this case was invalid because no security interest was created under the law at the relevant time, and the constitutional provisions specific to Nagaland restrict its retroactive application. The Corporation is therefore required to seek remedies through appropriate legal procedures outside of the SARFAESI framework.
Legal Category Hierarchy
- constitutional law
- banking law
Table of Contents
2. Whether the SARFAESI Act applies to debts arising from agreements predating the Act and whether it was applicable in Nagaland prior to official notification. (Para 14 , 16 , 23 )
3. The SARFAESI Act requires a security interest in favor of a secured creditor; here, property was mortgaged to a guarantor, not the lender. (Para 17 , 18 , 19 , 20 , 21 , 22 , 24 , 25 , 26 , 27 , 28 , 30 , 31 , 32 , 33 , 34 , 35 )
4. Invocation of the SARFAESI Act necessitates the existence of a security interest created in favor of the creditor; a mere guarantee does not constitute a security agreement. (Para 27 , 28 , 33 )
5. Appeal dismissed — High Court order upholding the quashing of SARFAESI notices and restoration of property possession affirmed. (Para 37 , 38 , 39 )
6. Does the SARFAESI Act automatically apply to the State of Nagaland?
No. Under Article 371A of the Constitution, Acts of Parliament regarding land ownership and transfer do not apply to Nagaland unless the Legislative Assembly so decides. In this case, the Act was only implemented via notification on 10th December 2021. (Para 18 , 19 , 20 , 21 )
7. Can a lender invoke the SARFAESI Act based solely on a guarantee agreement?
No. The Act requires the lender to be a secured creditor, meaning a security interest (such as a mortgage or charge) must be created in its favor. A guarantee agreement that does not create a right, title, or interest in the lender's favor is not a security agreement. (Para 13 , 25 , 27 , 28 , 32 , 33 )
8. Can the SARFAESI Act be used to recover debts arising from loan agreements executed before the Act's commencement?
Yes, the Act applies to claims that are alive at the time it comes into force, provided the lender is a secured creditor and the necessary security interest exists. However, this does not override constitutional protections or the requirement for a valid security agreement. (Para 30 , 31 , 36 , 37 )
JUDGMENT :
DIPANKAR DATTA, J.
FACTS
1. On or about 13th December, 2000, the respondent-Company1[Company, hereafter] approached the appellant-Corporation2[Corporation, hereafter] for financial assistance to set up a cold storage unit in the District of Dimapur, Nagaland.
2. The Corporation agreed to offer financial assistance. To secure the said loan, particularly in view of the provisions of law prevalent in the State of Nagaland, a couple of agreements were executed on 11th May, 2001. The first one was a loan agreement3[loan agreement, hereafter] between the Corporation and the Company, the second was an agreement4[Second agreement, hereafter] between the 5th Model Village Council5[Council, hereafter] and Sh. K. Doulo (Director of the Company), and the third was a deed of guarantee by which the Council stood as guarantor for the loan disbursed to the Company by the Corporation.
3. The loan agreement executed by and between the Company and the Corporation contained several terms and conditions, which formed part of Articles (I) to (VI) and Schedules (I) to (IV) thereto. Relevant terms and conditions from such loan agreement read as follows:
ARTICLE III
SECURITY
3.1 SECURITY FOR THE LOAN
(A) The Loan together with all interest, liquidated damages, premia on prepayment or on redemption, costs, expenses and other monies whatsoever stipulated in this Agreement shall be secured by:-
(a) a first mortgage and charge in favour of the Lenders in a form satisfactory to the Lenders or all the Borrower’s immovable properties, both present and future; and
(b) a first charge by way of hypothecation in favour of the Lenders of all the Borrower’s movables (save and except book debts), including movable machinery, machinery spares, tools and accessories, present and future, subject to prior charges created and/or to be created:-
(i) in favour of the Borrower’s Bankers on the Borrower's stocks of raw materials, semi-finished and finished goods, consumable stores and such other movables as may be agreed to by the Lenders for securing the borrowings for working capital requirements in the ordinary course of business; and
(B) The Borrower shall make out a good and marketable title to its properties to the satisfaction of the Lenders and comply with all such formalities as may be necessary or required for the said purpose.
3.2 CREATION OF ADDITIONAL SECUIRTY
If, at any time during the subsistence if this Agreement, the Lenders is of the opinion that the security provided by the Borrower has become inadequate to cover the balance of the Loans then outstanding, then, on the Lenders’ advising the Borrower to that effect, the Borrower shall provide and furnish to the Lenders, to their satisfaction such additional security as may be acceptable to the Lenders to cover such deficiency.
3.3 ACQUISITION OF ADDITIONAL IMMOVABLE PROPERTIES
So long as any monies remain due and outstanding to the Lenders, the Borrower undertakes to notify them in writing of its acquisition of immovable properties and as soon as practicable thereafter to make out a marketable title to the satisfaction of the Lenders and charge the same in favour of Lenders by way of first charge in such form and manner as may be decided by the Lenders.
3.4 AGREEMENT OF GUARANTEE
The Borrower shall procure irrevocable and unconditional personal guarantee(s) from Shri Lhoupenyi Doulo and Shri Kevechutso Doulo, the main promoters, in favour of the Lenders for the due repayment of the Loan and the payment of all interest and other monies payable by the Borrower in the form prescribed by the Lenders and to be delivered to the Lenders before any part of the loan is advanced. The Borrower shall not pay any guarantee commission to the said Guarantors.
SCHEDULE – I
THE PROJECT
The project is to set up a cold storage unit at Model Village, 5th Mile, Dimapur, in the state of Nagaland at an estimated cost of Rs.346.00 lakh.
SCHEDULE – IV
SPECIAL CONDITIONS
(A) PRE-DISBURSEMENT CONDITIONS
Before seeking disbursement of any portion o
