Constitutional Limits on SARFAESI in Nagaland and the Necessity of a Security Agreement: Commentary on NEDFi v. L. Doulo Builders & Suppliers Co. Pvt. Ltd.

1. Introduction

The Supreme Court’s decision in North Eastern Development Finance Corporation Ltd. v. L. Doulo Builders and Suppliers Co. Pvt. Ltd., 2025 INSC 1446 (Civil Appeal No. 6492 of 2024, decided on 16 December 2025), is a significant pronouncement at the intersection of:

• the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”),
• the special constitutional status of Nagaland under Article 371A, and
• the basic structural requirement of a “security agreement” and “security interest” for invoking SARFAESI.

The case arose from a project finance transaction: the respondent-company, L. Doulo Builders and Suppliers Co. Pvt. Ltd. (“the Company”), sought financial assistance from the appellant, North Eastern Development Finance Corporation Ltd. (“NEDFi” or “the Corporation”), to set up a cold storage unit in Dimapur, Nagaland. Because land transfer to non-tribals/juristic persons in Nagaland is constrained by local law and constitutional protections, a particular structure involving the Model Village Council (“the Council”) was adopted instead of a direct mortgage to NEDFi.

When the project failed and the loan turned irregular, NEDFi sought to recover its dues by invoking SARFAESI: it issued a demand notice under Section 13(2), obtained an order under Section 14 from the Deputy Commissioner, Dimapur, and took physical possession of the Company’s and its directors’ properties. The Company challenged these actions in a writ petition before the Gauhati High Court.

The High Court set aside NEDFi’s SARFAESI measures on the ground that:

• no “security interest” had been created in favour of NEDFi over the immovable properties, and
• NEDFi was therefore not a “secured creditor” within the meaning of the Act.

The Supreme Court, affirming the High Court, has now laid down two critical principles:

1. Constitutional limitation: SARFAESI does not override Article 371A; the Act became applicable in Nagaland only after a specific notification in 2021, and could not have been invoked in Nagaland before that date.
2. Substantive requirement of security interest: Absent a security agreement creating a security interest in favour of the creditor, the creditor is not a “secured creditor”, and any purported SARFAESI action is without jurisdiction—even if other remedies (like those under the RDB Act) are available.

This commentary examines the judgment’s facts, legal reasoning, use of precedent, and its implications for banking and secured transactions law, especially in constitutionally special-status regions like Nagaland.

2. Summary of the Judgment

2.1 Factual Background in Brief

• On 13 December 2000, the Company approached NEDFi for financial assistance to set up a cold storage unit at Model Village, 5th Mile, Dimapur, Nagaland.
• On 11 May 2001, three documents were executed:
  • a loan agreement between NEDFi and the Company for a term loan of ₹2 crores;
  • a separate agreement between the Model Village Council and Shri K. Doulo (a director of the Company), whereby the Council stood as surety and agreed to hold the Company’s and director’s immovable assets; and
  • a deed of guarantee by which the Council guaranteed repayment of the loan to NEDFi and referred to certain properties (residential building, project site, and residential plot) valued at ₹85 lakhs.
• The loan agreement contemplated, in Article III, a first mortgage and charge over the Company’s immovable and movable properties in favour of the “Lenders”, as well as personal guarantees of the promoters; Schedule IV required creation of security for the entire loan before disbursement.
• Because land of tribals in Nagaland cannot ordinarily be transferred to non-tribals/juristic entities, the arrangement structured the mortgage/security in favour of the Council, not in favour of NEDFi directly. The Council’s statutory powers arose under the Nagaland Village and Area Councils Act, 1978 (“1978 Act”).

When the Company defaulted:

• NEDFi issued a loan recall notice on 31 August 2010 demanding around ₹3.44 crores.
• A SARFAESI demand notice under Section 13(2) was issued on 30 June 2011 seeking ₹3.85 crores with interest.
• In 2018, NEDFi also filed an Original Application before the DRT, Guwahati under the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”) for recovery of about ₹7.64 crores.
• On 16 March 2019, NEDFi obtained an order under Section 14 of SARFAESI from the Deputy Commissioner, Dimapur, authorising taking of physical possession of assets.
• On 23 March 2019, NEDFi took possession of the Company’s assets and personal properties of its directors.
• The Company filed a writ petition under Article 226 before the Gauhati High Court, challenging the SARFAESI notices and the possession.

