The Supreme Court has clarified that a Multi-State Co-operative Society (MSCS) cannot submit a resolution plan under the Insolvency and Bankruptcy Code, 2016, unless its investment in the corporate debtor aligns with the objects defined in its own bye-laws. This ruling establishes a strict doctrinal boundary between financial intermediation and industrial manufacturing under Section 64(d) of the Multi-State Cooperative Societies Act, 2002.
Background & Facts
The Dispute
The appellant, M/s Nirmal Ujjwal Credit Co-operative Society Ltd., is a multi-state cooperative society registered under the Multi-State Cooperative Societies Act, 2002. It primarily functions as a financial institution, accepting deposits from members and advancing loans. It also operates a small internal textile unit named "Nirmal Textile" engaged in agro-based processing. The corporate debtor, Morarji Textiles Ltd., is engaged in the manufacturing of man-made fibre/viscose - a chemically processed synthetic textile activity.
Key Facts
- The appellant’s bye-laws, as originally framed, permitted it to "purchase, produce, procure, distribute the agro-products for the processing of product and by-product" (Clause 5(s))
- The appellant’s core business activities under its bye-laws include accepting deposits, advancing loans, housing assistance, healthcare, education, and welfare services for members (Clauses 5(a) - 5(r))
- The appellant’s textile unit, Nirmal Textile, incurred a loss of Rs. 3.37 crore in FY 2023 - 24, while its financial services generated income of Rs. 194.27 crore
- The corporate debtor’s business falls under NIC codes 131/139/203 (synthetic textile manufacturing); the appellant’s textile unit falls under NIC 01632 (agro-processing); the society as a whole falls under NIC 649 (financial services)
- The appellant submitted a resolution plan of Rs. 169 crores on 27.08.2024 to acquire Morarji Textiles Ltd.
- The Resolution Professional (RP) rejected the plan on 10.02.2025, citing violation of Section 30(2)(e) of IBC due to ineligibility under Section 64(d) of the 2002 Act
Procedural History
- 09.02.2024: Corporate Insolvency Resolution Process (CIRP) initiated against Morarji Textiles Ltd. by NCLT
- 18.05.2024: Appellant submitted Expression of Interest (EOI)
- 02.07.2024: Appellant included in final list of Prospective Resolution Applicants (PRAs)
- 27.08.2024: Appellant submitted resolution plan of Rs. 169 crores
- 10.02.2025: RP declared appellant ineligible due to conflict with bye-laws and Section 64(d)
- 09.04.2025: NCLT dismissed Interlocutory Application No. 880 of 2025, upholding ineligibility
- 21.08.2025: NCLAT dismissed Company Appeal (AT)(Ins) No. 790 of 2025, affirming NCLT’s order
- 21.07.2025: Appellant attempted to file certificate of amendment to bye-laws before NCLAT; request denied on 22.07.2025
- 24.01.2024: Central Registrar approved amendment to Clause 52 of bye-laws incorporating Section 64(d) language
- 28.03.2025: Civil Appeal No. 11193 of 2025 filed in Supreme Court
The Parties' Positions
Appellant: Argued that its textile unit qualifies as "same line of business" as the corporate debtor, and that the amendment to Clause 52 (effective 24.01.2024) permits investment in any institution in the same line of business. It contended that both entities operate in the textile sector.
Respondents (RP, COC, Successful Applicant): Contended that the appellant’s core business is financial services, and its textile unit is merely an incidental agro-processing activity. The corporate debtor’s synthetic fibre manufacturing is chemically distinct, industrially scaled, and unrelated to agro-products. The amendment to Clause 52 did not alter the object clause (Clause 5) and thus could not expand the scope of permissible business.
Relief Sought
The appellant sought quashing of the NCLAT order dated 21.08.2025, declaration of eligibility to submit the resolution plan, and direction to the RP and COC to consider its plan under Section 30(2)(e) of IBC.
The Legal Issue
The central question was whether a Multi-State Co-operative Society can invest in a corporate debtor under Section 64(d) of the Multi-State Cooperative Societies Act, 2002, where the debtor’s business is synthetic textile manufacturing, and the society’s bye-laws only permit agro-product processing and financial services.
Arguments Presented
For the Appellant
The appellant relied on the amendment to Clause 52 of its bye-laws, which incorporated the exact language of Section 64(d) of the 2002 Act. It argued that "same line of business" should be interpreted broadly to include any entity in the textile sector, citing the commonality of end-products. It contended that the Central Registrar’s approval of the amendment validated its expanded investment capacity. It further argued that the object clause (Clause 5(s)) permits processing of agro-products, which includes cotton, and that textile manufacturing is a natural extension.
