Investments Of Multi State Co-Operative Societies Must Align With Society's Own Business As Per Bye-Laws: Supreme Court

The Supreme Court has held that a multi-state co-operative society can invest in another company, including as a resolution applicant under the Insolvency and Bankruptcy Code, 2016, only if the target company is either its subsidiary or engaged in the “same line of business”.A bench of Justice JB Pardiwala and Justice KV Viswanathan clarified that Section 64 of the Multi-State Co-operative Societies Act, 2002, which governs how such societies can invest their funds, restricts investments to specific categories and requires that any investment in another institution must align with the society's own line of business as defined in its bye-laws. “it becomes evident that the expression “any other institution in the same line of business” under Section 64(d) is not to be construed in an expansive manner. It requires that, before deploying its funds, an MSCS must satisfy a threshold condition that the proposed investment aligns with its own line of business as reflected in its bye-laws. This requirement keeps a check on the manner in which funds of members of MSCS are being utilised and is intended to prevent diversion into activities that are unrelated or only remotely connected to the core business that an MSCS is entitled to do as per its bye-laws. Consequently, the determination of eligibility under Section 64(d) must involve an examination of the objects and functions contained in the bye-laws of the MSCS and a comparison thereof with the business activities of the target institution, so as to ascertain whether there exists a predominant or substantial sameness between the two”, the Court observed.The Court was dealing with a case arising out of the corporate insolvency resolution process of Morarji Textiles Ltd, where M/s Nirmal Ujjwal Credit Co-operative Society Ltd had submitted a resolution plan but was declared ineligible.The resolution professional had held that the plan was in contravention of Section 30(2)(e) of the IBC, which requires that a resolution plan must comply with all applicable laws. The objection was based on Section 64 of the Act of 2002, which governs how such societies can invest their funds. Section 64 allows a co-operative society to invest in specified instruments and, under clause (d), permits investment in the shares, securities or assets of a subsidiary institution or “any other institution in the same line of business”.The National Company Law Tribunal held that the appellant was not eligible to submit a resolution plan as its bye-laws did not permit it to invest in the corporate debtor. It found that the corporate debtor was neither a subsidiary of the appellant nor in the same line of business. The National Company Law Appellate Tribunal upheld this view observing that the appellant's activities were largely confined to agro-based processing and financial services, while the corporate debtor was engaged in manufacturing man-made fibre and viscose-based textiles.Before the Supreme Court, the appellant argued that it was entitled to submit a resolution plan as its bye-laws permitted it to engage in processing activities, including in the textile sector. They pointed to its textile unit “Nirmal Textile” and argued that both entities were in the textile business.The Court observed that the phrase “same line of business” was introduced in Section 64(d) through a 2023 amendment to restrict misuse of an earlier open-ended provision that allowed investment in “any other institution”. It noted that the change was meant to prevent diversion of members' funds into unrelated activities and ensure financial discipline. While the phrase is not defined in the Act, the Court relied on parliamentary discussions to construe its meaning. The Court observed, “In light of the deliberations of the JPC, it is clear that the determination of whether an institution operates in the same line of business as an MSCS must be made with reference to its bye laws, which constitute the decisive charter document in this regard.”The Court held that the expression requires a substantial or predominant sameness in business activities, and that this must be determined with reference to the society's bye-laws, which define its objects and permissible activities.The Court also referred to the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021, wherein the determination of the question whether two entities are in the same line of business is assessed on the basis of their principal or predominant economic activities, including classification under the National Industrial Classification (NIC) Code.“This indicates that the expression “same line of business” refers to a substantive sameness or close nexus in core business activities, and not a remote or incidental connection. However, at this juncture, it is important to note that such guidance to SEBI Regulation is only illustrative. In the present context, the determination must ultimately be made with reference to the objects and...

Investments Of Multi State Co-Operative Societies Must Align With Society's Own Business As Per Bye-Laws: Supreme Court

Amisha Shrivastava

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Amisha Shrivastava

Investments Of Multi State Co-Operative Societies Must Align With Society's Own Business As Per Bye-Laws: Supreme Court

Amisha Shrivastava

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Amisha Shrivastava

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