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2026 (4) TMI 704
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....rasad Naik, Adv., Mr. Md Arsalan Ahmed, Adv., Mr. Gajendra Singh Negi, Adv., Mr. Dcosta Ivo Manuel Simon, AOR, Mr. Siddharth Dharmadhikari, Adv., Aastha Singh, Adv., Mr. Mayank Pandey, Adv., Mr. Rajat Nair, Adv., Mr. Santosh Ramdurg, Adv., Mr. Shreekant Neelappa Terdal, AOR Ms. Aishwarya Bhati, A.S.G. JUDGMENT PER J.B. PARDIWALA, J.: For the convenience of exposition, this judgment is divided into the following parts:- INDEX A. FACTUAL MATRIX ................................................................................ 2 B. SUBMISSIONS ON BEHALF OF THE APPELLANT ......................... 9 C. SUBMISSIONS ON BEHALF OF THE RESPONDENTS ................. 11 D. ANALYSIS .............................................................................................. 15 (I) Meaning and scope of the expression "any other institution in the same line of business". ............................................................. 15 (II) Applicability of the standard of "same line of business" to the facts of the present case. .......................................................... 21 E. CONCLUSION ....................
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.... the 2002 Act with a view to insert certain qualifying terms in Clause (d) therein. The amended Section 64 provided in Clause (d) that a Multi-State Co-operative Society ("MSCS") may invest or deposit its funds, among other things, in the shares, securities, or assets of a subsidiary institution or any other institution in the same line of business as the MSCS. The amended Section 64(d) of the 2002 Act reads as under: "64. Investment of funds.- A multi-State co-operative society may invest or deposit its funds - xxx xxx xxx (d) in the shares, securities or assets of a subsidiary institution or any other institution [in the same line of business as the multi-State co-operative society] or" (Emphasis Supplied) 6. Pursuant to the above, the appellant issued a notice dated 01.09.2023 for conducting the Annual General Meeting (AGM) with an agenda to amend its bye-laws. Accordingly, an AGM was conducted on 24.09.2023 proposing amendments to the various clauses of its bye-laws. Among the amended clauses, Clause 52 was also amended to include in its Clause (iv) the verbatim provision of amended Section 64(d) of the 2002 Act as extracted above. Propose....
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.... Bankruptcy Code, 2016 ("IBC"), the NCLT appointed respondent no. 1 as the IRP/RP. 9. On 01.05.2024, the respondent no. 1 - RP issued an invitation seeking expression of interests ("EOI") under Section 25(2)(h) of the IBC inter alia, from various prospective resolution applicants ("PRA") by the end date 12.06.2024. The last date of submission of the resolution plan was set as 19.07.2024. 10. Accordingly, the appellant, after receiving the resolution to bid in a general meeting on 23.09.2024, submitted its EOI on 18.05.2024. Thereafter, the respondent no. 1 - RP on 23.06.2024 circulated a provisional list of PRAs to the Committee of Creditors ("COC"), which included the appellant. On 25.06.2024, the respondent no. 1 - RP sought the constitutional documents and other documents of the appellant in accordance with Regulation 36A(9) of the IBBI (CIRP) Regulations, 2016. On 27.06.2024, the appellant submitted all required documents, including the bye-laws. The appellant further clarified the reason for investing in the corporate debtor, specifically mentioning the details of its cotton ginning, pressing, and spinning mill. The respondent no. 1 - RP then circulated a final list of P....
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....e NCLT found that the appellant is neither a subsidiary institution of the corporate debtor nor in the same line of business as the corporate debtor. 14. Thereafter, in order to challenge the aforesaid ruling of NCLT, the appellant filed Company Appeal (AT) No. 790 of 2025 before NCLAT. The NCLAT, after hearing the parties, kept the matter reserved for judgment. The appellant, at this juncture, upon knowing that the certificate of registration of the amendment of bye-laws was not placed before the NCLT, sought to place the same before the NCLAT on 21.07.2025 by e-filing an IA with e-filing no. 9910138/06622/2025 with a request to reopen the hearing. However, on 22.07.2025, when the appellant mentioned the matter, the request for reopening the hearing was declined by the NCLAT. 15. Finally, the NCLAT vide the impugned judgment and order dismissed the appeal of the appellant inter alia holding that the appellant was not eligible to submit a resolution plan due to the restriction under Section 64(d) of the 2002 Act; the limited objective of the appellant's production in "agro-product"; and the bye-laws were not amended on the date of submission of the resolution plan. The releva....
