The Supreme Court ruled that Section 35 of the SARFAESI Act cannot override any provision of the Constitution, including special protections under Article 371A for Nagaland. The Court held that SARFAESI action taken before the Act’s adoption in Nagaland was without jurisdiction and legally invalid.
New Delhi: The Supreme Court has clearly held that the overriding provision under Section 35 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), cannot override or prevail over any provision of the Constitution of India.
The Court emphasised that while Parliament may give an Act overriding effect over other laws, it can never override the Constitution itself.
The Court was examining a case where a financial corporation had taken action under the SARFAESI Act in a situation where the Constitution provided special protections that operated independently and had overriding force.
The Bench comprising Justice Dipankar Datta and Justice Aravind Kumar made it clear that constitutional provisions will always prevail over statutory laws.
The Bench observed,
“Section 35 of the SARFAESI Act, though gives overriding effect to the provisions thereof notwithstanding anything to the contrary contained in any other enactment for the time being in force or any instrument having effect by virtue of any such law, the same cannot and does not override any provision of the Constitution, to wit, Article 371A thereof in this case which contains special provisions for the State of Nagaland”.
The case arose from a financial transaction between the appellant, North Eastern Development Finance Corporation Ltd., and the respondent company, M/s L. Doulo Builders and Suppliers Co. Pvt. Ltd.
The appellant had extended financial assistance to the respondent for establishing a cold storage unit in Nagaland.
The loan arrangement was not a simple mortgage transaction but involved multiple documents, including a loan agreement, an agreement involving the Village Council, and a deed of guarantee.
After the respondent defaulted in repayment, the appellant initiated recovery proceedings by invoking the provisions of the SARFAESI Act. Acting under Section 14 of the Act, the appellant took physical possession of the respondent’s assets through the district authorities.
The respondent company challenged this recovery action before the High Court, arguing that the SARFAESI Act could not be invoked in Nagaland at the relevant time and that the appellant had no jurisdiction to initiate such proceedings.
The High Court accepted this argument and quashed the SARFAESI proceedings. Aggrieved by this decision, the appellant approached the Supreme Court.
Before the Supreme Court, the appellant contended that Section 35 of the SARFAESI Act gives the Act overriding effect over other laws and instruments, and therefore the recovery action was legally valid. However, the Supreme Court rejected this argument.
The Court carefully examined the scope of Section 35 and held that the overriding clause applies only to other enactments or instruments and not to the Constitution. The Bench reiterated that no statutory law can override constitutional provisions. It categorically held that Section 35
“cannot and does not override any provision of the Constitution”.
The Court further took note of the special constitutional protection provided to the State of Nagaland under Article 371A of the Constitution.
It observed that Article 371A contains special provisions relating to land and its ownership in Nagaland, and these protections cannot be bypassed by invoking a central legislation like SARFAESI.
Importantly, the Court found that the SARFAESI Act itself was not applicable in the State of Nagaland at the time when the recovery proceedings were initiated. The Bench noted that the State of Nagaland adopted the SARFAESI Act only through a notification dated 10 December 2021.
Therefore, any action taken under the SARFAESI Act before this date was held to be without jurisdiction and legally invalid.
The Court then examined whether the appellant could otherwise justify its action under the SARFAESI Act by showing that it was a secured creditor with a valid security interest.
The Bench explained that the entire scheme of the SARFAESI Act is based on the existence of a legally recognised security interest in favour of the secured creditor.
Upon examining the facts, the Court found that no mortgage or security interest, as required under the SARFAESI Act, had been created in favour of the appellant.
Instead, the arrangements relied upon by the appellant involved a guarantee and a mortgage in favour of the Village Council, which was constituted under the Nagaland Village and Area Councils Act, 1978.
The Supreme Court held that such an arrangement did not make the appellant a “secured creditor” under the SARFAESI Act. It also held that the appellant could not use the enforcement mechanism of SARFAESI when the security interest was not created in its favour as required by law.
The Court further held that since the appellant had no jurisdiction to invoke the SARFAESI Act from the very beginning, the High Court was correct in entertaining the writ petition filed by the respondent.
The existence of alternate statutory remedies was held to be irrelevant in a case where the action itself was without jurisdiction.
The Bench concluded that the invocation of the SARFAESI Act by the appellant was legally unsustainable on multiple grounds, including constitutional limitations, non-applicability of the Act in Nagaland at the relevant time, and absence of a valid security interest.
Accordingly, the Supreme Court dismissed the appeal and upheld the High Court’s decision. However, the Court clarified that the appellant is free to pursue recovery of its dues through other remedies available under law.
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Senior Advocate Manish Singhvi appeared for the appellant, assisted by Advocates Rituraj Biswas, Mayan Prasad, Chandan Kumar (AOR), Sujaya Bardhan, Aayush Garg, and Sami Ahmed.
The respondent was represented by Advocate Kaushik Choudhury (AOR), along with Advocates Madhurjya Choudhury, Saksham Garg, and Jyotirmoy Chatterjee.
Case title:
North Eastern Development Finance Corporation Ltd. v. M/s L. Doulo Builders and Suppliers Co. Pvt. Ltd., 2025 INSC 1446.
