Court Orders Winding Up of Multi-State Cooperative Society for Non-Compliance with Ombudsman Orders regarding Deposit Refunds

In brief

The question

1. Whether there exists a statutory mechanism under the MSCS Act to enforce orders passed by the Cooperative Ombudsman in cases of non-compliance by a Society

The court held

The Court held that the interests of the depositors are paramount and must be secured through the winding-up process

It also directed

(i) The Central Registrar must pass a winding-up order by June 15, 2026, and appoint a Liquidator; (ii) The Liquidator is directed to take charge of all assets, including the hospital and holiday homes; (iii) All Society funds must be transferred to a new account in a nationalized bank by July 15, 2026; (iv) The Liquidator must endeavor to pay the claims of the Petitioners (especially those with Ombudsman orders) by October 15, 2026; (v) Criminal proceedings initiated by the Economic Offences Wing shall proceed independently of these directions

01Facts

The petitioners are retired or serving employees of Steel Authority of India (SAIL) who deposited life savings into the Steel Authority of India Limited Employees Co-operative Credit Society Limited ("Respondent Society"), registered under the Multi-State Cooperative Societies (MSCS) Act, 2002

p. 8

Since 2024, the Society failed to release fixed deposits to members despite several petitioners obtaining favorable orders from the Cooperative Ombudsman

p. 9

The Ombudsman had directed the Society to repay dues with interest within 15 days, but these orders remained un-complied with

pp. 10-11

Inspections and inquiries conducted by the Central Registrar and the Institute of Public Auditors of India (IPAI) revealed that the Society's net worth was severely eroded, with a deficit of approximately ₹365 crores due to financial mismanagement and illegal diversion of funds into a hospital trust and market-linked investments

p. 17, 19, 26

Consequently, the Directorate of Economic Offences, West Bengal, froze the Society's bank accounts

p. 29

02Issues

i.1. Whether there exists a statutory mechanism under the MSCS Act to enforce orders passed by the Cooperative Ombudsman in cases of non-compliance by a Society

pp. 13-14

ii.2. Whether the financial condition and mismanagement of the Respondent Society warrant winding up proceedings and the appointment of a Liquidator to secure members' deposits

pp. 36-37

03Law Applied

The court primarily applied Section 85A of the MSCS Act, 2002 (as amended in 2023), which establishes the Cooperative Ombudsman for grievance redressal regarding deposits but lacks specific enforcement provisions

p. 33

It relied on Sections 78, 86, 89, and 90 of the MSCS Act regarding inquiry, winding up, and the powers of the Liquidator

p. 18, 38

The court applied Rule 29 of the MSCS Rules, 2002, which establishes the priority of claims during liquidation, placing the repayment of members' deposits as a high priority

p. 40

The court also cited the precedent in Writers & Publishers (P) Ltd. v. Super Bazar Official Liquidator (2021) 13 SCC 279, which clarified the statutory scheme for winding up and the Liquidator's duty to determine priorities rateably

pp. 37-40

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 significant legislative lacuna: while Section 85A makes Ombudsman orders binding on Societies, the Act provides no mechanism for members to seek enforcement or penalties for non-compliance, rendering such orders "mere paper orders"

p. 35

In applying the law to the facts, the Court noted that the forensic audit confirmed gross financial defalcation, including unauthorized investments prohibited under Section 64 of the Act

pp. 25-26

Because the Society's liabilities overshadowed its assets and it had "ceased to function in accordance with cooperative principles," the Court found that the only viable path to protect the senior citizen petitioners was to invoke the Central Registrar’s power of winding up under Section 86

pp. 36-37

The Court determined that a Liquidator was necessary to consolidate assets currently scattered across various investments and bank accounts to satisfy claims in the order of priority mandated by Rule 29

pp. 40-41