2.2 High Court’s Decision

The Gauhati High Court (Division Bench) allowed the writ petition, holding that:

• NEDFi had failed to establish any validly created right, title or interest over the Company’s or Council’s immovable assets.
• The deed of guarantee executed by the Council was merely a guarantee agreement and did not create any proprietary right in favour of NEDFi over the immovable properties mentioned in the SARFAESI notices.
• Consequently, there was no “security agreement” and no “security interest” within the meaning of SARFAESI, and NEDFi was not a “secured creditor”.
• The SARFAESI notices and the Section 14 order were therefore without jurisdiction and liable to be set aside.
• The Court directed restoration of possession to the Company, while clarifying that NEDFi remained free to pursue other legal remedies (including the pending DRT proceedings) for recovery of its dues from the Company or the Council.

2.3 Supreme Court’s Decision

On appeal, the Supreme Court (Dipankar Datta and Aravind Kumar, JJ.) dismissed NEDFi’s appeal and affirmed the High Court’s judgment. The core holdings are:

1. Non-applicability of SARFAESI in Nagaland prior to 10 December 2021:
   • Article 371A(1)(a)(iv) provides that no Act of Parliament relating to “ownership and transfer of land and its resources” applies to Nagaland unless the State Legislative Assembly resolves to apply it.
   • SARFAESI involves transfer and sale of secured assets (including land) to realise debts; it thus squarely implicates “ownership and transfer of land and its resources”.
   • A notification dated 10 December 2021 implemented the SARFAESI Act in Nagaland with effect from that date, and specified that sale of secured assets by banks/financial institutions could be only to “indigenous inhabitants of Nagaland”.
   • Therefore, SARFAESI could not have been lawfully invoked in Nagaland before 10 December 2021. All SARFAESI actions taken by NEDFi in 2011 and 2019 were ultra vires.
2. Absence of security interest in favour of NEDFi:
   • The Company’s immovable properties were mortgaged/entrusted to the Council, not to NEDFi.
   • The Council had statutory powers under Section 2(6) and 2(8) of the 1978 Act to provide security for loans to permanent residents and to seize and dispose of such security in case of default.
   • The Council executed a deed of guarantee in favour of NEDFi, but no mortgage or charge was created in NEDFi’s favour; NEDFi had only a contractual guarantee, not a proprietary security interest.
   • Under SARFAESI, a creditor must be a “secured creditor” holding a “security interest” created by a “security agreement”. The guarantee did not qualify as a security agreement, nor did it create a security interest in favour of NEDFi.
   • Hence, NEDFi was not a secured creditor under SARFAESI and lacked jurisdiction to invoke Sections 13 and 14.
3. Writ jurisdiction and alternative remedy:
   • The Court held that where the very foundation of jurisdiction to invoke SARFAESI is absent (no security interest; Act not applicable), the borrower need not be relegated to alternative remedies under Section 17 of SARFAESI.
   • This distinguishes the case from United Bank of India v. Satyawati Tondon, where borrowers were discouraged from bypassing statutory remedies when SARFAESI action was prima facie within jurisdiction.
4. NEDFi’s remaining remedies:
   • The Supreme Court expressly left it open to NEDFi to pursue/seek remedies against the Company or the Council in accordance with law (e.g., via the DRT under the RDB Act, or by enforcing the guarantee).
   • However, SARFAESI-based actions taken so far were declared invalid.

3. Detailed Analysis

3.1 The Transaction Structure and the Nature of “Security”

A key to understanding the Court’s reasoning lies in unpacking how the security was structured. The loan agreement (11 May 2001) between NEDFi and the Company contained standard security clauses:

• Article III(3.1)(A): required a first mortgage and charge over the Company’s immovable properties in favour of the lender, and a first charge by way of hypothecation over movables.
• Article III(3.4): required personal guarantees from the promoters.
• Schedule IV (Special Conditions): stipulated that before disbursement, the borrower had to “create security for the total loan sanctioned”.

