Central Registrar Must Order Winding Up Where MSCS Ombudsman Orders Lack Enforcement Mechanism for Depositors.

The Petitioners, retired and serving employees of Steel Authority of India (SAIL), deposited substantial savings as Fixed Deposits in the Respondent No. 4 Society, a Multi-State Cooperative Credit Society.

Upon the Society’s failure to release funds for medical and personal emergencies, many Petitioners obtained favorable orders from the Cooperative Ombudsman under Section 85A of the Multi-State Cooperative Societies (MSCS) Act, 2002, directing repayment with interest.

Despite these orders, the Society remained in default, prompting writ petitions before the Delhi High Court for enforcement.

Interim inquiries by the Institute of Public Auditors of India (IPAI) and a forensic audit revealed severe financial mismanagement, erosion of net worth (deficit of approx. ₹365 crores), and illegal fund diversions to a private trust.

Simultaneously, the West Bengal Directorate of Economic Offences froze the Society’s bank accounts following multiple FIRs against its former management.

Section 85A of the MSCS Act, 2002, which provides for the appointment of an Ombudsman for grievance redressal and mandates that societies "shall be bound to comply" with its directions within one month.

Sections 86, 89, and 90 of the MSCS Act regarding the winding up of societies and the appointment and powers of a Liquidator.

Rule 29 of the MSCS Rules, 2002, which establishes the priority of claims, placing repayment of deposits to members second only to outside liabilities.

The precedent Writers & Publishers (P) Ltd. v. Super Bazar Official Liquidator (2021) 13 SCC 279, which clarifies the statutory scheme of liquidation and the binding nature of the order of priorities under the Rules.

The Court observed a critical legislative lacuna: while Section 85A mandates compliance with Ombudsman orders, the MSCS Act provides no mechanism for their enforcement, rendering them "paper orders".

The Court found that the Society’s leadership had blatantly ignored these statutory directions and breached fiduciary duties.

Based on the forensic audit and IPAI inquiry, the Court determined that the Society had "seized to function in accordance with Cooperative Principles," justifying the invocation of the Central Registrar’s winding-up powers under Section 86.

Applying Rule 29, the Court reasoned that the only viable method to return the Petitioners’ "hard-earned money" was to liquidate the Society’s substantial immovable assets (hospitals and holiday homes) and investments, thereby converting frozen assets into a fund managed by a Liquidator to satisfy claims according to statutory priority.

The Liquidator is ordered to take charge of all assets, including those disclosed in the Society's affidavit (valued at several hundred crores), and transfer all funds to a new nationalized bank account by July 15, 2026.

The Court held that claims of those with Ombudsman orders must be prioritized and settled by October 15, 2026.