TaxTMI 
TaxTMI 
2025 (12) TMI 1067
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....2001. The first one was a loan agreement between the Corporation and the Company, the second was an agreement between the 5th Model Village Council 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 mac....
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.... Before seeking disbursement of any portion of the assistance, the Borrower shall to the satisfaction of the Lenders: *** (vii) create security for the total loan sanctioned. 4. Since, in the State of Nagaland, transfer of any property by any tribal in favour of a non-tribal including juristic person is not permitted under the extant law, the second agreement came to be executed between the Council and Sh. K. Doulo, representing the Company. Having regard to the fact that availing loan from any financial institution or corporation without placing any property on mortgage in favour of such institution or corporation is not possible as per the existing norms, the Council had worked out modalities for Model Village citizens to avail loan facility from any financial institution or corporation. Accordingly, the agreement executed by and between Council and Sh. K. Doulo was executed, inter alia, with the following agreed clauses: AGREEMENT **** 4. In consideration of this agreement and in consideration of Model Village Council to stand as surety and guarantor for refund of the said loan to North Eastern Development Finance Corporation Ltd., said M/s L.....
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.... of the said loan from the North Eastern Development Finance Corporation Ltd. to said M/s. L. Doulo Builders Suppliers Company Pvt. Ltd. and shall continue in force until and unless the entire amount of loan with interests and other charges is fully repaid by said M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. 3. The guarantee hereinbefore mentioned shall not be affected be any change in the constitution of the Model Village Council nor on the death of said Sri. K. Doulo of M/s. L. Doulo Builders & Suppliers Company Pvt. Ltd. IN WITNESS WHERE OF the parties hereto have set and subscribe their respective hands and seals the day, month and year first above written. Schedule of the property Sl.No. Name of the assets Measurement Value/Amount (in Rs.) 1 Residential 2 storyed Building Model Village Area 20,000 sq. ft. 45,00,000 2 Project site, Developed Model Village Area 1,07,700 sq. ft. 30,00,000 3 Residential Plot, Developed Model Village Area 15,000 sq. ft. 10,00,000 Total 85,00,000 (Rupees Eighty five lakhs only) 6. Such being the position with regard to the agreements by and between the pa....
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....d storage as well as the properties belonging to the Directors of the Company. 11. It was at this stage that the Company invoked the writ jurisdiction of the Gauhati High Court by applying under Article 226 of the Constitution of India, 1950. In the writ petition [W.P(C) No. 9241/2019], the Company prayed for quashing of arbitrary and illegal action of the Corporation in taking over possession pursuant to the possession notice dated 23rd March, 2019. A mandamus was also claimed directing the Corporation to hand over possession of the properties of the Company and the personal properties of its Directors. OUTCOME OF THE WRIT PETITION 12. The writ petition was heard by a Division Bench of the High Court. Vide a judgment and order dated 6th March, 2020, the High Court allowed the writ petition and held the notices dated 30th June, 2011 and 23rd March, 2019 as well as the order dated 16th March, 2019 as wholly illegal and without jurisdiction and, accordingly, set aside the same. While the properties, possession of which had been taken over by the Corporation in terms of the order of the Commissioner was directed to be restored in favour of the Company within 15 days from date....
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....urity for repayment of loan obtained by any permanent resident of the village. However, a guarantee provided under section 12(6) would not amount to 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." THE APPEAL 14. Special leave to appeal having been granted on 14th May, 2024, the judgment and order dated 6th March, 2020 is assailed by the Corporation on multiple grounds which have been canvassed by Dr. Manish Singhvi, learned senior counsel for the Corporation. THE QUESTION 15. A couple of questions could arise for our determination. However, the first question that we are tasked to decide is whether provisions of the SARFAESI Act could at all have been invoked by the Corporation against the Company by issuing the notice dated 30th June, 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. ANALYSIS 16. Although, it is recorded in the impugned judgment that learned counsel for the Company had not canvassed the plea....
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....on Special Duty, Finance, published in the Nagaland Gazette Extraordinary of even date. The notification reads as follows: "No. FIN/GEN/SLBC/12/2012 (PART-I):: Dated Kohima, the 10th December, 2021. In conformity with the special provision conferred by Article 371A (1) (a) (iv) of the Constitution of India, the Governor of Nagaland is pleased to notify the implementation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) in Nagaland with effect from the date of this notification. 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." 21. Bare perusal of the aforesaid notification leads one to the conclusion that provisions of the SARFAESI Act could be implemented in the State of Nagaland with effect from 10th December, 2021, i.e., more than two decades after the Company availed loan granted by the Corporation. 22. Notably, the SARFAESI Act itself became operati....
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....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. 25. 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 [RDB Act]. An original application under the RDB Act can be filed for recovery of both secured as well as unsecured loans. Under the SARFAESI Act, however, security interest can be enforced without intervention of Court while the procedure under the RDB Act is for execution of the decree passed by the jurisdictional Debts Recovery Tribunal upon reaching a satisfaction of there being outstanding dues of the lender which need to be recovered from the borrower. 26. As is evident from the factual narrative adverted to by us at the beginning of this judgment, the arrangement worked out resulted in the Company mortgaging its property to the Council. There is an enactment titled Nagaland Village and Area Councils Act 1978 [1978 Act], which confers ....
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....g that the action of the Corporation was without jurisdiction. 29. Reliance has been placed by Dr. Singhvi for the Corporation on several decisions of this Court to persuade us to overturn the impugned judgment and order. We wish to consider three of them, which have some relevance and requires our observation. 30. M.D. Frozen Foods Exports Private Limited v. Hero Fincorp (2017) 16 SCC 741 is the first decision relied on by the Corporation. Two of the issues which arose for decision before this Court are - "(ii) Whether resort can be had to Section 13 of the SARFAESI Act in respect of debts which have arisen out of a loan agreement/mortgage created prior to the application of the SARFAESI Act to the respondent? (iii) A linked question to Question (ii), whether the lender can invoke the SARFAESI Act provision where its notification as financial institution under Section 2(1)(m) has been issued after the account became an NPA under Section 2(1)(o) of the said Act?" 31. This Court was called upon to answer these questions premised on a different factual situation. Loans had been granted by the respondent at a point of time when it was not notified as a finan....
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....s right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes- (i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or (ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset; 33. We reiterate, no security interest in respect of any property (secured asset) was created in favour of the Corporation within the meaning of the SARFAESI Act and, therefore, the Corporation is not a secured creditor. The law ....