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, which confers special constitutional protections for the State; consequently, measures taken under SARFAESI could not be sustained. Independently, SARFAESI prerequisites were not met because enforcement under the Act presupposes a "security interest"/mortgage, and the HC had found (undisputedly) that no property was mortgaged; given that the loan agreement pre-dated SARFAESI's commencement, the absence of security further negated SARFAESI invocation. Having found the action without jurisdiction, the borrower could not be relegated to the DRT under s.17. The SC upheld the HC and dismissed the appeal.

---

---

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.

---