Central Registrar must proactively wind up Multi-State Cooperative Societies following persistent non-compliance with Cooperative Ombudsman directions.

The Petitioners, mostly retired or serving employees of the Steel Authority of India (SAIL), are members of the SAIL Employees Co-operative Credit Society Ltd. (Respondent Society), a Multi-State Cooperative Society registered under the MSCS Act.

The Petitioners deposited substantial sums in Fixed Deposits, which the Society failed to release upon maturity or request for closure.

Several Petitioners obtained favourable orders from the Cooperative Ombudsman directing repayment with interest, but these orders remained unimplemented.

Inquiries conducted by the Institute of Public Auditors of India (IPAI) and a court-ordered forensic audit revealed a net deficit of approximately ₹364.84 crores due to financial mismanagement and illegal diversions of funds into unauthorized trusts and market investments.

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

1. Whether there exists an effective statutory mechanism under the Multi-State Co-operative Societies Act, 2002 to enforce the orders passed by the Cooperative Ombudsman

2. Whether the financial condition and mismanagement of the Respondent Society warrant an order for winding up and liquidation to secure the interest of depositors

The Court primarily considered the Multi-State Co-operative Societies Act, 2002 (MSCS Act), specifically Section 85A, which governs the appointment and powers of the Cooperative Ombudsman to adjudicate member complaints.

Rule 29 of the MSCS Rules, 2002, which prescribes the priority of liabilities during liquidation, placing "pro rata repayment of loans and deposits of members" as the second highest priority.

Sections 86, 89, and 90 of the MSCS Act regarding the Central Registrar’s power to order winding up, appointment of a liquidator, and the powers of such liquidator.

Precedent from Writers & Publishers (P) Ltd. v. Super Bazar Official Liquidator (2021) was applied to underscore the mandatory nature of the priority of claims in winding-up proceedings.

The Court observed a critical legislative lacuna in Section 85A of the MSCS Act; while the Ombudsman’s directions are "binding" on the Society, the statute provides no enforcement mechanism for members nor penalties for non-compliance, rendering such orders mere "paper orders".

Applying the 'Rule of Law' to the facts, the Court found that the Society’s net worth was severely eroded due to "financial mismanagement, violation of statutory provisions, and fraudulent transactions" as evidenced by the IPAI and forensic audit reports.

Given that the Society had ceased to function on cooperative principles and its bank accounts were frozen by criminal investigating agencies, the Court reasoned that the only viable method to protect the senior citizens (petitioners) was to invoke the Central Registrar’s powers under Section 86 for winding up.

The Court emphasized that the liquidator must follow the priority of claims under Rule 29 to ensure members' deposits are repaid ahead of share capital.

It directed the Central Registrar to pass an order for winding up the Respondent Society and appoint a Liquidator by 15th June 2026. The Liquidator is ordered to take charge of all assets, transfer all funds to a new account in a nationalized bank by 15th July 2026, and endeavour to pay the petitioners’ claims by 15th October 2026. The petitions were disposed of with these specific reliefs granted.