IBC Applies To Multi-State Cooperative Societies Despite MSCS Act Excluding Companies Act: NCLAT

The National Company Law Appellate Tribunal (NCLAT) recently held that proceedings under the Insolvency and Bankruptcy Code, 2016, can be maintained against a multi-state cooperative society.

It said the jurisdiction of the insolvency tribunal cannot be excluded by relying on the Multi-State Cooperative Societies Act, 2002, which excludes the applicability of the Companies Act, 2013.

The ruling came while the tribunal upheld a direction requiring Mehsana Urban Co-Operative Bank Ltd to refund 56 lakh to Swastik Ceracon Limited in a dispute arising out of insolvency resolution proceedings.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra said that the exclusion of the Companies Act under the 2002 law does not take cooperative societies outside the scope of the insolvency law.

The tribunal observed, “Section 121 of the Multi-State Cooperative Societies Act, 2002, which excludes the applicability of the Companies Act 2013, on Multistate Cooperative Societies cannot be read to mean that provisions of IBC are not applicable with respect to Multistate Cooperative Societies.”

Swastik Ceracon Limited entered the corporate insolvency resolution process in January 2019. Mehsana Urban Co-Operative Bank filed a claim of about 10.43 crore, which was admitted. Under the resolution plan approved in June 2022, the bank was to receive more than 5 crore.

After the successful resolution, the applicant took control and discovered that the bank had adjusted dividend amounts and the value of shares belonging to the corporate debtor. These adjustments were made during the insolvency period and even after approval of the resolution plan.

The tribunal at Ahmedabad held that the adjustments violated the moratorium. It directed the bank to refund 56 lakh with 10 per cent interest from the dates of adjustment. The bank then filed the appeal.

The bank argued that the insolvency tribunal had no jurisdiction to decide the dispute. It relied on Section 121 of the Multi-State Cooperative Societies Act to contend that the Companies Act does not apply to multi-state cooperative societies, and therefore a tribunal constituted under the Companies Act could not pass orders against it.

The bank also submitted that the dispute should have been decided under the mechanism provided in the 2002 Act. It further argued that shares of the cooperative bank could not be treated as assets of the corporate debtor. Swastik Ceracon opposed the appeal. It pointed out that the bank had itself filed a claim in the insolvency proceedings and received payment under the resolution plan. It argued that the bank could not later question the tribunal's jurisdiction.

It was also submitted that the Code has an overriding effect and that no dividend could have been adjusted after the moratorium came into force.

Rejecting the objections, the appellate tribunal said the insolvency law is a complete code and prevails over inconsistent provisions in other statutes.

It noted that the definition of “person” under the Code includes any entity created under a statute, which covers multi-state cooperative societies. The bench also recorded that the bank had participated in the insolvency process as a financial creditor and accepted payment under the resolution plan.

It observed, "Multistate Cooperative Societies Act, 2002, is also included within definition of person and covered by definition 3(23)(g). We, thus are of the opinion that Multi-State Cooperative Societies are not beyond the fold of IBC and submission of the appellant that Tribunal constituted under the provisions of the Companies Act that is NCLT cannot have any jurisdiction by virtue of Section 121 of the Multi-State Cooperative Societies Act, 2002, is fallacious."

It added, “More so, as noted above the appellant himself having filed the claim which claim was admitted and he has received the substantial amount under the resolution plan, appellant cannot be heard to contend that NCLT has no jurisdiction.”

The tribunal further held that the insolvency tribunal has jurisdiction to decide questions arising out of the resolution process. It said the adjustment of the dividend during the moratorium was not permissible because the shares formed part of the assets of the corporate debtor. However, the appellate tribunal modified the earlier order on the limited issue of interest.

It held that interest at 10 per cent on the refund of 56 lakh would run only from March 4, 2025, the date on which the application seeking refund was filed, and not from the earlier dates of adjustment. The appeal was allowed to that extent, while the rest of the order was upheld.