However, because of legal and customary restrictions in Nagaland on transfer of tribal land to non-tribal entities, including companies, NEDFi could not receive a direct mortgage over land. Instead:

• Under the second agreement between the Council and K. Doulo (representing the Company):
  • The Council agreed to act as surety and guarantor for repayment of NEDFi’s loan.
  • The Company, as “beneficial owner”, purported to “grant, transfer, convey” all listed assets (two-storey residential building, project site, residential plot) to the Council, valued at ₹85 lakhs.
  • The Council obtained rights to “seize and dispose off all the mortgaged assets” to realise the loan and to examine accounts of the Company.
• Under the deed of guarantee:
  • The Council guaranteed repayment of up to ₹200 lakhs to NEDFi in case of the Company’s default.
  • The guarantee was to remain in force until full repayment of principal, interest, and charges.
  • The schedule of property mirrored the list of assets in the second agreement, again valued at ₹85 lakhs.

Crucially, no document was executed by which the Company or Council transferred or charged immovable property in favour of NEDFi. The Council held the property (or security over it) vis-à-vis the Company. NEDFi’s direct right was only a personal guarantee from the Council, not a proprietary interest in the land.

The Supreme Court accepted the High Court’s finding that NEDFi could not show any document “which created semblance of a right, title or interest” in its favour over the immovable properties. Thus, while security existed in a broad commercial sense (the Council having recourse against the borrower’s property), no “security interest” existed in the technical sense required by SARFAESI in favour of NEDFi.

3.2 The Statutory Framework

3.2.1 SARFAESI Act: Key Concepts

The SARFAESI Act is designed to permit enforcement of security interests without court intervention. Three definitions are central:

• Section 2(1)(zf) – “security interest”:
  “security interest” means right, title or interest of any kind… upon property created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment… on tangible assets… or rights in intangible assets…
• Section 2(1)(zd) – “secured creditor”:

  Though not quoted in the judgment, it essentially covers banks, financial institutions, NBFCs, debenture trustees, etc., in whose favour a security interest is created.

• Section 2(1)(zb) – “security agreement”:

  Again, not reproduced in full but understood as any agreement or document under which a security interest is created in favour of a secured creditor.

Sections 13 and 14 of the Act allow a secured creditor to:

• issue a demand notice under Section 13(2) to a defaulting borrower whose account has become a non-performing asset (NPA),
• and, upon non-compliance, take possession of the secured asset, manage it, or sell it to realise the debt (Section 13(4)), including with assistance of the District Magistrate/Chief Metropolitan Magistrate under Section 14.

Section 35 gives SARFAESI an overriding effect over “any other law” or instrument in conflict. However, the Court emphasises that this non obstante clause cannot override the Constitution itself, particularly Article 371A in this case.

3.2.2 Article 371A and the 2021 Notification

Article 371A(1)(a) provides:

The State of Nagaland issued a notification dated 10 December 2021, which:

• implemented the SARFAESI Act in Nagaland with effect from that date, and
• restricted sale of secured assets by banks/financial institutions to “indigenous inhabitants of Nagaland” in line with the Nagaland Land and Revenue Regulations (Amendment) Act, 2002.

The Supreme Court draws a clear conclusion:

• Until 10 December 2021, SARFAESI did not apply to Nagaland in so far as it dealt with ownership/transfer of land and its resources, because no prior resolution/notifying step had been taken under Article 371A.
• Therefore, SARFAESI actions taken by NEDFi in 2011 and 2019 were constitutionally unsustainable.

3.2.3 Nagaland Village and Area Councils Act, 1978

The 1978 Act empowers Village Councils to deal with security for loans obtained by village residents. Section 2 (as quoted in the judgment) includes:

• Section 2(6): power “to provide security for due repayment of loan received by any permanent resident of the Villages from the Government, Bank or financial institution”.
• Section 2(8): power “to forfeit the security of the individual borrower on his default in repayment of loan… and to dispose of such security by public auction or by private sale”.

These provisions explain:

• why the Council could validly accept security over the borrower’s property, and
• how the Council could, in turn, stand as guarantor to NEDFi and exercise recourse against the borrower’s assets in case of default.

However, these powers reside in the Council, not in NEDFi. The Council’s provision of security and guarantee does not ipso facto transfer a security interest to NEDFi within the meaning of SARFAESI.

