Kerala HC Orders Appointment of Sales Officers to Expedite Recovery from Ailing Co-op Banks Under Amended S.36A of KCS Act - 2025-09-28

Kerala High Court Steps in to Protect Co-op Bank Depositors, Orders Swift Recovery Under New Law

ERNAKULAM: In a significant move to address the crisis plaguing Kerala's co-operative banking sector, the High Court of Kerala has issued a sweeping set of directions to expedite the recovery of funds for thousands of distressed depositors. A Division Bench of Justice Amit Rawal and Justice P.V. Balakrishnan , while hearing a batch of 42 writ appeals, bypassed earlier directives relying on government revival schemes and instead invoked a recent amendment to the Kerala Co-operative Societies Act, 1969, to create a robust mechanism for debt recovery and fund disbursement.

The court expressed grave concern over the "piquant situation" where depositors, many of whom are senior citizens and patients suffering from serious ailments, have been left "high and dry" due to financial mismanagement, embezzlement, and the failure of societies to repay matured fixed deposits.

Background of the Crisis

The appeals were filed by depositors who were aggrieved by a Single Bench judgment that had directed them to seek remedies through the Kerala Co-operative Revival Fund Scheme, 2024, and the Kerala Co-operative Deposit Guarantee Scheme, 2018. The appellants argued that these schemes were inadequate to provide immediate relief.

The Division Bench appointed Advocate D. Kishore as Amicus Curiae, whose report painted a grim picture. The report described the government schemes as an "eyewash" that failed to address the root causes of the crisis, such as mismanagement and large-scale scams like those in Karuvannur and Mylapra banks. It also highlighted massive tax evasion by societies running unauthorized chit funds under the guise of deposit schemes, causing significant losses to the state exchequer.

Court's Landmark Directions

Setting aside the reliance on revival schemes, the Bench focused on a new legal tool: the amended Section 36A of the Kerala Co-operative Societies Act . This amendment, effective from June 7, 2024, incorporates powers similar to the SARFAESI Act, enabling societies to fast-track the recovery of loans from defaulting debtors.

To prevent further delays and ensure accountability, the court issued the following key directives:

1. Appointment of Sales Officers: The Registrar of Co-operative Societies must, within two weeks, appoint one Sales Officer for every five societies at the Taluk level. These officers, who will remain on the government's payroll, are tasked with recovering dues from bank debtors using the powers under Section 36A.

2. Escrow Account and Disbursement: All funds recovered by the Sales Officers will be deposited into an escrow account managed by the concerned District Collector. The Collector will then verify the claims of depositors and disburse the amounts, prioritizing older claims. If the recovered amount is insufficient, it will be distributed proportionally among the creditors.

3. Action Against Illegal Chit Funds: The court took serious note of societies evading GST and stamp duty by running chit fund-like schemes. It directed that all such societies must register under the GST Act and pay all statutory dues. Failure to comply will invite legal action from the concerned departments.

4. Immediate Relief for Depositors: The court ordered the committee managing the Deposit Guarantee Scheme to immediately disburse the permissible guarantee amount (up to ₹5 lakhs under the new scheme) to depositors in several specified cases. For other appellants who had received partial payments, an additional 30% of the due amount must be paid within two months.

5. No Unilateral Renewal of FDs: The judgment explicitly prohibits co-operative societies from unilaterally extending the maturity period of fixed deposits without the depositor's consent.

Judgment Excerpt

"...a very piquant situation has arisen, which is a matter of grave concern to the society and as well as this Court that in the absence of any deep and policy control of the state the supervising of the State Government has not resulted into bringing any succor or redressal of the grievances of the depositors who are running from pillar to post and left high and dry."

Conclusion and Implications

The High Court's judgment marks a pivotal shift from relying on administrative schemes to enforcing statutory recovery mechanisms. By empowering Sales Officers and placing the disbursement process under the direct supervision of the District Collector, the court aims to break the cycle of litigation and delay. This proactive intervention provides a clear roadmap for recovering public money and offers a glimmer of hope to thousands of depositors whose life savings have been trapped in the ailing co-operative sector. The ruling also sends a strong message to the management of co-operative societies about financial discipline and statutory compliance.