BANKING AND INSURANCE LAW PSDA ASSIGNMENT

RC COOPER V UNION OF INDIA: ‘THE BANK NATIONALIZATION CASE’

BA LLB - Semester VII (C)

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 INDEX

S. Topic Page
No. No.

1. Acknowledgement 02

2. Declaration 03

3. Index 04

4. Introduction 05

5. Background and Facts 05

6. Issues Raised 06

7. Judgement 06

8. Critical Analysis and Conclusion 08

INTRODUCTION

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Rustom Cavasjee (R.C.Cooper) v. Union of India,1970, which is famously known as ‘The
Bank Nationalization Case’, is one of the most important landmark judgements of Indian
Banking Law. It is also based on many principles of the Indian Constitution. The case is so-
called because the petitioner, R.C.Cooper, who was the director of Central Bank of India
(One of the 14 banks in the list) and had shares in Bank of Baroda, filed a petition against the
Union of India in the year 1969 when many of the banks were being nationalized.

He challenged many important provisions of The Banking Companies (Acquisition and

Transfer of Undertakings) Ordinance, 1969, one of them being Schedule II which mentioned
that when the government will acquire any bank then, the compensation would be decided
through an agreement. And if the agreement fails then such matter shall be discussed in a
tribunal.

Moreover, after the verdict of the tribunal, the company would get the compensation amount
after ten years. These ten years would be counted from the date on which the agreement
would be declared failed.

The majority Judgement, which was given by 10 out of the 11 Judges, was drafted by Justice
J. C. Shah for himself and on behalf of the other 9 Judges who were for the majority opinion.
The dissenting order was drafted by Justice A. N. Ray. Thus, the Judgement was passed by a
10:1 majority in this particular case.

BACKGROUND AND FACTS

Earlier in 1955, Imperial bank of India was taken under the SBI Act and just in four years its
7 subsidiaries were also amalgamated into the SBI branch. The Reserve Bank of India
also played a pro-active role in regulating the banking sector and reduced the number of
commercial banking institutions from 569 in 1951 to 89 in 1969. The government under Mrs
Indira Gandhi government in 1969 at the instance of the then Acting President M.
Hidayatullah promulgated the Banking Companies (Acquisition & Transfer of Undertaking)
Ordinance, 1969 nationalizing the 14 banks. These 14 banks were chosen on the basis that
they had deposits exceeding 50 crores. The ordinance was promulgated just two days before
the Session of Parliament. The ordinance w.e.f. 19 July 1969 brought more than 75%
banking sector under state control along with its assets, liabilities, entire paid-up-capital. The
most controversial part of the Ordinance was the second schedule it contained. The
second schedule provided that: 1. Where an amount of compensation could be fixed
by an agreement; it would be determined by such agreement 2. Where no such agreement
could be reached in the provided time, the matter would be referred to tribunal. The
compensation fixed by the tribunal will be awarded after 10 years from the date when
the agreement failed. Two days later when Parliament came in session it enacted the Banking
Companies (Acquisition & Transfer of Undertaking) Act, 1969 with the same provisions as
were in the Ordinance. Therefore, Rustom Cavasjee Cooper, the majority shareholder of
Central Bank of India & Bank of Baroda filed a writ petition in Supreme Court under Article
32 for the violation of his Fundamental Rights mentioned under articles 14, 19(1)(f) & 31(2)
of the Constitution of India.

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ISSUES RAISED

1. Whether a shareholder could file a Writ petition for the violation of his Fundamental
Rights, when the company in which he is a shareholder is acquired by the
Government?

2. Whether the Ordinance in question had been properly made or not?

3. Whether the Act was within the jurisdiction of the Parliament to get formulated or
not?

4. Whether the impugned Act was violative of Article 19(1)(g) and Article 31(2) of the
Constitution of India or not?

5. Whether the method of ascertaining the compensation was valid or not?

JUDGMENT

On the 2nd of February, 1970, the landmark judgement, by a majority of 10:1 was delivered
by the Supreme Court of India. Except Justice A.N. Ray, the other Judges gave the following
judgement that a shareholder was not entitled to move to the Supreme Court for enforcing the
Fundamental Rights in the name of his company, until and unless the action which was being
complained of, directly or indirectly violated the petitioner’s Fundamental Rights as well.

The major findings of the Court in the present case are as follows-

1. The major contribution of this case was the overruling of the ‘Mutual Exclusivity
Theory’ which had been practiced for 20 years till this case happened, from A. K
Gopalan Vs. State of Madras. The Court held that just on the basis of
technicalities, it can’t reject a petition which clearly shows that the Fundamental
Rights of the citizens are being violated. Just because a Legislative action was also
violating the Rights of the company didn’t mean that the Court was not having the
jurisdiction to protect the Rights of the shareholder of the company as well. The
Court also struck down the ‘Object’ test and laid down the ‘Effect’ test. The Effect
test would now look into the Effect of any particular legislative Act, rather than
looking at the objective with which it had been formulated. Thus, if any Act of the
Legislature, even at a remote stage, violated the Fundamental Rights of the
citizens, then, it was liable to be struck down.
2. As far as whether the Ordinance was promulgated properly or not, to this the Court
said that since the Ordinance had already been converted into an Act, so it was
unnecessary for the Court to discuss the same. The Court said that the same had
become a question for academicians to ponder upon, but not for the present case.
3. As far as the arguments regarding the Parliament’s competence to acquire banking
companies was concerned, the Court, very interestingly, rejected both the
petitioner’s as well as the respondent’s arguments. The Court said that the term
property included all the Rights, liabilities, assets, etc., which were associated with

