NCLAT Holds IBC Applies to Multi-State Cooperative Societies, Rejects Jurisdiction Challenge by Co-Op Bank

NCLAT Holds IBC Applies to Multi-State Cooperative Societies, Rejects Jurisdiction Challenge by Co-Op Bank

Introduction

The National Company Law Appellate Tribunal (NCLAT) has held that the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) apply to multi-state cooperative societies, and their exclusion from the Companies Act, 2013 under the Multi-State Cooperative Societies Act, 2002 does not bar insolvency proceedings before the NCLT. A Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) upheld the jurisdiction of the insolvency tribunal and rejected the contention that cooperative societies fall outside the scope of the IBC.

Factual Background

The dispute arose during the corporate insolvency resolution process (CIRP) of Swastik Ceracon Limited, which commenced in January 2019. Mehsana Urban Co-Operative Bank Ltd. filed a claim of approximately ₹10.43 crore, which was admitted. Under the approved resolution plan in June 2022, the bank was entitled to receive over ₹5 crore. Subsequently, after the resolution applicant took control, it was discovered that the bank had adjusted dividend amounts and share values belonging to the corporate debtor during the moratorium period and even after approval of the resolution plan. The adjudicating authority held such adjustments to be in violation of the moratorium and directed the bank to refund ₹56 lakh with interest.

Procedural Background

The bank challenged the NCLT’s order before the NCLAT, contending that the insolvency tribunal lacked jurisdiction over a multi-state cooperative society. It relied on Section 121 of the Multi-State Cooperative Societies Act, 2002, which excludes the applicability of the Companies Act, 2013, to such entities. The NCLAT examined whether this exclusion also implied that cooperative societies were outside the ambit of the IBC.

Issues

1. Whether insolvency proceedings under the IBC can be initiated against multi-state cooperative societies.

2. Whether exclusion of the Companies Act under the Multi-State Cooperative Societies Act, 2002 excludes the jurisdiction of the NCLT under the IBC.

3. Whether adjustments made by the bank during the moratorium period were legally permissible.

Contentions of the Parties

The appellant bank contended that since the Multi-State Cooperative Societies Act excludes the applicability of the Companies Act, the NCLT—being a tribunal constituted under the Companies Act—lacked jurisdiction to adjudicate disputes involving cooperative societies.

It further argued that the dispute ought to have been resolved under the mechanism provided in the 2002 Act and that shares of the cooperative bank could not be treated as assets of the corporate debtor.

Swastik Ceracon Limited opposed the appeal, arguing that the IBC has an overriding effect over other statutes and applies to all “persons” as defined under the Code, including statutory entities such as cooperative societies.

It also contended that the bank, having participated in the CIRP and accepted payments under the resolution plan, could not subsequently challenge the jurisdiction of the tribunal.

Reasoning and Analysis

The NCLAT held that the IBC is a complete code and has an overriding effect over inconsistent provisions in other laws. The Tribunal observed that the definition of “person” under Section 3(23) of the IBC includes entities established under statutes, which would encompass multi-state cooperative societies. It clarified that Section 121 of the Multi-State Cooperative Societies Act merely excludes the applicability of the Companies Act and cannot be interpreted to exclude the applicability of the IBC. The Tribunal further noted that the appellant bank had actively participated in the insolvency process by filing its claim and receiving payments under the resolution plan. Having done so, it could not subsequently challenge the jurisdiction of the NCLT.

On the issue of adjustments, the Tribunal held that any adjustment of dividends or share value during the moratorium period was impermissible, as such assets formed part of the corporate debtor’s estate and were protected under the moratorium provisions.

Decision

The NCLAT upheld the order directing Mehsana Urban Co-Operative Bank Ltd. to refund ₹56 lakh to Swastik Ceracon Limited. It held that insolvency proceedings under the IBC are maintainable against multi-state cooperative societies and that the NCLT has jurisdiction to adjudicate such matters. However, the Tribunal modified the order on the limited issue of interest, while affirming the substantive directions issued by the NCLT.