3.2.4 RDB Act vs SARFAESI

The judgment also briefly contrasts:

• RDB Act, 1993: permits recovery of debts (secured or unsecured) through a judicial process before the Debts Recovery Tribunal (DRT). No mortgage is strictly necessary; an unsecured loan may also be recovered, subject to proof and decree.
• SARFAESI Act, 2002: is an extra-judicial enforcement mechanism available only to “secured creditors” holding a “security interest” in specified types of property (secured assets). A mortgage or other recognised form of security is essential.

NEDFi had already invoked the RDB Act (O.A. No. 163/2018) against the Company before the DRT, Guwahati—an avenue the Supreme Court has left undisturbed.

3.3 The Court’s Legal Reasoning

3.3.1 Threshold Question: Could NEDFi Invoke SARFAESI at All?

The Supreme Court framed the primary question as:

The Court resolved this by examining two independent but mutually reinforcing grounds:

1. Constitutional inapplicability of SARFAESI in Nagaland before 10 December 2021.
2. Absence of security interest / security agreement in favour of NEDFi.

Either ground by itself rendered the SARFAESI measures without jurisdiction.

3.3.2 Article 371A vs Section 35 of SARFAESI

Section 35 provides that SARFAESI overrides “any other law” inconsistent with it. However, the Court emphasizes:

• Section 35 cannot and does not override provisions of the Constitution itself.
• Article 371A is a constitutional guarantee, not merely an ordinary statute.
• Hence, SARFAESI must yield to Article 371A’s condition precedent that Parliamentary laws on ownership/transfer of land and its resources apply to Nagaland only if the State Legislative Assembly so resolves.

Once the 10 December 2021 notification is examined, it becomes clear that:

• The State specifically “notified the implementation of the SARFAESI Act, 2002 in Nagaland with effect from the date of this notification”.
• Thus, implementation is prospective from 10 December 2021.

As a result, when NEDFi:

• issued a Section 13(2) notice in June 2011, and
• secured a Section 14 order and took possession in March 2019,

those actions were taken under a statute that had not yet been implemented in Nagaland for land-related enforcement. The Court therefore implicitly concludes that:

• Even if NEDFi had a valid security interest (which it did not), SARFAESI remedies for land/immovable property could not be invoked in Nagaland pre-2021.

3.3.3 Security Agreement and Security Interest: The Decisive Deficiency

The Court next examines whether NEDFi could qualify as a “secured creditor” entitled to take SARFAESI measures. Key reasoning steps:

1. Nature of banking security: At para 24, the Court recognises common banking practice that a “security agreement” may be a bundle of documents—loan agreement, hypothecation deed, mortgage, and guarantee agreements—collectively aimed at securing the loan. A distinction is drawn between:
   • Primary security: assets created/financed by the loan (e.g., plant, machinery, stock) where a security interest is directly created in favour of the lender; and
   • Collateral security: existing property (such as land) offered as additional security, generally by way of mortgage or charge.
2. SARFAESI requires mortgage/secured interest: At para 25, the Court states categorically:
   “For invocation of the provisions of the SARFAESI Act, mortgage is a must…”

   While technically SARFAESI covers other forms of security interest (hypothecation, assignment, charge), the Court’s use of “mortgage is a must” in context clearly signals that a proprietary interest in immovable property, created in favour of the creditor, is essential for enforcement against immovables. At the very least, some form of “security interest” within Section 2(1)(zf) must exist in favour of the creditor.

