Can Insolvency Proceedings Be Initiated Against Co-operative Societies?

Co-operative societies are a significant part of the financial landscape in many countries, including India. However, unlike traditional companies, co-operatives are governed by specialized laws, including the Co-operative Societies Act at both state and national levels. Insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) were initially not applicable to co-operative societies, leading to uncertainties regarding their treatment in case of financial distress.

Can Insolvency Proceedings Be Initiated Against Co-operative Societies?

Co-operative Societies Under IBC:

The Insolvency and Bankruptcy Code (IBC) does not explicitly include co-operative societies within its scope. The IBC primarily applies to companies, limited liability partnerships (LLPs), and individuals, but it does not specifically cater to co-operatives.

Co-operative societies are governed by the Co-operative Societies Act, which is a separate legal framework. As a result, insolvency proceedings cannot be initiated directly against a co-operative society under the IBC, unlike corporations that can be subject to the Corporate Insolvency Resolution Process (CIRP).

State-Specific Laws for Co-operative Societies:

Co-operative societies are primarily regulated by state-specific Co-operative Societies Acts and not the IBC. These laws deal with issues like financial distress, default in payments, or bankruptcy but do not provide a direct mechanism for initiating insolvency proceedings akin to CIRP under the IBC.

In case of financial failure, liquidation of co-operative societies typically follows the procedures laid down by the respective state laws. These laws may involve tribunal hearings, government-appointed liquidators, and other processes that differ from the IBC.

Challenges in Applying IBC to Co-operatives:

The IBC was designed primarily for commercial enterprises, while co-operative societies operate on mutual assistance principles. They often have different objectives, governance structures, and financial mechanisms, which makes the application of IBC challenging.

Co-operatives may not fit neatly into the corporate debtor category as defined under the IBC. Many co-operatives are formed to serve the interests of their members rather than profit generation, which complicates the insolvency process under the IBC.

There is also a lack of a defined resolution professional or insolvency professional framework for co-operatives, unlike in the case of companies and LLPs.

Alternative Financial Rescue Mechanisms:

While the IBC doesn’t cover co-operatives, they are subject to financial intervention by state or central government authorities when in distress. Some state governments have enacted specific laws to deal with the winding up and liquidation of co-operatives facing insolvency.

These laws allow the Registrar of Co-operatives or other designated authorities to step in for the liquidation or closure of a co-operative society, sometimes with the option to restructure its operations or facilitate debt recovery outside of the IBC framework.

Financial Distress of Co-operatives:

When a co-operative society faces financial distress, the members of the society (i.e., depositors, creditors, and borrowers) are likely to approach the Registrar of Co-operatives or a relevant government authority for relief.

In certain cases, creditors of co-operatives may be able to recover dues under alternative laws, but these will not follow the IBC's structured process of creditor claims and debt resolution.

Recent Discussions on Inclusion in IBC:

There has been increasing discussion about whether co-operatives should be brought under the ambit of the IBC. The growing complexity of financial markets, including the rise of multi-state and large co-operatives, has raised concerns about their ability to handle insolvency without formal processes like CIRP.

In response to the need for more robust mechanisms to address financial crises in co-operatives, there may be future amendments to the IBC or the introduction of new laws to address insolvency in co-operatives.

Example:

Consider a multi-state co-operative bank facing financial failure due to non-performing assets and liquidity issues:

• The co-operative’s members and creditors cannot initiate CIRP under the IBC.
• Instead, creditors may approach the Registrar of Co-operatives for intervention, or the government may initiate a liquidation process through a state-level regulatory framework.
• In some cases, the government may facilitate a restructuring plan to resolve the co-operative’s financial issues, with creditors agreeing to a debt rescheduling.

Conclusion:

Insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) cannot be directly initiated against co-operative societies. These entities are governed by specialized laws, such as the Co-operative Societies Act, which provides different mechanisms for handling financial distress or insolvency. However, the absence of IBC applicability raises challenges for co-operatives facing serious financial issues, and there is ongoing debate about whether the framework of the IBC should be extended to co-operatives in the future.