Section 35 of SARFAESI Act Cannot Override Article 371A: Supreme Court Holds Enforcement Without Security Interest Lacks Jurisdiction
- REEDLAW
- 12 minutes ago
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REEDLAW Legal News Network reports: In a constitutionally significant ruling, the Supreme Court held that enforcement proceedings under the SARFAESI Act, 2002, cannot be sustained in the absence of a valid security interest where constitutional protections under Article 371A apply. The Court clarified that statutory override under Section 35 of the SARFAESI Act does not eclipse special constitutional provisions, rendering such enforcement action without jurisdiction and legally unsustainable.
The Supreme Court Bench comprising Justice Dipankar Datta and Justice Aravind Kumar, while adjudicating an appeal, held that Section 35 of the SARFAESI Act did not override Article 371A of the Constitution. The Court held that where no valid security interest existed, any SARFAESI enforcement action undertaken within the State was without jurisdiction. It was further held that constitutional safeguards under Article 371A could not be diluted by statutory non obstante clauses, and enforcement measures initiated in disregard thereof were liable to be set aside.
The Supreme Court examined the legality of action initiated by the Financial Creditor under the SARFAESI Act against the Corporate Debtor for recovery of dues arising out of a loan transaction entered into in the year 2001 for setting up a cold storage unit in the State of Nagaland. It was noted that the loan was disbursed pursuant to a loan agreement supported by ancillary arrangements, including an agreement with the Village Council and a deed of guarantee, devised in view of the constitutional and statutory restrictions on transfer of land by tribals in Nagaland. The Corporate Debtor defaulted in repayment, following which the Financial Creditor issued recall and demand notices and ultimately took physical possession of the assets by invoking Sections 13 and 14 of the SARFAESI Act.
The Court noted that the High Court had set aside the SARFAESI proceedings on the ground that no security interest had been created in favour of the Financial Creditor and that the SARFAESI Act itself was not applicable in Nagaland at the relevant time, having been notified only in December 2021 pursuant to Article 371A of the Constitution. It was held that Article 371A expressly barred the application of Parliamentary enactments relating to ownership and transfer of land in Nagaland unless adopted by the State Legislature, and that Section 35 of the SARFAESI Act could not override a constitutional provision. In the absence of any mortgage or security agreement creating a right, title or interest in favour of the Financial Creditor, the Financial Creditor could not be treated as a “secured creditor” within the meaning of the SARFAESI Act.
The Court further held that the deed of guarantee executed by the Village Council merely constituted a personal guarantee and did not amount to the creation of a security interest. It was observed that while the Council had statutory powers under the Nagaland Village and Area Councils Act, 1978, to provide security and proceed against mortgaged property, such powers had not been exercised, and the Financial Creditor could not bypass the legal framework by invoking the SARFAESI Act. The distinction between remedies under the SARFAESI Act and proceedings under the Recovery of Debts and Bankruptcy Act, 1993 was reiterated, emphasising that enforcement without court intervention under SARFAESI was permissible only where a valid security interest existed.
Reliance placed by the Financial Creditor on decisions such as M.D. Frozen Foods Exports Private Limited and Others v. Hero Fincorp Limited, REEDLAW 2022 SC 09201; United Bank of India v. Satyawati Tondon and Others, REEDLAW 2010 SC 07202 and UCO Bank v. Deepak Debbarma, were held to be misplaced, as those cases proceeded on the existence of a security interest, which was absent in the present case. The Court affirmed that erroneous invocation of the SARFAESI Act amounted to a lack of jurisdiction, thereby justifying the High Court’s interference despite the availability of an alternative remedy. Upholding the impugned judgment, the appeal was dismissed, while leaving it open to the Financial Creditor to pursue recovery against the Corporate Debtor or the guarantor in accordance with law.
Dr. Manish Singhvi, Senior Advocate with Mr. Chandan Kumar (AOR), Mr. Rituraj Biswas, Mr. Mayan Prasad, Mr. Sujaya Bardhan, Mr. Aayush Garg and Mr. Sami Ahmed, Advocates, represented the Appellant.
Mr. Kaushik Choudhury AOR, Mr. Madhurjya Choudhury, Mr. Saksham Garg, and Mr. Jyotirmoy Chatterjee, Advocates, appeared for the Respondent.
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