3. Who holds the security? The Court notes that the Company’s property was mortgaged/entrusted to the Council, not to NEDFi. The Council’s right to seize and dispose of property arises under the 1978 Act. NEDFi’s only direct right is the Council’s guarantee of the loan.
4. Guarantee ≠ Security Agreement: The High Court had held that a guarantee by the Council “would not amount to a ‘security agreement’ under section 2(zb) unless such interest is created in favour of a secured creditor”. The Supreme Court concurs:
   • The deed of guarantee is “merely a guarantee agreement without creating any right, title or interest of the lender over any of the immovable properties”.
   • No component of the transaction—loan agreement, guarantee, or Council’s internal arrangements—creates a security interest in favour of NEDFi.
5. Consequences:
   • NEDFi is not a “secured creditor” under Section 2(1)(zd) of SARFAESI in respect of the immovable properties.
   • Without being a secured creditor, NEDFi cannot invoke Sections 13(2), 13(4) or 14 at all.
   • The High Court was justified in concluding that the SARFAESI action was “wholly illegal and without jurisdiction”.
6. Proper course for NEDFi: As the Court notes, given the structure of the transaction:
   • NEDFi’s primary recourse under SARFAESI was non-existent.
   • NEDFi’s remedies lay instead in:
     • enforcing the personal guarantees (both of the promoters and of the Council) through ordinary suits or DRT proceedings; and/or
     • pursuing the Council (which held the actual security) to exercise its statutory powers under the 1978 Act, subject to the law.

3.3.4 Treatment of Precedents Relied Upon by NEDFi

(a) M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd. (2017) 16 SCC 741

In M.D. Frozen Foods, the Supreme Court held that:

• once a creditor (there, an NBFC) is notified as a “financial institution” under SARFAESI, the Act applies to all live and actionable debts owed to that creditor, even if the loan/mortgage predates the application of SARFAESI to that class of creditor;
• the Act itself is not “retrospective” in an impermissible sense; it operates prospectively but attaches to existing debts, provided certain conditions are met (existence of an actionable debt, security interest, NPA classification, etc.).

NEDFi relied on this to argue that SARFAESI could be invoked against a loan granted in 2001 (before SARFAESI came into force in June 2002) so long as the debt and account status satisfied SARFAESI criteria when invoked.

The Supreme Court in the present case responds by:

• Accepting the general principle that SARFAESI can apply to pre-Act loans when the Act becomes applicable, if and only if there is a security interest in favour of the creditor.
• Emphasising that in M.D. Frozen Foods, there was no dispute that a valid security interest existed; the issue was only whether the temporal application of SARFAESI to NBFCs was permissible.
• Pointing out that here, no security interest existed in favour of NEDFi at any point; hence the ratio of M.D. Frozen Foods simply does not assist NEDFi.

The Court notes that the four factors identified in M.D. Frozen Foods (existence of an actionable debt; creditor’s status as secured creditor; security having been created; borrower being NPA) include, as a sine qua non, the existence of a security interest in favour of the creditor. That condition fails here.

(b) Uco Bank v. Dipak Debbarma (2017) 2 SCC 585

In UCO Bank, the Court considered whether SARFAESI could override restrictions under the Tripura Land Revenue and Land Reforms Act, 1960, which limited transfer of land belonging to Scheduled Tribes. The Supreme Court held that:

• being a later Parliamentary statute with an overriding clause, SARFAESI prevailed over inconsistent State law in terms of Article 254 of the Constitution;
• the bank’s sale of secured assets (including land) under SARFAESI was thus valid despite State law restrictions.

NEDFi relied on UCO Bank to argue that SARFAESI overrides local restrictions on land transfer and that its enforcement actions in Nagaland should be similarly upheld.

The Supreme Court distinguishes UCO Bank on two grounds:

• First, in UCO Bank, there was no dispute about the existence of a security interest in favour of the bank; the sale there was a culmination of an undisputed SARFAESI process.
• Second, that case involved a conflict between a State law and a Central law, resolved under Article 254. Here, the conflict is between a Parliamentary statute (SARFAESI) and a Constitutional special provision (Article 371A), which SARFAESI cannot override.

Thus, UCO Bank is held inapplicable as a precedent supporting NEDFi’s position.

(c) United Bank of India v. Satyawati Tondon (2010) 8 SCC 110

Satyawati Tondon is frequently cited for the principle that High Courts should ordinarily not entertain writ petitions where effective alternate remedies are available under SARFAESI or the RDB Act. The Court had observed that exercising writ jurisdiction despite statutory remedies had a “serious adverse impact on the right of banks and other financial institutions to recover their dues.”

NEDFi invoked this to argue that the Gauhati High Court ought not to have entertained the writ petition and should have relegated the borrower to a Section 17 SARFAESI remedy.

