INVOCATION OF PERSONAL GUARANTEE IN NAGALAND STATE

Applicability of Article 371A to Nagaland

Article 371A of the Constitution is a special provision with respect to Nagaland State. This Article provides that notwithstanding any thing in the Constitution no Act of Parliament in respect of-

• religious or social practices of the Nagas,
• Naga customary law and procedure,
• administration of civil and criminal justice involving decisions according to Naga customary law,
• ownership and transfer of land and its resources,

shall apply to the State of Nagaland unless the Legislative Assembly of Nagaland by a resolution so decides.

On 10.12.2021 the Nagaland Government issued a Notification in regard to the implementation of the provisions of SARFAESI Act to Nagaland. The said notification provides that in so far as the sale of secured assets taken over by the banks and financing institutions is concerned, it can be sold only to indigenous inhabitants of Nagaland in accordance with provisions of the Nagaland Land and Revenue Regulations (Amendment) Act, 2002.

Nagaland Village and Area Councils Act 1978 confer power on the Council to seize and dispose of the mortgaged property in case of any default in payment of loan. the SARFAESI Act not being in existence on 11.05.2001, a secured creditor might not have thought of creation of any security interest in the secured asset including creation of mortgage by deposit of title deeds in terms of a security agreement to enforce a secured debt.

In North Eastern Development Finance Corporation Ltd. (NEDFI) Versus M/s. L. Doulo Builders And Suppliers Co. Pvt. Ltd. - 2025 (12) TMI 1067 - Supreme Court, the respondent company approached the Financial Creditor (appellant) for financial assistance to set up a cold storage in Dimalpur District, Nagaland at an estimate cost of Rs.346 lakhs. The transfer of property in the State of Nagaland by any resident of Nagaland to any non-tribal including juristic person is prohibited. Therefore, nearly 3 agreements were to be made-

1. Loan agreement between the Financial Creditor and the company;
2. The agreement between the Model Village Council and the company; and
3. Deed of guarantee by Model Village Council.

The first agreement was signed between the Financial Creditor and the company. This agreement required the company to create security for the loan sanctioned. The second agreement was executed between the Model Village Council and the Company. According to this agreement the Model Village Council is the surety and the guarantor for the refund of the loan amount to the Financial Creditor. Three properties were placed towards the security for the loan given to the company, the value is Rs.85 lakhs.

Based on the above said three agreements the Financial Creditor sanctioned Rs.2 crore loan to the company. The company could not able to repay the loan amount due to rough weather conditions. Therefore, the Financial Creditor was forced to take action under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’ for short).

The Financial Creditor issued a notice to the company on 31.08.2010 directing the company to repay the sum Rs.3.45 crores within 15 days from the date of receipt of the notice. The company failed to file any reply for the said notice. Therefore, the Financial Creditor issued a notice to the company demanding the payment of Rs.3.85 crores with interest.

After the lapse of 7 years the Financial Creditor filed an application before the Debts Recovery Tribunal, Guwahati under the Recovery of Debts and Bankruptcy Act, 1993 for the recovery of Rs.7.64 crores. In the meanwhile, the Financial Creditor was able to get an order under Section 14 of the SARFAESI from the Deputy Commissioner, Dimapur. The said order dated 16.03.2019 of the Commissioner empowered the Sub-Divisional Officer (C) Sadar, Dimapur, to oversee the process of taking over physical possession of the assets mentioned therein. By means of the order of the Commissioner dated 23.03.2019 the Financial Creditor took over physical possession of the assets of the Company including the cold storage as well as the properties belonging to the Directors of the Company.

In the meanwhile, the company filed a writ petition before the High Court with the prayer to quash the take over of the possession of the properties by the financial creditor. The writ petition also prayed directing to hand over the properties to the company. The Division Bench of the High Court heard the petition and vide their judgment dated 06.03.2010 allowed the writ petition and quashed the notices issued by the Financial Creditor on 16.03.2019, 23.03.2019 and 30.06.2011. The High Court also directed the Financial Creditor to restore the properties to the company within 15 days from the date of receipt of the order of the High Court.  The High Court held that a ‘security agreement’ under section 2(zb) unless such interest is created in favour of a secured creditor by following the procedure prescribed by the Act of 2002.

Against the order of High Court, the Financial Creditor filed the present appeal before the Supreme Court. The Supreme Court considered the submissions put forth by the parties to the present appeal.  A couple of questions could arise for our determination. However, the first question that to decide is whether provisions of the SARFAESI Act could at all have been invoked by the Financial Creditor against the Company by issuing the notice dated 30.06.2011 under Section 13(2) thereof, seeking to recover of Rs.7,64,35,358/-. Should the answer be in the negative, that would mark the end of the lis at least at the stage the same has reached.

The Supreme Court observed that a security agreement may not be contained in a single document. Typically, it is a collection of agreements including loan, hypothecation, guarantee and mortgage agreements. All of these are aimed at securing the loan. When a business or project loan is granted, the borrower utilises the funds to create business property, which becomes the primary security. This can include assets like stock, plant and machinery, and raw materials. A separate agreement may be entered into, offering land or other property as collateral security. The key difference is that primary security involves creating a security interest, while collateral security involves transferring an interest in the property by the borrower to the lender.

The Council guaranteed that in case the Company failed or neglected to repay the loan with interest to the Financial Creditor in accordance with the terms of the loan agreement, the Council shall repay to the Financial Creditor such amounts as they may be called upon to pay. In view of such deed of guarantee, the Financial Creditor lacked the authority to invoke the SARFAESI Act against the Company. The sole option available to the Financial Creditor was to proceed against the Council in a manner known to law. The SARFAESI Act not being in existence on 11.05.2001, a secured creditor might not have thought of creation of any security interest in the secured asset including creation of mortgage by deposit of title deeds in terms of a security agreement to enforce a secured debt. The Division Bench has held in no unmistakable terms that no property was mortgaged by the Company in favour of the Financial Creditor. Since no security interest in respect of any property (secured asset) was created in favour of the Financial Creditor within the meaning of the SARFAESI Act the Supreme Court held that the Financial Creditor is not a secured creditor.

Therefore, the Supreme Court held that once it was held that the SARFAESI Act was erroneously invoked by the Financial Creditor and that such invocation was without jurisdiction, there is no question of relegating the Company to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. The Supreme Court concurred with the Division Bench orders and dismissed the appeal filed by the Financial Creditor. The Supreme Court directed the Financial Creditor to pursue remedies against the Company or the Council in accordance with law.