Can a co-operative society act as resolution applicant under IBC? Supreme Court answers

There is no blanket prohibition under the Multi-State Co-operative Societies Act, 2002 (MSCS Act) on co-operative societies acting as resolution applicants under the Insolvency and Bankruptcy Code, the Supreme Court held on Thursday [Nirmal Ujjwal Credit Co-operative Society Vs Ravi Sethia].

A Bench of Justices JB Pardiwala and KV Viswanathan clarified that while co-operative societies are not barred from participating in the corporate insolvency resolution process (CIRP) as resolution applicants, their eligibility is conditional upon compliance with statutory restrictions governing investment of funds.

"Section 64(d) of the 2002 Act permits an MSCS to invest or deposit its funds in two distinct categories of institutions: (a) a subsidiary institution, and (b) any other institution in the same line of business," the Court held.

The case arose from the corporate insolvency resolution process of Morarji Textiles Ltd. with Nirmal Ujjwal Credit Co-operative Society Ltd. having submitted a resolution plan. The resolution professional declared the society ineligible on the ground that its bye-laws did not permit such investment and that it was not in the same line of business as the corporate debtor.

The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) upheld this view. The appeal before the Supreme Court was later withdrawn, following which the Court proceeded to clarify the legal position without deciding on the merits of the dispute.

The Court explained that the IBC framework itself does not exclude co-operative societies from acting as resolution applicants. However, any such participation must satisfy Section 30(2)(e) of the IBC which mandates that a resolution plan must not contravene any law in force.

In this context, the Court underscored that the MSCS Act governs how a multi-state co-operative society can deploy its funds, including when it seeks to acquire a corporate debtor through a resolution plan.

Referring to Section 64(d) of the MSCS Act, the Bench noted that such societies may invest only in a subsidiary institution or in an entity engaged in the “same line of business”.

This requirement operates as a substantive restriction when a co-operative society seeks to participate in the corporate insolvency resolution process, the Court said.

The Court further explained that the phrase “same line of business” was introduced through the 2023 amendment to the MSCS Act to curb misuse of funds and prevent speculative investments by co-operative societies.

It also emphasised that the line of business of a co-operative society is determined by its bye-laws, and any investment must align with those governing documents.

Accordingly, the Court clarified that while co-operative societies may participate in insolvency resolution under the IBC, their eligibility as resolution applicants is conditional upon compliance with the MSCS Act and their own bye-laws.

Nirmal Ujjwal Credit Co-operative Society was represented by Senior Advocates Mukul Rohatgi and Rajiv Shakdher and advocates Amit Pai, Honey Satpal, R Prashant Reddy, Pankhuri Bhardwaj, Aniruth G Purusothaman, Abhiyduaya Vats and Keshav Sehgal.

Ravi Sethia was represented by Senior Advocate Gopal Jain with advocates Rajesh Kumar Gautam, Anant Gautam, Deepanjal Chaudhary, Rishi Chauhan, Likivi K Jhakalu and Azal Aekram.

Shriniwas Spintex Industries Pvt Ltd was represented by Senior Advocate Neeraj Kishan Kaul along with advocates Himanshu Satija, Jatin Kumar, Neha Mehta Satija, Raghav, Harsh Saxena, Shevaaz Khan and Anshul Rao.

Committee of Creditors was represented by Senior Advocate Navin Pahwa along with advocates Rajesh J, Dhrupad Vaghani, Yashwardhan Agarwal, Guruprasad Naik, Md Arsalan Ahmed, Gajendra Singh Negi and Dcosta Ivo Manuel Simon.

Central Registrar of Cooperative Societies was represented by Additional Solicitor General Aishwarya Bhati and Advocates Siddharth Dharmadhikari, Aastha Singh, Mayank Pandey, Rajat Nair, Santosh Ramdurg and Shreekant Neelappa Terdal.

[Read Judgment]