The Supreme Court rejects this contention on the specific facts here:

• When the very jurisdictional foundation for SARFAESI action is absent—no applicable Act (pre-2021) and no security interest—there is no valid SARFAESI “proceeding” in the eye of law.
• Relegating a party to statutory remedies under a statute which does not apply, or provides no jurisdictional foundation, would be illogical.
• Therefore, the High Court was correct in exercising writ jurisdiction and in directly setting aside the ultra vires SARFAESI measures.

The Court thus refines the application of Satyawati Tondon: the bar on Article 226 intervention is not absolute and does not apply where the impugned action is without jurisdiction or in violation of constitutional limitations.

3.4 Impact of the Judgment

3.4.1 On Financial Institutions Operating in Nagaland

For banks, financial institutions, and NBFCs lending in Nagaland, the judgment sends a clear set of messages:

1. Temporal applicability of SARFAESI:
   • SARFAESI became applicable in Nagaland for land/immovable-asset enforcement only from 10 December 2021.
   • Any SARFAESI proceedings commenced before that date involving transfer/sale of land in Nagaland are susceptible to being declared void for lack of constitutional authority.
2. Requirement of a direct security interest:
   • Where local structures (like village councils) hold property or security on behalf of borrowers, lenders must ensure that a security interest is also created in their own favour (e.g., by way of sub-mortgage, assignment, or other permissible mechanism), if they intend to utilise SARFAESI.
   • A mere guarantee by a council, even if backed by the council’s statutory powers over the borrower’s property, does not make the lender a “secured creditor” under SARFAESI.
3. Structuring of future transactions:
   • Post-2021, lenders must tailor their documentation to simultaneously:
     • Respect Nagaland’s land laws and Article 371A protections;
     • Create a valid security interest in favour of the lender consistent with SARFAESI definitions; and
     • Ensure eventual sale, if necessary, complies with restrictions (e.g., sale only to indigenous inhabitants).
   • Failure to do so may leave lenders reliant solely on personal guarantees and contractual remedies, without SARFAESI’s expedited enforcement mechanism.
4. Re-examination of legacy portfolios:
   • Lenders with legacy loans in Nagaland secured through village councils or other local bodies may need to re-examine whether:
     • they actually hold a security interest, or
     • they merely have guarantees or indirect recourse.
   • Where necessary, they may need to restructure or augment security documentation to meet SARFAESI’s requirements, subject to local law.

3.4.2 On Constitutional Special Provisions and Financial Legislation

The judgment is a reminder that:

• Economic legislation like SARFAESI, however crucial for NPA recovery, operates within the hierarchy of norms established by the Constitution.
• Special provisions for certain States (e.g., Articles 371A–371J) may:
  • delay or condition the application of central statutes, or
  • require special implementing measures (like State resolutions/notifications).
• Section 35’s overriding effect is strong, but it is not absolute; it cannot override constitutional prescriptions governing legislative competence or the applicability of Acts of Parliament.

This has broader implications for:

• other special-status States and regions where central property or land laws are subject to constitutional or statutory carve-outs; and
• the drafting of future financial legislation that may need to explicitly account for such constitutional variations.

3.4.3 On the Doctrine of Alternative Remedy in SARFAESI Litigation

The decision also subtly refines the doctrine concerning alternate remedies:

• While Satyawati Tondon remains good law in discouraging premature writ petitions, this restraint is conditional on some prima facie jurisdiction existing under SARFAESI.
• Where a borrower demonstrates that:
  • the Act itself was not applicable in the State at the relevant time; or
  • the lender was not a “secured creditor” (no security interest, no security agreement),
  High Courts can and should intervene under Article 226 to quash ultra vires actions without relegating parties to Section 17.

4. Complex Concepts Simplified

To make the judgment more accessible, some of the key legal terms and concepts are simplified below.

4.1 Security Interest, Security Agreement, and Secured Creditor

• Security interest: A legal right in someone else’s property that gives a creditor the power to:
  • take, manage, or sell that property if the borrower fails to repay the loan.
  In SARFAESI, this includes mortgages, charges, hypothecation, and assignments in favour of the creditor.
• Security agreement: Any document (or set of documents) under which a borrower or third party creates a security interest in favour of a creditor. For SARFAESI purposes, the agreement must:
  • clearly transfer or charge rights in the property to the creditor, and
  • identify the secured obligations (e.g., a particular loan).
• Secured creditor: A creditor who holds a valid security interest in the borrower’s property. Only such creditors can use SARFAESI to enforce their security without court intervention.

