Entire Managing Committee Of Registered Society Responsible For Granting Loan To A Fraud, Not Just Signing Authority: Bombay High Court

The Bombay High Court recently held that when a loan was sanctioned by the management committee of a cooperative society, a committee member who merely signed the disbursement cheque cannot be held liable for financial loss caused by a fraudulent loan applicant.

Justice Milind Jadhav observed that the entire management committee is responsible in such a case and dismissed a writ petition filed by a society of police employees seeking to make the signatory of disbursement cheques liable for the loss caused by fraudulent applicant.

“...a resolution to that effect was passed by the Society assigning and authorising individual Managing Committee members to sign the cheques of the loan amount which were signed by the Managing Committee. In that view of the matter, the entire Managing Committee is liable and responsible and not the member who has appended his signature on the cheque for disbursement of loan”, the court held.

The petitioner society Brihanmumbai Police Karmachari Sahakari Pat Sanstha Maryadit advances loan to its members i.e., employees of the police department. To avail a loan, an applicant must submit a certificate issued by the head of department certifying that the applicant is a police employee along with completed loan application form.

In 2004-05, the society came to know that 8 applicants who availed loan from the society were not employees of the police department and procured the loan by fraud. The Authorized Officer cum Assistant Registrar, Co-operative Societies conducted statutory inquiry under section 88 of the Maharashtra Co-operative Societies, Act 1960.

The Enquiry Report held that at least seven society members, including its office bearers were liable for disbursement of loan amount and the consequential financial loss to the society as the loan accounts turned into non performing assets. The report concluded that the financial loss of Rs. 6,99,700/- was caused and four members, who signed the cheques in the fraudulent loans, were responsible. Chandrakant More, then Joint Secretary of the Society, signed four of the cheques and was made liable to pay Rs. 1,54,925/- to the society.

The Divisional Joint Registrar (Co-operative Societies) dismissed More’s appeal against the report. The State Minister of Co-operation allowed More’s revision application and exonerated him from the liability. Therefore, the society filed the present writ petition challenging the Minister’s order.

All four cheques signed by More were also counter signed by RR Bhogale, the President of the society. Bhogale was completely exonerated from liability despite not replying to the enquiry proceedings or submitting any evidence, the court noted. The court opined that if More was indicted on the basis of a signature on the cheque, Bhogale should equally have been indicted. The court further said that when the enquiry report records a finding that 7 persons are responsible for active role in the alleged fraud, indictment of only 4 members is not justified.

The court noted that More, as the Joint Secretary of this society had the duty of signing the disbursement cheques. However, he was not liable for the preparation of cheque, submission of loan application form along with the recommendation letter, verification of documents, carrying out due diligence and scrutinising individual files of the applicants, the court said

The court said that the Joint Secretary cannot be solely held responsible for disbursement of loan to a person who is not an employee of the police department

The court opined that due diligence is the most important aspect in the present case. “Appropriate enquiry and due diligence if carried out by those responsible to do so before recommending the application of such persons (Applicants) for loan sanction to the Managing Committee could have unearthed the genuineness of the Applicants”, the court remarked.

Only More and the three other members who signed the cheques cannot be held liable for causing financial loss to the society and made to reimburse it, the court held. When the enquiry officer has exonerated other management committee members, More’s indictment is high handed and arbitrary, the court opined.

“This is a classic case where the Managing Committee has sanctioned the loan amount and an individual office bearer of the Managing Committee who has been entrusted with the responsibility and duty of signing the cheques is held responsible for disbursement of loan. This cannot be countenanced in the facts of the case”, the court held.

The court also noted that the Revisional Authority, i.e., the State Minister has dealt with the allegations of tampering with cheques against More.

The court upheld the impugned order observing that the findings therein are cogent and based on sound reasoning.

Case no. – Writ Petition No. 1475 of 2017

Case Title – Brihanmumbai Police Karmachari Sahakari Pat Sanstha Maryadit v. State of Maharashtra