The Supreme Court of India has clarified important legal principles governing investments by multi-state cooperative societies (MSCS), while permitting withdrawal of the appeal in the case involving Nirmal Ujjawal Credit Co-operative Society Ltd. vs Ravi Sethia & Ors.
At the outset, the Court recorded that the appellant sought withdrawal of the appeal. While allowing the same, the Court stated that, given the importance of the issue, it would examine the matter only to explain the position of law, without returning any findings on the merits of the case.
The dispute centred around the interpretation of Section 64(d) of the Multi-State Cooperative Societies Act, 2002, which permits an MSCS to invest its funds in shares, securities, or assets of a subsidiary institution or “any other institution in the same line of business.”
The Court clarified that under Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016, a resolution plan must not contravene any law in force. Accordingly, compliance with Section 64 of the MSCS Act is mandatory when an MSCS seeks to invest or submit a resolution plan.
It held that before making any investment, a cooperative society must demonstrate that the target entity is either its subsidiary institution or is engaged in the “same line of business” as the society.
The Court noted that the expression “same line of business” is not defined under the Act. Referring to the legislative background and the Joint Parliamentary Committee deliberations, it observed that the phrase was introduced to address concerns over misuse of funds arising from the earlier open-ended provision allowing investment in “any other institution.”
The judgment records that the amendment aimed to restrict investments to entities within the business domain of the society, prevent diversion of funds into unrelated or risky ventures, and ensure financial discipline and protection of members’ deposits.
The Court further emphasized that the line of business of an MSCS is primarily determined by its bye-laws. Therefore, any investment must be consistent with the objects and activities permitted under the society’s bye-laws.
It also noted that while societies retain autonomy to frame or amend their bye-laws, such autonomy operates within the statutory framework, including the restrictions imposed under Section 64 of the MSCS Act.
While no final adjudication was made due to withdrawal of the appeal, the ruling provides authoritative guidance on the interpretation of investment provisions under the MSCS Act, particularly in their interplay with the IBC.