Central Registrar must initiate winding up of multi-state societies failing to comply with Cooperative Ombudsman orders.

In brief

The question

1. Whether there is an adequate statutory mechanism under the MSCS Act to enforce orders passed by the Cooperative Ombudsman in the event of non-compliance by a society

The court held

The Court held that the interests of the depositors are paramount and cannot be stymied by legislative gaps or financial mismanagement

It also directed

The Court directed the Central Registrar to: (a) pass an order for winding up the Society and appoint a Liquidator by June 15, 2026; (b) ensure the Liquidator takes charge of all disclosed and undisclosed assets, including those frozen by the Economic Offences Wing; and (c) create a centralized account to consolidate funds by July 15, 2026

The Court ordered that claims of the Petitioners be settled in a time-bound manner, ideally by October 15, 2026, while clarifying that these civil directions do not prejudice ongoing criminal proceedings against the previous management

Both the writ petitions and pending applications were disposed of with these directions

01Facts

The Petitioners, primarily retired and serving employees of Steel Authority of India (SAIL), are members of the Steel Authority of India Limited Employees Co-operative Credit Society Limited (“Respondent Society”), a Multi-State Co-operative Society

p. 8

Since 2024, the Society failed to release Fixed Deposits to members despite requests for closure for personal/medical reasons

p. 9

Many petitioners obtained favorable orders from the Cooperative Ombudsman under Section 85A of the Multi-State Cooperative Societies Act, 2002 (MSCS Act), directing repayment with interest

pp. 9-10

The Society failed to comply, citing poor financial health

p. 11

Forensic audits and inquiries by the Institute of Public Auditors of India (IPAI) revealed a net deficit of approximately Rs. 364 Crores, erosion of net worth, and illegal diversion of funds into a hospital trust and market investments

pp. 19-25

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

pp. 29-31

02Issues

i.1. Whether there is an adequate statutory mechanism under the MSCS Act to enforce orders passed by the Cooperative Ombudsman in the event of non-compliance by a society

p. 13 / para. 12

ii.2. Whether the financial condition and mismanagement of the Respondent Society warrant the initiation of winding-up proceedings and the appointment of a Liquidator to protect depositors’ interests

p. 36 / para. 39

03Law Applied

Section 85A of the MSCS Act, 2002, which provides for the appointment of a Cooperative Ombudsman for grievance redressal and mandates that societies comply with its directions within one month

p. 33

Sections 78, 86, 89, and 90 of the MSCS Act regarding inquiry, winding up, and the powers of the Liquidator to realize and distribute assets

pp. 36-39

Rule 29 of the Multi-State Cooperative Societies Rules, 2002, which places "repayment of loans and deposits of members" as a high priority during liquidation

p. 39

Writers & Publishers (P) Ltd. v. Super Bazar Official Liquidator (2021) 13 SCC 279, which affirms the statutory order of priorities during winding up

p. 37

Provisions in the judgment · 17 · Linked ones open on LawLens

Multi-State Co-operative Societies Act, 2002 12 provisions

Section 64 Section 70 Section 77 Section 78 Section 79 Section 85 Section 86 Section 89 Section 90 Section 97 Section 104 Section 108

Bharatiya Nyaya Sanhita, 2023 Section 61 Section 316 Section 318

Bharatiya Nagarik Suraksha Sanhita, 2023 Section 175

West Bengal Protection Of Interest Of Depositors In Financial Establishments Act, 2013 Section 3

04Reasoning

The Court observed a critical legislative lacuna in Section 85A of the MSCS Act, noting that while orders of the Ombudsman are "binding," the Act lacks specific enforcement provisions or penalties for non-compliance, rendering such orders mere "paper orders"

p. 35

The Court found that the Central Registrar, despite receiving periodic reports from the Ombudsman under Section 85A(4), failed to proactively ensure compliance

p. 36

Applying the findings of the forensic audit—which highlighted massive financial defalcation of Rs. 455 Crores and unauthorized market investments—the Court determined that the Society had ceased to function on cooperative principles

p. 36

By connecting the financial erosion to the priority rights of senior citizen depositors under Rule 29, the Court reasoned that the only viable path to provide relief was through the formal winding-up process under Section 86, ensuring assets are liquidated and distributed according to statutory priority under the supervision of a Liquidator

pp. 39-40