For the Respondent
The respondents argued that Section 64(d) imposes a restrictive standard to prevent misuse of cooperative funds. They emphasized that the appellant’s primary business is financial intermediation, with textile processing being a minor, loss-making ancillary activity. They relied on NIC codes to demonstrate that the corporate debtor’s synthetic fibre manufacturing (NIC 131/139/203) is categorically distinct from the appellant’s agro-processing (NIC 01632). They contended that Clause 5(s) permits only processing of agricultural inputs, not industrial manufacturing of synthetic fibres, and that the amendment to Clause 52 merely mirrored statutory language without altering the society’s core objects.
The Court's Analysis
The Court undertook a detailed examination of the legislative intent behind the 2023 amendment to Section 64(d) of the Multi-State Cooperative Societies Act, 2002. The Joint Parliamentary Committee (JPC) report dated 15.03.2023 was pivotal in this analysis. The JPC noted that the earlier provision permitting investment in "any other institution" had been misused for dubious and fraudulent investments. The introduction of the phrase "in the same line of business" was intended to impose discipline, ensure prudential investment, and safeguard members’ deposits.
"The phrase ‘any other institution’ in 64(d) is open-ended and has been misused by some societies for making dubious investment [sic]. The proposed amendment will help in preventing such kinds of investments."
The Court held that the expression "same line of business" must be interpreted with reference to the objects and functions contained in the MSCS’s bye-laws - the decisive charter document governing its permissible activities. The Court rejected the notion that revenue or profit/loss figures could determine the line of business, stating that such metrics are irrelevant to the legal inquiry.
The Court examined Clause 5 of the appellant’s bye-laws in its entirety. Clauses 5(a) to 5(r) collectively establish the society’s primary function as a financial and welfare-oriented cooperative - accepting deposits, advancing loans, providing housing, healthcare, education, and transport services. Clause 5(s), which permits "purchase, produce, procure, distribute the agro-products for the processing of product and by-product," is narrowly confined to agricultural inputs and allied processing. It does not authorize industrial manufacturing of synthetic fibres.
The Court distinguished between agro-processing and synthetic textile manufacturing. The former involves natural, biodegradable inputs (e.g., cotton); the latter involves chemically derived, petroleum-based raw materials (viscose). The NIC codes confirmed this distinction. The Court further held that the amendment to Clause 52 - which merely reproduced Section 64(d) - did not alter the object clause (Clause 5). Without a corresponding amendment to Clause 5 to include synthetic textile manufacturing, the appellant could not claim eligibility.
"The amendment to Clause 52 merely reproduces the language of Section 64(d) and governs the manner in which funds may be invested. It does not, in any manner, amend, alter or expand the objects and functions of the appellant as contained in Clause 5 of the bye-laws, which in substance determines the nature and scope of its business activities."
The Court also rejected the appellant’s attempt to introduce the certificate of amendment to its bye-laws at the appellate stage, noting that it was not placed before the NCLT or NCLAT despite multiple opportunities, and thus could not be considered under Order XLI Rule 27 of the CPC.
The Verdict
The appeal was withdrawn by the appellant. The Supreme Court dismissed the appeal as withdrawn, with no findings on merits. The Corporate Insolvency Resolution Process of Morarji Textiles Ltd. shall continue under the Insolvency and Bankruptcy Code, 2016. The Court directed the Resolution Professional to address the outstanding deposit of Rs. 36,57,338.85 by the Committee of Creditors with the Adjudicating Authority.
What This Means For Similar Cases
Bye-Laws Define the Legal Boundary for Investment
- Practitioners must examine the object clause (Clause 5) of an MSCS’s bye-laws - not merely its investment clause - to determine eligibility under Section 64(d)
- An amendment to the investment clause alone cannot expand the scope of permissible business if the object clause remains unchanged
- Any resolution plan by an MSCS must be evaluated against the society’s legally defined line of business, not commercial convenience
Industrial vs. Agro-Processing Is a Clear Legal Divide
- Agro-processing (e.g., ginning, pressing, spinning cotton) is distinct from synthetic fibre manufacturing (e.g., viscose, polyester)
- NIC codes, while not binding, provide an objective benchmark for distinguishing business lines
- A cooperative society’s incidental or loss-making unit does not redefine its core business for statutory purposes
Procedural Compliance Is Non-Negotiable
- Documents proving amendment to bye-laws must be filed at the earliest forum; failure to do so bars reliance at higher levels
- Applications for additional evidence under Order XLI Rule 27 CPC require strict compliance with conditions of discovery and prejudice
- Courts will not entertain belated submissions that could have been raised earlier, especially in time-sensitive CIRP proceedings