4.2 Mortgage, Hypothecation, and Guarantee

• Mortgage: A transfer of an interest in immovable property (like land or a building) to secure a debt. The borrower remains owner, but the lender gets a right over the property and can sell it if the borrower defaults.
• Hypothecation: A charge over movable property (like machinery or stock) where possession remains with the borrower, but the lender has a right to take and sell the assets on default.
• Guarantee: A promise by a third party (guarantor) to pay the borrower’s debt if the borrower fails. It is a personal obligation of the guarantor; it does not by itself give the creditor any right over the guarantor’s or borrower’s property unless a separate security agreement is executed.

In this case:

• The Council’s arrangement with the borrower gave the Council rights over the borrower’s property (akin to security).
• But the Council’s guarantee to NEDFi did not transfer those property rights to NEDFi. Therefore, NEDFi had no security interest over the land—it only had a contractual right to demand payment from the Council.

4.3 Article 371A of the Constitution

Article 371A grants special protections to Nagaland. Key points for this case:

• Acts of Parliament dealing with ownership and transfer of land and its resources do not automatically apply to Nagaland.
• They apply only if the Nagaland Legislative Assembly adopts them by resolution (or if the State otherwise implements them consistently with Article 371A).
• SARFAESI, by enabling sale/transfer of land by banks to recover loans, falls within this category.
• Thus, SARFAESI became operative in Nagaland for such purposes only from 10 December 2021, when the State issued a notification implementing it.

4.4 SARFAESI vs. RDB Act

• RDB Act (Recovery of Debts and Bankruptcy Act, 1993):
  • Lender must file a case (Original Application) before a DRT.
  • The DRT conducts a trial-like process and passes a recovery certificate (akin to a decree).
  • Enforcement involves attachment and sale of borrower’s assets through legal process.
  • Applies to both secured and unsecured debts.
• SARFAESI Act:
  • A secured creditor can enforce its security directly (e.g., take possession, sell the secured asset) without filing a suit.
  • The borrower can challenge the action before the DRT under Section 17, but the initial step is with the creditor.
  • Applies only to secured creditors with a valid security interest.

In this case, NEDFi had properly invoked the RDB Act (which remains valid), but could not legitimately use SARFAESI due to lack of security interest and constitutional constraints.

5. Conclusion

The Supreme Court’s decision in NEDFi v. L. Doulo Builders crystallises two important legal propositions:

1. SARFAESI’s reach is constitutionally conditioned in Nagaland. By virtue of Article 371A(1)(a)(iv), SARFAESI did not apply to ownership and transfer of land in Nagaland until its explicit implementation by notification on 10 December 2021. Section 35’s overriding clause cannot displace this constitutional limitation. Any pre-2021 SARFAESI actions involving land/immovable property in Nagaland are constitutionally suspect.
2. A valid security interest in favour of the creditor is indispensable for SARFAESI. A creditor must be a “secured creditor” holding a “security interest” created by a “security agreement”. A mere deed of guarantee, even by a statutory local body empowered to seize and sell the borrower’s assets, does not create such an interest. In the absence of mortgage/charge/hypothecation or similar rights in favour of the lender, SARFAESI proceedings are without jurisdiction.

The judgment also:

• distinguishes and correctly cabins earlier decisions like M.D. Frozen Foods, UCO Bank, and Satyawati Tondon to their factual matrices;
• clarifies that High Courts may exercise writ jurisdiction where SARFAESI is invoked in clear excess of jurisdiction (either because the Act does not apply or because no security interest exists); and
• preserves lenders’ ordinary and statutory remedies (e.g., under the RDB Act, or via guarantee enforcement), even as it invalidates misapplied SARFAESI proceedings.

In the broader legal landscape, this judgment reinforces a fundamental message: expedited enforcement mechanisms like SARFAESI cannot be used to bypass constitutional protections or basic structural requirements of secured transactions law. Financial institutions must carefully align their security structures and enforcement strategies with both the statutory definitions of security interest and the constitutional peculiarities of the territories in which they operate.