2025 (12) TMI 1067 - SC - Indian Laws

SARFAESI loan recovery without any mortgaged property, barred by Article 371A despite s.35; appeal dismissed upheld ruling

Invocation of SARFAESI in Nagaland was held unconstitutional and without jurisdiction because s.35's overriding clause cannot prevail over Article 371A, ... Invocation of provisions of the SARFAESI Act by the Corporation against the Company by issuing the notice dated 30th June, 2011 u/s 13(2) thereof for recovery - applicability of SARFAESI Act in the State of Nagaland - HELD THAT:- Section 35 of the SARFAESI Act, though gives overriding effect to the provisions thereof notwithstanding anything to the contrary contained in any other enactment for the time being in force or any instrument having effect by virtue of any such law, the same cannot and does not override any provision of the Constitution, to wit, Article 371A thereof in this case which contains special provisions for the State of Nagaland. Since the loan agreement in this case was executed on 11th May, 2001 and the SARFAESI Act became operational from 21st June, 2002, question of the Corporation resorting to the provisions of such enactment in respect of a loan agreement executed prior in point of time has definitely to be viewed with some degree of caution and circumspection in view of a couple of precedents to which our attention was drawn. For invocation of the provisions of the SARFAESI Act, mortgage is a must which, however, is not so for filing an original application under the Recovery of Debts and Bankruptcy Act, 1993 - It is reasonable to presume that the SARFAESI Act not being in existence on 11th May, 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. Indeed, the terms ‘secured creditor’, ‘secured interest’, ‘secured debt’, ‘security agreement’, etc., all together, are to be found only in the SARFAESI Act and not in any previous enactment. The Division Bench has held in no unmistakable terms that no property was mortgaged by the Company in favour of the Corporation. This is an undisputed fact. It is, therefore, abundantly clear that the Division Bench of the High Court was clearly right in interdicting the actions of the Corporation and in allowing the writ petition filed by the Company by returning a finding that the action of the Corporation was without jurisdiction. Once it is held that the SARFAESI Act was erroneously invoked by the Corporation 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 impugned judgment and order upheld - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the lender could validly invoke the SARFAESI Act in Nagaland at the relevant time, having regard to Article 371A and the subsequent State notification implementing the Act. (ii) Whether, on the facts proved, any 'security interest'/'security agreement' had been created in favour of the lender so as to make it a 'secured creditor' entitled to issue a notice under Section 13(2) and take measures under Section 13(4)/Section 14 of the SARFAESI Act. (iii) Whether the existence of an alternative remedy under Section 17 of the SARFAESI Act barred writ relief where the lender's SARFAESI action was found to be without jurisdiction. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Applicability of the SARFAESI Act in the State at the relevant time in view of Article 371A Legal framework (as discussed by the Court): The Court treated Article 371A(1)(a)(iv) as controlling the applicability of Parliamentary enactments relating to 'ownership and transfer of land and its resources' in Nagaland unless the State Legislative Assembly decides otherwise. The Court also noted Section 35 of the SARFAESI Act gives it overriding effect over other laws/instruments, but held such override cannot extend to the Constitution. Interpretation and reasoning: The Court held that SARFAESI enforcement contemplates transfer of property (including by auction sale) for realisation of a secured asset, which engages the constitutional protection over land transfer in Nagaland. The Court relied on the State notification dated 10 December 2021 stating implementation of the SARFAESI Act in Nagaland would take effect from that date, with sales restricted to indigenous inhabitants in accordance with local land regulation. The Court drew the conclusion that implementation in the State was only from 10 December 2021 and, therefore, SARFAESI could not be invoked in the State earlier for the impugned recovery steps. Conclusion: The Court held the SARFAESI Act could not be treated as applicable in Nagaland for the lender's actions initiated long before 10 December 2021; Section 35 could not override Article 371A. Issue (ii): Whether a 'security interest' was created in favour of the lender, making it a 'secured creditor' entitled to invoke SARFAESI Legal framework (as discussed by the Court): The Court proceeded on the SARFAESI scheme that enforcement under Section 13 presupposes existence of an enforceable 'security interest' over a 'secured asset', and that, for SARFAESI invocation, 'mortgage is a must'. The Court also treated the statutory definitions and concepts ('secured creditor', 'security interest', 'security agreement') as essential to SARFAESI enforcement. Interpretation and reasoning: The Court accepted as undisputed that no property had been mortgaged by the borrower in favour of the lender. It analysed the arrangement created by the parties: due to restrictions on transfer of land by tribals to non-tribals/juristic persons, the borrower's property was arranged to be mortgaged/placed with the Village Council, and the Council executed a deed of guarantee in favour of the lender. The Court noted the Village Council, under the 1978 Act, had power to provide security and to forfeit and dispose of the borrower's security on default, indicating the structure contemplated enforcement through the Council's statutory powers rather than through SARFAESI by the lender. On the deed of guarantee, the Court held it established only an obligation by the Council to repay if called upon, but did not create in the lender any right, title, or interest over the properties listed. Consequently, the lender could not show it was a 'secured creditor' with a 'security interest' enabling SARFAESI measures. The Court distinguished authorities relied upon by the lender on the ground that they arose in contexts where a security interest existed, whereas here none was created in favour of the lender. The Court reaffirmed that, absent a security interest created by a security agreement, SARFAESI was 'erroneously invoked' and the lender's action was 'without jurisdiction'. Conclusion: The Court conclusively held that no security interest/security agreement existed in favour of the lender; therefore, the lender was not a secured creditor and lacked jurisdiction to issue the Section 13(2) demand notice, seek Section 14 assistance, and take possession under SARFAESI. Issue (iii): Effect of alternative remedy under Section 17 SARFAESI where the action is without jurisdiction Legal framework (as discussed by the Court): The Court considered the principle discouraging writ intervention where SARFAESI provides an alternative remedy, but treated this as inapplicable where the lender's recourse to SARFAESI itself is without jurisdiction. Interpretation and reasoning: Having held that SARFAESI was wrongly invoked and that the lender was not a secured creditor (no security agreement/security interest), the Court reasoned that there was 'no question' of relegating the borrower to the tribunal remedy under Section 17 against measures that the lender had no authority to take. Thus, writ interference was upheld as appropriate in the circumstances. Conclusion: The Court upheld the setting aside of the SARFAESI notices and the Section 14 order despite the statutory remedy, because the lender's SARFAESI action was without jurisdiction.