SARFAESI Action Invalid Where Loan Predates Act and No Security Interest Exists | SC

Case Details: North Eastern Development Finance Corporation Ltd. (NEDFI) vs. L. Doulo Builders and Suppliers Co. (P.) Ltd. - [2025] 181 taxmann.com 539 (SC)

Judiciary and Counsel Details

• Dipankar Datta & Aravind Kumar, JJ.
• Dr Manish Singhvi, Sr. Adv., Rituraj Biswas, Mayan Prasad, Ms Sujaya Bardhan, Aayush Garg, Sami Ahmed, Advs. & Chandan Kumar, AOR for the Appellant.
• Kaushik Choudhury, AOR, Madhurjya Choudhury, Saksham Garg & Jyotirmoy Chatterjee, Advs. for the Respondent.

Facts of the Case

In the instant case, the Respondent-company approached the appellant-corporation for financial assistance to set up a cold storage unit in Nagaland. The appellant agreed to offer financial assistance. To secure the said loan, a loan agreement was executed between the appellant and the respondent company.

Respondent defaulted in honouring its obligation under the loan agreement, resulting in the initiation of action by the appellant under the SARFAESI Act. The appellant took physical possession of the respondent’s assets. The Respondent invoked the writ jurisdiction of the High Court, praying for the quashing of the arbitrary and illegal action of the appellant in taking over possession.

The High Court allowed the writ petition and held that the appellant failed to establish that any security interest was created in its favour either by the respondent (borrower) or the guarantor and/or that the appellant was a ‘secured creditor’ within the meaning of section 2(1)(zd) of the Act.

It was noted that the SARFAESI Act does provide for transfer of property by auction sale or otherwise for realising secured assets, i.e., property on which a security interest is created. In the instant case, provisions of the SARFAESI Act were implemented in the State of Nagaland with effect from 10.12.2021, i.e., more than two decades after the respondent availed a loan from the appellant.

Thus, no security interest in respect of any property (secured asset) was created in favour of the appellant within the meaning of the SARFAESI Act and, therefore, the appellant was not a secured creditor.

Supreme Court Held

The Supreme Court held that Section 35 of the SARFAESI Act, though gives overriding effect to the provisions thereof notwithstanding anything to contrary contained in any other enactment for time being in force or any instrument having effect by virtue of any such law, same could not and did not override any provision of Constitution, to wit, Article 371A thereof in instant case which contains special provisions for State of Nagaland.

Therefore, the High Court’s impugned order was to be upheld, and the appeal against the impugned order was to be dismissed, leaving it open to the appellant to pursue/seek remedies against the respondent in accordance with the law.

List of Cases Reviewed

• Gauhati High Court’s Order in M/s. L. Doulo Builders and Suppliers Co. Pvt. Ltd. v. North Eastern Development Finance Corporation Ltd. (NEDFI [W.P(C) No. 9241/2019 dated 6-3- 2020] (Para 37) affirmed

List of Cases Referred to

• M.D. Frozen Foods Exports (P.) Ltd. v. Hero Fincorp Ltd. [2017] 86 taxmann.com 92/[2018] 142 CLA 115/[2017] 144 SCL 220/[2018] 207 COMP CASE 558 (SC) (para 30)
• UCO Bank v. Dipak Debbarma [2017] 77 taxmann.com 33/139 SCL 216 (SC) (para 34)
• United Bank of India v. Satyawati Tondon (2010) 8 SCC 110 (para 35).