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....discussions." (Emphasis Supplied) 16. In such circumstances referred to above, the appellant is here before us with the present appeal. B. SUBMISSIONS ON BEHALF OF THE APPELLANT 17. Mr. Mukul Rohatgi and Mr. Rajiv Shakdher, the learned senior counsel appearing for the appellant, submitted that the appellant is not barred from submitting a resolution plan or from investing in the corporate debtor. They argued that, as per the object clause in the bye-laws, the appellant is entitled to purchase, produce, procure, and distribute the "agro-products" for the processing of the product and byproduct. It also proposes to make available to its members the various modern techniques used in the processing of agro-products and other activities in the processing sector. 18. The learned counsel argued that the appellant had carried out certain amendments to its bye-laws, particularly to Clause 52, as mentioned above, to include the investment in the shares, securities, assets of any subsidiary institution or any other institution in the same line of business as the appellant. It is argued that the sole purpose of the amendment was to bring the bye-laws of the appellant in co....
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....Act, the appellant cannot be said to be not in the same line of business as the corporate debtor. C. SUBMISSIONS ON BEHALF OF THE RESPONDENTS 21. Mr. Navin Pahwa, the learned senior counsel appearing for the respondent no. 1 - RP, submitted that the resolution plan submitted by the appellant did not meet the requirement of Section 32(2)(e) of IBC since the investments made by an MSCS are governed by Section 64 of the 2002 Act, according to which an MSCS can only invest in share securities or assets of: (i) a subsidiary institution, or (ii) any other institution in the same line of business He submitted that prior to investing its resources, the appellant must demonstrate that the institution it is investing in is either its subsidiary or that it is "in the same line of business". 22. In the aforesaid context, the learned senior counsel made a twofold argument: (i) that the corporate debtor is not an existing subsidiary institution of the appellant and (ii) that the corporate debtor is not in the same line of business as the appellant. While dealing with the first argument, the learned counsel submitted that the corporate debtor is admitt....
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....ominant business activity is in finance. The learned counsel submitted that even the textile unit of the appellant, namely, Nirmal Textile, is limited only to the processing of agro-products, and not industrial manufacturing of the same. 26. The learned counsel further submitted that the appellant's main business is to render banking and financial services to its members. Its agro-processing activity is incidental and carried out through a small internal vertical called Nirmal Textiles. The learned counsel also submitted that on one hand the appellant's business is agro based i.e., procured from agricultural sources, on the other hand, the corporate debtor's business is industrial manufacturing of viscose/man-made fibre which is chemically processed synthetic product. As per the learned counsel, this is entirely different in nature, scale, technology, and regulatory environment as compared to agro-processing, as is being undertaken by the appellant through its internal vertical, Nirmal Textile. He contended that the corporate debtor's activities involve man-made fibres and processing such fibres into fabrics, which processes are not agrobased but industrial manufacturing of synt....
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....e., an MSCS that is giving credit to its own members. D. ANALYSIS (I) Meaning and scope of the expression "any other institution in the same line of business". 30. Section 30 of the IBC deals with the submission of the resolution plan. As per Section 30(2)(e), the RP is required to confirm that each resolution plan inter alia does not contravene any provisions of the law for the time being in force. Such a law, for the time being in force in the present case, is Section 64 of the 2002 Act, which deals with the investment of funds by an MSCS and certain restrictions therein. As per Section 64(d), an MSCS may invest or deposit its funds inter alia in shares, securities, or assets of a subsidiary institution or "any other institution in the same line of business as the MSCS". The relevant extract from Section 30 of the IBC and Section 64 of the 2002 Act is as under: "IBC 2016 30. Submission of resolution plan. - (1) A resolution applicant may submit a resolution plan [along with an affidavit stating that he is eligible under section 29A] to the resolution professional prepared on the basis of the information memorandum. (2) The resolution profession....
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....ture. The introduction of restrictions, including the phrase "same line of business" in Section 64(d), formed part of a larger legislative attempt to curb the misuse of society's funds, prevent risky investments, and bring about overall financial discipline in the functioning of MSCSs. The relevant extract from the JPC report dated 15.03.2023 is as under: "In the existing MSCS Act, 2002, Section 64 (f) provides that an MSCS may invest or deposit its funds 'in such other modes as may be provided in the bye-laws'. This leaves scope for investment into dubious entities & fraudulent investment. In the amendment bill, clause 25 (section 64) is being proposed which will substitute in Section 64(f) the words "in such other mode as may be provided in the byelaws" with "in such other manner as may be determined by Central Govt." This will prevent misuse and fraudulent investments. Since the future emerging instruments /avenues for investments may vary from time to time, flexibility is required for the Central Government to determine the manner in which such investments can be made; keeping the overall interest of Cooperatives in mind. The phrase 'any other institution' in 64(d) is ....
