Co-ops Cannot Use Insolvency Process to Enter Unrelated Industries: Supreme Court Defines ‘Same Line of Business’ [Read Order]
The Supreme Court ruled that multi‑state cooperative societies cannot use insolvency proceedings to acquire companies in unrelated industries.
In a recent ruling, the Supreme Court has clarified the investment powers of multi‑state cooperative societies, holding that such entities cannot use the insolvency process to acquire companies operating in unrelated industries.
The Court interpreted the phrase “same line of business” under Section 64(d) of the Multi‑State Cooperative Societies Act, 2002, as requiring substantial similarity in core activities not merely broad industry overlap.
The case arose from an appeal against orders of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), which had declared a cooperative society ineligible to submit a resolution plan for a textile company undergoing insolvency proceedings.
The cooperative, registered under the 2002 Act, primarily operated as a credit society but also ran a small textile unit. After the 2023 amendment to Section 64(d), it modified its bye‑laws to permit investment in “any other institution in the same line of business.” It then sought to acquire a synthetic‑fibre manufacturer through the Insolvency and Bankruptcy Code (IBC) process.
Senior advocates for the petitioner, Nirmal Ujwal Credit Cooperative Society, contended that the society’s amended bye‑laws allowed investment in textile businesses, and its own textile unit placed it within the “same line of business.” Also, the IBC does not prohibit cooperative societies from acting as resolution applicants, provided their investments comply with Section 64 and their bye‑laws.
The phrase “same line of business” should be interpreted broadly to include similar sectors such as textile processing and manufacturing. They also relied on a note from the Central Registrar stating that the 2002 Act does not expressly bar cooperatives from participating in insolvency proceedings if their activities align with statutory and internal rules.
Counsel for the resolution professional and other respondents countered that the cooperative’s principal activity was financial services, not textile manufacturing. Its textile unit was agro‑based, dealing in cotton processing, while the corporate debtor produced synthetic viscose fibre—a chemically driven industrial process.
They stated that Section 64(d) restricts investments to subsidiaries or institutions in the same line of business, not merely related ones. Financial statements showed the cooperative’s textile operations were minor and loss‑making, reinforcing that its main business was credit and finance.Also, the Committee of Creditors (CoC), exercising commercial wisdom, rightly rejected the plan after obtaining independent legal opinions.
The bench led by Justice J.B. Pardiwala examined the legislative intent behind the 2023 amendment. The Joint Parliamentary Committee had introduced the “same line of business” qualifier to curb misuse of cooperative funds and ensure prudential discipline.
The Court observed that the term must be applied strictly, requiring demonstrable similarity in the nature, scale, and purpose of operations. Agro‑based cotton processing and synthetic fibre manufacturing differ fundamentally in technology, raw materials, and regulatory frameworks. Hence, the cooperative could not claim to be in the same line of business as the corporate debtor.
The Court also noted that while the appeal was withdrawn, it proceeded to clarify the law given its wider importance.
The Supreme Court held that Cooperative societies may invest only in subsidiaries or institutions engaged in substantially identical activities. Broad or incidental overlap does not satisfy the “same line of business” test. Insolvency resolution plans must comply with all applicable laws, including the MSCS Act.
Accordingly, the Court affirmed the principle that co‑ops cannot use the insolvency process to enter unrelated industries, setting a precedent for future cases under the IBC.
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