Art 371A prevails over SARFAESI: SC

The Supreme Court has dismissed an appeal filed by the North Eastern Development Finance Corporation Ltd. (NEDFI), holding that the corporation could not invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) in Nagaland, as no valid “security interest” had been created in its favour and the Act was not applicable in the State at the relevant time.
According to report, a Bench comprising Justice Dipankar Datta and Justice Aravind Kumar reiterated that while Parliament may confer overriding effect on a statute over other laws, no legislation can override the Constitution. The Court underscored that constitutional provisions would always prevail over statutory enactments. The apex court was examining NEDFI’s challenge to a High Court order that had quashed SARFAESI proceedings initiated by the corporation against M/s L. Doulo Builders and Suppliers Co. Pvt. Ltd., a Nagaland-based firm. NEDFI had extended financial assistance to the respondent company for setting up a cold storage unit in the State.
After the borrower defaulted, NEDFI initiated recovery proceedings under the SARFAESI Act and, invoking Section 14, took physical possession of the assets through the district administration.
The respondent challenged the action before the High Court, contending that the SARFAESI Act was not applicable in Nagaland at the time and that NEDFI lacked jurisdiction to proceed under the Act. The High Court accepted the plea and set aside the recovery action, prompting NEDFI to approach the Supreme Court.
Rejecting the appeal, the Bench observed that Section 35 of the SARFAESI Act, which gives the Act overriding effect over other enactments or instruments, “cannot and does not override any provision of the Constitution.” The Court specifically referred to Article 371A, which provides special constitutional protections to Nagaland, particularly in relation to land and its ownership.
The Bench further noted that the SARFAESI Act was adopted in Nagaland only through a State notification dated December 10, 2021. As the recovery proceedings were initiated prior to this date, the Court held that the action was without jurisdiction and legally invalid.
On the issue of security interest, the Court held that the SARFAESI framework presupposes the existence of a valid security interest in favour of the secured creditor.
In the present case, the arrangements relied upon by NEDFI involved a guarantee and a mortgage in favour of a Village Council constituted under the Nagaland Village and Area Councils Act, 1978, and not a mortgage or security interest created in favour of NEDFI itself.
The Court ruled that such an arrangement did not render NEDFI a “secured creditor” under the SARFAESI Act and that it could not invoke the Act’s enforcement mechanism in the absence of a legally recognised security interest.
Holding that the invocation of SARFAESI was unsustainable on multiple grounds—constitutional limitations, non-applicability of the Act in Nagaland at the relevant time, and absence of a valid security interest—the Supreme Court upheld the High Court’s decision and dismissed the appeal. However, it clarified that NEDFI remains free to pursue recovery of its dues through other remedies available under law.