Multi-State Co-op Societies Can Only Invest In Entities With Substantially Similar Core Business Under Bye-Laws: Supreme Court

"Expression “any other institution in the same line of business” under Section 64(d) requires a substantial or predominant, or closely related sameness in business activities, which must be determined with reference to the objects and functions contained in the bye-laws of an MSCS," Supreme Court of India, in a significant ruling, held that a Multi-State Co-operative Society (MSCS) can only invest in or acquire another institution under the Insolvency and Bankruptcy Code (IBC) if both entities share a substantial or predominant sameness in core business activities.

A bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan observed that the eligibility of an MSCS to submit a resolution plan depends strictly on its own bye-laws, noting that the statutory restriction prevents the diversion of members' funds into unrelated and risky investments.

M/S Nirmal Ujjwal Credit Co-Operative Society Ltd. submitted a resolution plan to acquire Morarji Textiles Ltd., a corporate debtor engaged in manufacturing man-made synthetic fibres. The Resolution Professional rejected the plan on the ground that the society was primarily a financial institution, making it ineligible under Section 30(2)(e) of the IBC read with Section 64(d) of the MSCS Act, 2002. Both the NCLT and NCLAT affirmed this ineligibility, prompting the society to approach the Supreme Court.

The primary question before the court was how to interpret the expression "any other institution in the same line of business" under Section 64(d) of the Multi-State Co-operative Societies Act, 2002. The court was also called upon to determine whether amending a general investment clause in the bye-laws, without altering the core object clause, expands an MSCS's permissible line of business.

Court Clarifies Law Despite Withdrawal

Although the appellant society sought to withdraw its appeal during the proceedings, the Supreme Court exercised its discretion to render an authoritative interpretation of the law. The bench noted that it was explaining the position of law governing the pivotal issue under Section 64(d) of the 2002 Act, having regard to the widespread importance of the question involved in the insolvency landscape.

Legislative Intent Curbs Risky Investments

Analyzing the 2023 amendment to Section 64(d) of the MSCS Act, the court relied heavily on the Joint Parliamentary Committee (JPC) report. The bench observed that the earlier provision allowing investments in "any other institution" was dangerously open-ended. The court noted that the introduction of the "same line of business" restriction formed part of a larger legislative attempt to curb the misuse of society’s funds, prevent risky investments, and bring about overall financial discipline.

Bye-Laws Are The Decisive Charter

The court laid down that the determination of an MSCS's business line cannot be made in a vacuum but must be rooted in its foundational documents. The bench held that every proposed investment must be tested against the society's specific objectives. The court emphatically stated that the determination of whether an institution operates in the same line of business as an MSCS must be made with reference to its byelaws, which constitute the decisive charter document in this regard.

Agro-Processing Is Not Industrial Manufacturing

Comparing the businesses of the appellant and the corporate debtor, the court found a stark mismatch. While the appellant’s bye-laws permitted the processing of agricultural products, the corporate debtor manufactured synthetic, man-made fibres. Rejecting the argument that both fell under the broad "textiles" umbrella, the bench observed that under the second limb of Section 64(d), the requirement is for predominantly or substantially the same or closely related business activities, which was absent in this case.

"We must clarify that the revenue earned or profit/loss incurred has no relevance in determining the standard of the same line of business, which necessarily has to be determined through the bye-laws of the MSCS only."

Revenue And Profit Figures Are Irrelevant

The Supreme Court corrected a specific reasoning adopted by the NCLAT, which had looked at the society's income from financial services versus the losses from its textile unit to conclude it was not predominantly a textile business. Discarding this financial test, the bench held that revenue metrics have absolutely no bearing on determining a company's line of business. The court ruled that the inquiry must be strictly confined to the objects and functions in the bye-laws of the MSCS.

Mere Word-Play In Bye-Laws Is Insufficient

The appellant argued that it had amended its bye-laws to verbatim include the statutory phrase "same line of business" in its investment clause, thereby curing any defect. The court firmly rejected this shortcut. The bench observed that merely reproducing the language of Section 64(d) governs the manner in which funds may be invested, but it does not expand the objects and functions of the appellant.

Core Object Clause Must Be Amended

Expanding on the amendment issue, the court held that an MSCS cannot bypass statutory restrictions through superficial drafting changes. The bench ruled that in the absence of any corresponding amendment to the object clause to align permissible activities with those of the corporate debtor, the requirement of being in the same line of business cannot be satisfied merely by adopting statutory language.

The Supreme Court ultimately allowed the appellant's application for withdrawal, dismissing the appeal as withdrawn. However, through its detailed exposition of the law, the court permanently settled the eligibility criteria for Multi-State Co-operative Societies acting as resolution applicants, directing that the corporate debtor's CIRP shall continue in accordance with the IBC.

Date of Decision: 09 April 2026