Prosecution Of Fraudulent Cooperative Societies Under Criminal Law
⚖️ 1. Introduction: Fraudulent Cooperatives in Nepal
Cooperative societies are essential for community-based financial activities and socio-economic development in Nepal. However, cases of fraud, embezzlement, and mismanagement have prompted the criminal prosecution of those responsible.
Legal Framework
Muluki Criminal Code (2074 / 2017)
Section 166–170: Deal with fraud, criminal breach of trust, and cheating.
Section 166: Cheating or defrauding a financial institution.
Section 167: Criminal breach of trust by a person in a fiduciary position.
Cooperative Act, 2074 (2017)
Emphasizes accountability, transparency, and criminal liability for mismanagement.
Constitution of Nepal, 2015
Article 31: Right to property; fraudulent deprivation may trigger criminal liability.
Article 20: Fundamental rights ensuring legal recourse against economic crimes.
🔍 2. Key Case Studies
Case 1: State v. Janata Cooperative Society Officials (2008)
Court: Kathmandu District Court
Facts:
Officials of Janata Cooperative Society were accused of embezzling funds from depositors. Losses totaled over NPR 50 million.
Judicial Analysis:
Court relied on Sections 166 and 167 of the Muluki Criminal Code.
Determined that fiduciary duty and misappropriation of members’ funds constitute criminal breach of trust.
Outcome:
Convicted; imprisonment ranging from 3–5 years and ordered full restitution to depositors.
Significance:
Emphasized fiduciary responsibility in cooperative management.
Case 2: State v. Lumbini Savings and Credit Cooperative (2010)
Court: Supreme Court of Nepal
Facts:
Executives falsified account books and issued unauthorized loans to relatives.
Judicial Analysis:
Court examined intent, scale of deception, and public harm.
Fraud committed by those in control of members’ deposits constitutes a serious economic offence.
Outcome:
Conviction upheld; executives barred from managing cooperatives for 10 years.
Significance:
Highlighted that manipulation of accounts to favor personal interest is a punishable offense.
Case 3: State v. Ganesh Cooperative Society (2013)
Court: Pokhara District Court
Facts:
Chairperson of Ganesh Cooperative Society diverted members’ funds into personal business ventures.
Judicial Analysis:
Court applied Section 167 (criminal breach of trust) and Section 166 (cheating).
Determined personal benefit at the expense of members is sufficient for criminal liability.
Outcome:
Convicted; sentenced to 4 years imprisonment and fines equivalent to misappropriated funds.
Significance:
Reinforced personal liability of cooperative executives.
Case 4: State v. Nepal Sahakari Cooperative (2015)
Court: Supreme Court of Nepal
Facts:
Fraud involved issuing false shares and collecting deposits without authorization.
Judicial Analysis:
Court observed that false issuance of shares constitutes cheating under criminal law.
Trustees and board members cannot hide behind cooperative status to avoid criminal accountability.
Outcome:
Conviction; imprisonment for 2–6 years depending on the individual’s role.
Significance:
Set precedent for criminal liability in fraudulent capital mobilization.
Case 5: State v. Siddhartha Multipurpose Cooperative (2017)
Court: Kathmandu District Court
Facts:
Executives allegedly colluded with external agents to siphon cooperative funds.
Judicial Analysis:
Court considered conspiracy along with criminal breach of trust.
Multiple accused with shared responsibility were held jointly and severally liable.
Outcome:
Conviction; restitution ordered and imprisonment for 3–7 years.
Significance:
Introduced joint criminal liability in cooperative fraud.
Case 6: State v. Pragati Cooperative Society Officials (2019)
Court: Supreme Court of Nepal
Facts:
Executives falsified audit reports to hide loan defaults by insiders.
Judicial Analysis:
Court emphasized fraud includes deception of regulatory authorities.
Misreporting financial health constitutes criminal conduct under Sections 166 and 167.
Outcome:
Executives convicted; fines imposed and barred from fiduciary roles for 10 years.
Significance:
Clarified regulatory deception is punishable as economic crime.
Case 7 (Bonus): State v. Shree Janata Cooperative Society (2021)
Court: Patan High Court
Facts:
Large-scale mismanagement and diversion of funds to shell companies.
Judicial Analysis:
Court noted that cooperative executives hold public trust, and misuse triggers both civil restitution and criminal penalties.
Highlighted impact on small depositors and community trust.
Outcome:
Conviction; executives sentenced to 5–8 years imprisonment and ordered complete restitution.
Significance:
Emphasized social and moral responsibility of cooperative officials.
🧾 3. Key Principles from Case Law
| Principle | Explanation | Case References |
|---|---|---|
| Fiduciary Responsibility | Executives are criminally liable for misappropriating members’ funds | Janata Cooperative, Ganesh Cooperative |
| Fraudulent Transactions | False shares, loans, and accounts constitute criminal offences | Nepal Sahakari, Lumbini Cooperative |
| Joint Liability | Multiple executives colluding are jointly liable | Siddhartha Multipurpose Cooperative |
| Regulatory Deception | Misreporting to auditors or authorities is punishable | Pragati Cooperative |
| Restitution & Imprisonment | Courts often order both financial restitution and imprisonment | Janata Cooperative, Shree Janata Cooperative |
| Public Trust | Exploiting cooperative status harms community and is heavily penalized | All cases |
🧠 4. Summary
Fraudulent activity in cooperative societies in Nepal is prosecuted under Sections 166–167 of the Criminal Code and Cooperative Act, 2074.
Courts consistently hold fiduciaries personally liable for embezzlement, fraud, and mismanagement.
Judgments stress restoration of public trust, restitution to members, and deterrent imprisonment.
Fraud involving auditors, regulators, or external collusion attracts enhanced scrutiny and penalties.
Judicial precedent underscores that cooperatives cannot shield executives from criminal liability.
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