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....ended and had been misused by some societies for making dubious investments in any other institution; (ii) This had to be ensured by limiting the investments to institutions falling within the line of business as reflected in the bye-laws of the MSCS; (iii) While at the same time preventing diversion of funds into unrelated investments and securing the interest and safety of deposits of the members. (iv) However, an MSCS was still empowered to frame or amend its bye-laws democratically and autonomously to decide its line of business. 36. In light of the deliberations of the JPC, it is clear 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. It is pertinent to note that every MSCS is required to frame its bye-laws in accordance with the provisions of the 2002 Act and the rules made thereunder, particularly Section 10(2), which, inter alia, provides for the inclusion of an object clause in the bye-laws. Further, the 2002 Act also empowers an MSCS under Section 11 to amend its bye-laws, including its obj....
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....o the facts of the present case, it is imperative to first set out the objects and functions as stated in the bye-laws of the appellant, since the determination of "line of business" must necessarily flow from the same. Clause 5 of the bye-laws of the appellant deals with the objects and functions, which reads as under: "5. OBJECTIVES AND FUNCTIONS: The following are the objectives & functions of the society: a. To encourage the members to thrifty and abide by the cooperative principles. b. To Accept Deposit from Members and Nominal Members and advancing Loans to Members. c. To own land or building for the use of the society with prior permission of Central Registrar of the society. d. To arrange for the recovery of the loans by disposal of the movable or immovable property that has been pledged towards the society against loans receivables. e. To manage the properties of the society, maintain it and to run it smoothly. f. To serve the interest of the poor and middle class of people more than one state by admitting as members. g. To solve the Housing Problems of the Members, Employees and the Agents of....
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.... the second limb of Section 64(d), namely, whether the corporate debtor is in the same line of business as the appellant, is required to be examined. 41. For this purpose, the line of business of the appellant must be understood from the objects as stated in its bye-laws as a whole. Clauses 5(a) to 5(r) show that the appellant is primarily a cooperative society engaged in accepting deposits, advancing loans, and providing various facilities to its members, such as housing, healthcare, education, and other welfare activities. These clauses indicate that the main business activity that the appellant is entitled to carry out as per the bye-laws is that of a financial service provider and member-oriented co-operative, and not a standalone industrial manufacturing entity. 42. A careful reading of the relevant clauses of objects and functions further clarifies this position. Clause 5(b) provides for accepting deposits from members and advancing loans, forming the core of its financial activity. Clause 5(d) enables recovery of such loans through the disposal of pledged assets, which is incidental to its lending function. Clause 5(g) relates to solving housing problems of members thr....
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....of the nature of the entity, being confined to other co-operative societies only and not companies like corporate debtors. 45. In contrast, the corporate debtor is engaged in the business of manmade fibre/viscose-based textiles, which involves synthetic or semi-synthetic raw materials. This is distinct from agro-based processing, which the appellant is permitted to undertake under the bye-laws. Although both may broadly fall under the textile sector, yet the actual nature of their activities is different. One is agro-product processing, while the other is synthetic or semisynthetic fibre manufacturing. Under the second limb of Section 64(d), the requirement is for predominantly or substantially the same or closely related business activities. Such sameness is not present in the present case. Thus, it can be said that the processing activity contemplated in Clause 5(s) is integrally linked to agro-products and not to processing in general. 46. Therefore, applying the standard of the same line of business, it cannot be said that the appellant and the corporate debtor are in the same line of business. As far as the reasoning of the NCLAT on the aforesaid aspect is concerned, we ....
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....e same line of business. This is because 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. In the absence of any corresponding amendment to the object clause so as to bring the appellant's permissible activities in alignment with those of the corporate debtor, the requirement of being in the same line of business cannot be said to be satisfied merely by adopting the statutory language of Section 64(d). E. CONCLUSION 50. In view of the foregoing discussion and considering the totality of the circumstances, the inevitable conclusion on the position of law is that Section 64(d) of the 2002 Act permits an MSCS to invest or deposit its funds in two distinct categories of institutions: (a) a subsidiary institution, and (b) any other institution in the same line of business. As per the JPC Report dated 15.03.2023, the second limb, i.e., "any other institution in the same l....