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 the property. The power of the Parliament to acquire any banking company was an
independent power of the Parliament and it required no separate Legislation to be
enacted first under List II and List III.
4. The Court declared the Act to be clearly violative of the Article 31, as Article 31
talked about compensation for the acquired property. Now, the term
‘compensation’ meant complete indemnification to the person, whose property
was being acquired. Since it was frankly clear from the objectives of the Act that
equal indemnification was not going to be provided and also, after applying the
test of severability, as the Act was not independent enough to stand alone without
the part in question, so it was liable to be struck down.
5. The Court, however, for the contention of Articles 19(1)(g) held that the Act was
not violative of Article 19(1)(g), as the State had the complete Right to partially or
completely monopolise any business that it felt to.
6. However, the Court discovered that the Act was in clear violation of Article 14.
This was held on the basis of the following reason that the concerned Act barred
the 14 banks carrying out banking activities within the country, however, other
banks, including the foreign banks, had not been stopped from doing so. The
Supreme Court, thus, held the Act to be ‘flagrantly practicing discrimination’ and
thus, held it to be violative of Article 14.

Justice A.N. Ray was the only Judge who gave the dissenting opinion. He gave the following
points-

1. The only way in which the Ordinance passing power of the President could be
challenged was on the basis of malafide and corrupt intentions. The fact that the
Ordinance had been promulgated just two days before the session of the
Parliament began, indicated that the same had been passed legitimately, although
in a haste.
2. There was considerable speculation in the country regarding Government’s
intention with regard to nationalisation of banks during few days immediately
before the Ordinance.
3. The reason is obvious that in matters of policy, just as Parliament is the master of
its province, similarly the President is the supreme and sole judge of his
satisfaction on such policy matters on the advice of the Government.
4. He dismissed the petitions upon various other reasons and thus, declared the
petitions to fail.
5. A shareholder can’t approach the Court for the violation of his Rights, which at the
end, were associated with a company, which by virtue of being a non-citizen, was
not possessing the Right to claim Fundamental Rights.
6. The ‘mutual exclusivity theory’, as propounded in the A. K. Gopalan case, was
upheld by him.

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However, there were indeed two things upon which he agreed with the majority and they
were-

1. That the impugned Act was not violative of Article 19 (1) (g) of the Constitution
of India, inhibiting the freedom to carry on any trade or business.
2. That the Parliament was competent enough to pass the impugned Act, related to
the acquisition of banking.

CRITICAL ANALYSIS AND CONCLUSION

Many people confuse this case with going against the socialistic ideals of the nation.
However, it must be understood that in reality, the Supreme Court had upheld the socialistic
ideals of the Constitution by upholding the Government’s power to nationalise. However, it
must also be remembered that the Court also increased the ambit of the Fundamental Rights
of the citizens by ruling that it was not binding upon the Supreme Court to reject the claim for
enforcement of a shareholder’s Fundamental Rights, if in the process of violation of his
Rights, the Rights of his company were also being violated.

It was understood that if the shareholder’s Rights were to be enforced by the Supreme Court,
then in the process, it would mean that the Supreme Court was inevitably enforcing the
Rights of the company too in which he was a shareholder, meaning that the Fundamental
Rights were being enforced for a non-citizen. But, the Court clearly stated that even if the
enforcement of Fundamental Rights of the shareholder would mean the enforcement of
Rights of the company, it wouldn’t stop the Supreme Court from protecting the Rights of the
citizens, even if in the process some unwanted enforcements were happening.

Moreover, this case was a landmark one, as it rejected the mutual exclusivity theory which
had been propounded in the case of A. K. Gopalan Vs. State of Madras. It mentioned that all
the Rights were interlinked to one another and couldn’t be treated separately for the purposes
of jurisprudence.

Another landmark point given by the Supreme Court was regarding the setting free of the
Parliament from lengthy processes of making laws. The Court clearly mentioned that in order
to make any law upon the nationalisation of any subject, it didn’t mean that the Parliament
would first have to make a separate law upon that subject and then move on to make the law
regarding its nationalisation, as it expanded the interpretation of the term property that was
under Entry 42 of the State List.

The Bank Nationalisation case indeed served as a landmark judgement for guiding the
Parliament, as well as the Constitutional jurisprudence of the country for years to come.
However, the aftermath of the judgement maybe noted from the fact that the Parliament, in
order to strengthen its position, made the 25th Constitutional (Amendment) Act, in which the
following points were noted-

1. The word ‘compensation’ in Article 31(2) was replaced by the word ‘amount’.
This meant that the Government was now not liable to pay an ‘adequate’ amount
to the person whose property was being acquisitioned as earlier.

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2. Article 19(1)(g) was clearly detached from Article 31(2).
3. Article 31C, a new provision was added to the Constitution to remove all
difficulties that-
4. Articles 14, 19 and 31 are not to be applied to any law enacted under the fulfilment
of objectives laid down under Articles 39(b) and 39(c).
5. Any law to give effect to Articles 39(b) & 39(c) will be immunized from Court’s
intervention.