Supreme Court Rules SARFAESI Act Inapplicable for Pre-2002 Agreements in Nagaland

Landmark Judgment Upholds Article 371A, Restricts Retrospective Application of SARFAESI Act by NEDFI Against Nagaland-based Company

In a significant judgment by the Supreme Court of India, the applicability of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, was ruled as inapplicable to loan agreements executed before its operational date, especially in the state of Nagaland. The case involved the North Eastern Development Finance Corporation Ltd. (NEDFI) and M/s L. Doulo Builders And Suppliers Co. Pvt. Ltd., where the court upheld the special constitutional provisions for Nagaland under Article 371A.

The case arose from a financial arrangement between NEDFI and M/s L. Doulo Builders And Suppliers Co. Pvt. Ltd., dating back to May 2001, before the SARFAESI Act came into force. The Supreme Court, led by Justices Dipankar Datta and Aravind Kumar, clarified that the SARFAESI Act cannot be applied retrospectively to agreements made prior to its implementation, and especially not in Nagaland where Article 371A confers special provisions regarding the ownership and transfer of land.

The judgment stated that the SARFAESI Act, while providing mechanisms for financial institutions to recover their dues, does not override the constitutional provisions specific to Nagaland. It highlighted that the Act could only be implemented in Nagaland from December 10, 2021, as per a notification by the Nagaland government, which explicitly restricted the sale of secured assets to indigenous inhabitants of Nagaland.

The court found that no security interest was created in favor of NEDFI under the SARFAESI Act and, therefore, the corporation could not be deemed a secured creditor. The Supreme Court upheld the Gauhati High Court’s decision to set aside NEDFI's actions under the SARFAESI Act, including taking possession of the company's assets, which were deemed without jurisdiction.

This ruling underscores the importance of respecting regional laws and constitutional provisions while applying national statutes, a precedent that may impact future cases involving regional autonomy and financial recoveries.

Bottom Line:

Application of SARFAESI Act, 2002 cannot be invoked retrospectively for agreements executed prior to its implementation in Nagaland; special provisions under Article 371A of the Constitution of India limit the applicability of laws related to ownership and transfer of land in the State of Nagaland.

Statutory provision(s): SARFAESI Act, 2002, Article 371A of the Constitution of India, Nagaland Village and Area Councils Act 1978

North Eastern Development Finance Corporation Ltd. (NEDFI) v. M/s L. Doulo Builders And Suppliers Co. Pvt. Ltd., (SC) : Law Finder Doc Id # 2822442