Central Registrar must proactively wind up Multi-State Cooperative Societies to enforce non-compliant Ombudsman orders and protect depositors.

The Petitioners, primarily retired or serving employees of Steel Authority of India (SAIL), are members of the SAIL Employees Co-operative Credit Society Ltd. (Respondent Society), a Multi-State Co-operative Society registered under the MSCS Act, 2002.

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

Many Petitioners obtained favorable orders from the Co-operative Ombudsman under Section 85A of the MSCS Act, directing repayment with interest, but the Society failed to comply.

Inquiries by the Institute of Public Auditors of India (IPAI) and a subsequent forensic audit revealed severe financial mismanagement, erosion of net worth with a deficit of approximately ₹365 crores, and illegal diversion of funds into a private trust and unauthorized market investments.

Simultaneously, the Directorate of Economic Offences, West Bengal, initiated criminal proceedings and froze the Society's bank accounts.

Section 85A of the Multi-State Co-operative Societies Act, 2002 (as amended in 2023), which establishes the Co-operative Ombudsman to adjudicate member complaints regarding deposits and mandates society compliance within one month.

Section 86 regarding the Central Registrar’s power to direct winding up following an inquiry, Section 89 regarding the appointment of a Liquidator, and Section 90 regarding the Liquidator’s powers.

Rule 29 of the Multi-State Co-operative Societies Rules, 2002, which prescribes the priority of claims during liquidation, placing pro-rata repayment of deposits in the second-highest priority.

Precedent in Writers & Publishers (P) Ltd. v. Super Bazar Official Liquidator (2021), which affirms that the Liquidator must follow the statutory order of priorities to ensure fair distribution of assets.

The Court observed a significant legislative lacuna: while Section 85A makes Ombudsman orders binding on Societies, the Act lacks a specific enforcement mechanism or penal consequences for non-compliance, rendering such orders "paper orders".

Examining the IPAI and forensic audit reports, the Court found that the Society’s net worth was eroded due to fraudulent transactions and illegal investments (e.g., equity and mutual funds prohibited under Section 64).

The Court reasoned that since the Central Registrar had already issued a show-cause notice for winding up due to financial mismanagement and the Society had failed to respond, the statutory threshold for winding up under Section 86 was met.

Applying the priority list under Rule 29, the Court determined that the Petitioners (depositors) hold a high priority in the realization of assets (behind only outside liabilities), and because the Society’s management had seized to function in accordance with cooperative principles, judicial intervention was necessary to secure the remaining assets.

The Central Registrar must pass a winding-up order under Section 86 and appoint a Liquidator by June 15, 2026; the Liquidator must take charge of all assets and transfer funds to a new account in a nationalized bank by July 15, 2026; the Liquidator is directed to settle the claims of the Petitioners and similarly placed depositors by October 15, 2026.

These directions do not halt ongoing criminal proceedings by the Directorate of Economic Offences, West Bengal. The petitions were disposed of.