Central Registrar Must Enforce Ombudsman Orders Through Winding Up and Liquidation to Protect Depositor Interests

The Petitioners are retired or serving employees of Steel Authority of India (SAIL) who deposited substantial funds in Fixed Deposits with the Steel Authority of India Limited Employees Co-operative Credit Society Limited (Respondent Society), a Multi-State Co-operative Society.

In 2024, the Society failed to release deposits upon request, and many Petitioners obtained favorable orders from the Co-operative Ombudsman under Section 85A of the MSCS Act directing repayment with interest.

Despite these orders, the Society, which recorded a net deficit of approximately ₹365 crores due to alleged defalcation and mismanagement by the previous board, failed to comply.

Procedurally, the Central Registrar initiated an inquiry under Section 78 and a forensic audit after being directed by the High Court.

Meanwhile, the Directorate of Economic Offences, West Bengal, froze the Society’s bank accounts and arrested the erstwhile Chairman.

1. Whether the Multi-State Co-operative Societies Act, 2002 provides an adequate mechanism for the enforcement of orders passed by the Co-operative Ombudsman.

2. Whether the financial condition and mismanagement of the Respondent Society warrant its winding up and the appointment of a liquidator to protect depositors' interests.

The Court primarily applied Section 85A of the Multi-State Co-operative Societies Act, 2002 (as amended in 2023), which establishes the Co-operative Ombudsman for grievance redressal regarding deposits but lacks specific enforcement provisions.

It relied on Sections 78 and 86 of the MSCS Act regarding inquiries and the Central Registrar’s power to direct winding up of societies that cease to function on cooperative principles.

Rule 29 of the Multi-State Co-operative Societies Rules, 2002, which establishes the order of priority for payment of liabilities during liquidation, placing pro-rata repayment of deposits of members second only to outside liabilities.

The court also cited Writers & Publishers (P) Ltd. v. Super Bazar Official Liquidator (2021) 13 SCC 279 to interpret the statutory scheme of winding up and priority of claims.

The Court observed a critical legislative lacuna in Section 85A; while Ombudsman orders are "final and binding," the Act provides no penal consequences or execution mechanism for non-compliance, rendering them "paper orders."

The Court found that the erosion of net worth and criminal investigations into defalcation by the previous management proved the Society had ceased to function in accordance with cooperative principles.

The Court determined that the only viable path to secure the senior citizens' hard-earned money was to bypass the stalled Ombudsman execution and trigger the winding-up process under Chapter X, utilizing the Liquidator’s powers to realize assets and satisfy claims as per statutory priority.

It directed the Central Registrar to: (i) pass an order for winding up and appoint a Liquidator by June 15, 2026; (ii) ensure the Liquidator takes charge of all disclosed and undisclosed assets, transferring all funds to a centralized account in a nationalized bank by July 15, 2026; and (iii) prioritize the repayment of claims, ensuring those with Ombudsman orders are paid by October 15, 2026.

The Court clarified that these directions do not impede ongoing criminal proceedings by the Directorate of Economic Offences, West Bengal.