SARFAESI Act cannot be invoked in Nagaland without a valid security interest and legislative approval under Article 371A

The Supreme Court of India has held that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 cannot be invoked in the State of Nagaland in the absence of legislative approval under Article 371A of the Constitution and without the creation of a valid security interest in favour of the lender. The Court ruled that a lender who is not a “secured creditor” within the meaning of the SARFAESI Act lacks jurisdiction to initiate measures under the Act.

Upholding the judgment of the Gauhati High Court, the Court clarified that statutory recovery mechanisms under SARFAESI cannot override special constitutional protections relating to ownership and transfer of land in Nagaland. The decision reinforces the limits of financial institutions’ enforcement powers and underscores the constitutional primacy of Article 371A in matters concerning land and property in the State.

Case Background

The dispute arose from a loan transaction entered into in May 2001 between North Eastern Development Finance Corporation Ltd. and a private company for setting up a cold storage unit in Dimapur, Nagaland. Due to restrictions on transfer of land by tribals to non-tribals under the prevailing law in Nagaland, the loan was structured through a series of agreements involving the local Village Council.

When the borrower defaulted, the lender initiated recovery proceedings under the SARFAESI Act, took physical possession of the secured assets, and issued statutory notices. The borrower challenged these actions before the Gauhati High Court, contending that the SARFAESI Act was inapplicable in Nagaland and that no security interest had been created in favour of the lender.

What The Lower Authorities Held

The Division Bench of the Gauhati High Court allowed the writ petition filed by the borrower. It held that the lender had failed to establish the creation of any right, title, or interest over the borrower’s assets that would qualify as a security interest under the SARFAESI Act.

The High Court further concluded that, in the absence of such a security interest, the lender could not be treated as a secured creditor and therefore lacked jurisdiction to invoke the SARFAESI Act. The recovery notices and possession proceedings were accordingly set aside, while preserving the lender’s right to pursue recovery through other lawful means.

The Court’s Reasoning

The Supreme Court examined whether the lender was legally entitled to invoke the SARFAESI Act in the facts of the case. It identified two foundational issues: the applicability of the SARFAESI Act in Nagaland, and the existence of a valid security interest in favour of the lender.

Applicability of SARFAESI Act in Nagaland

The Court noted that Article 371A of the Constitution expressly provides that no Act of Parliament relating to ownership and transfer of land shall apply to Nagaland unless the State Legislative Assembly so resolves. The SARFAESI Act, by its very nature, contemplates enforcement of security interests through sale or transfer of secured assets.

Relying on a State notification issued on 10 December 2021, the Court observed that the SARFAESI Act was formally implemented in Nagaland only from that date. Since the loan agreement and the recovery actions in question predated this notification, the Act could not have been lawfully invoked in the State at the relevant time.

Absence of security interest in favour of the lender

The Court examined the contractual arrangement between the parties and found that the borrower had mortgaged its properties in favour of the Village Council, not the lender. The deed of guarantee executed by the Council merely obligated it to repay the loan in case of default, without transferring any security interest to the lender.

In the absence of any mortgage, charge, or hypothecation created in favour of the lender, the Court held that no security interest existed within the meaning of the SARFAESI Act. Consequently, the lender did not qualify as a secured creditor capable of invoking statutory enforcement mechanisms under the Act.

Statutory Interpretation

The Court analysed the definition of “security interest” under the SARFAESI Act, which requires the creation of a right, title, or interest in property in favour of a secured creditor. It clarified that such interest must be created directly in favour of the lender through a security agreement.

The Court further explained that while recovery proceedings under the Recovery of Debts and Bankruptcy Act, 1993 may be initiated for unsecured loans, the SARFAESI Act is confined to enforcement of secured debts. Without satisfaction of this statutory prerequisite, any action taken under SARFAESI is without jurisdiction.

Constitutional / Policy Context

The Court situated the dispute within the special constitutional framework governing the State of Nagaland. Article 371A of the Constitution confers unique protections by providing that no Act of Parliament relating to ownership and transfer of land and its resources shall apply to Nagaland unless the State Legislative Assembly so resolves.

The Court noted that enforcement proceedings under the SARFAESI Act necessarily involve transfer or sale of secured assets for realisation of dues. Such statutory mechanisms directly implicate ownership and transfer of land, bringing them squarely within the scope of Article 371A.

Referring to the notification dated 10 December 2021 issued by the State of Nagaland, the Court observed that the SARFAESI Act was implemented in the State only from that date. The notification itself reflected constitutional compliance by limiting sale of secured assets to indigenous inhabitants of Nagaland in accordance with local land laws.

In view of this constitutional arrangement, the Court held that statutory recovery mechanisms cannot be applied in Nagaland by implication or assumption. Legislative approval under Article 371A is a constitutional precondition, and its absence renders any contrary action without authority of law.

Why This Judgment Matters

This judgment has significant implications for financial institutions operating in States governed by special constitutional provisions. It reaffirms that statutory recovery mechanisms such as the SARFAESI Act cannot be invoked mechanically without examining their constitutional applicability.

For lenders, the ruling underscores the necessity of ensuring that a valid security interest is created directly in their favour before initiating SARFAESI proceedings. Contractual arrangements involving intermediaries or guarantors cannot substitute this statutory requirement.

For courts and practitioners, the decision clarifies that writ jurisdiction may be exercised where SARFAESI action is taken without jurisdiction, notwithstanding the availability of alternate remedies under the Act.

Final Outcome

The Supreme Court dismissed the appeal filed by North Eastern Development Finance Corporation Ltd. It upheld the judgment and order of the Gauhati High Court quashing the recovery notices and possession proceedings initiated under the SARFAESI Act.

While affirming that the SARFAESI Act had been wrongly invoked, the Court clarified that the lender remained at liberty to pursue recovery of its dues against the borrower or the Village Council in accordance with law through appropriate legal remedies.

The parties were directed to bear their own costs.

Case Details

• Case Title: North Eastern Development Finance Corporation Ltd. v. M/s L. Doulo Builders and Suppliers Co. Pvt. Ltd.
• Citation: 2025 INSC 1446
• Court & Bench: Supreme Court of India; Dipankar Datta J. and Aravind Kumar J.
• Date of Judgment: 16 December 2025