R.C. Cooper v. Union of India – Bank Nationalization Case

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1460
Bank Nationalization Case
Equivalent Citation: AIR 1970 SC 564 ; 1970 SCR (3) 530
Petitioner: 
Rustom Cavasjee Cooper / R C Cooper
Respondent: 
Union of India
Date of Judgement: 10/02/1970
Bench:               
Shah, J.C. & Sikri, S.M., Shelat, J.M. & Bhargava, Vishishtha, 
Mitter, G.K. & Vaidyialingam, C.A., Hegde, K.S. & Grover, A.N., 
Ray, A.N. & Reddy, P.J. & Dua, I.D.

Background

The Preamble and various constitutional provisions of the Constitution of India obligate the state to build an egalitarian society for the people of India. These obligations are in detail discussed in Part IV of the Constitution under the heading Directive Principles of State Policy. The Part IV starts with Article 37 declaring the part not enforceable in the courts of law is however fundamental in the governance of the country. Therefore, while making laws the Parliament must apply these provisions. State control of industries was seen as a great means to achieve the ends of Socialism. After Independence of the nation transport undertakings, electricity, insurance sector, oil refineries etc., were nationalized in order to achieve the goals of Socialism.

Since Independence the distribution of credit in rural areas was at a great low. This was because of the inaccessibility of banks and other financial institutions in the rural areas. Therefore, in order to target the rural area, the government schemed a plan to target the needy sectors. This solution they devised was Nationalization.

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 Indira Gandhi government in 1969 at the instance of the then Acting PresidentM. 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 broght more than 75% banking sector under state control along with its assets, liabilities, entire paid-up-capital.

The most horrific and 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.

2 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 u/a 32 for the violation of his Fundamental Rights mentioned under articles 14, 19(1)(f) & 31(2).

Issues

  1. Whether a shareholder can file a petition for remedy against violation ofhis fundamental rights when the company in which the shares are held is taken over.
  2. Whether the Ordinance was properly promulgated.
  3. Whether the Parliamentary Act was within Parliamentary Competence.
  4. Whether the impugned Parliamentary Act was violative of Article 19(1)(f) & 31(2) of Constitution of India.
  5. Whether the method of ascertaining compensation was valid.

Petitioner’s Arguments

  1. The writ petition is maintainable because the petitioner has filed it for enforcement of his Fundamental Rights and not that of company. Since Company is not a citizen within the context of Indian Citizenship Act, 1955 and the Constitution of India, a company cannot claim the protection of those FR’s which are solely available to citizens of India.
  2. Since in just two days the Parliament was coming in monsoon session the President promulgated an ordinance which is in direct contravention of condition precedent for promulgation of Ordinance[1]. Therefore, the President’s promulgation of Ordinance is invalid and that the SC has power to annul an invalid Ordinance.
  3. The three lists under Schedule VII of the Constitution Union, State & Concurrent List clearly demarcate the area of operation of Union Parliament, State Legislature and areas where both can operate respectively. The Parliament can only legislate in the matters of “Banking” as defined in the Section 5(b)of Banking Regulation Act, 1949 by the virtue of Entry 45 of List I. Further, the legislature by the virtue of Entry 42 of list III can only make laws for effectuating laws under List I. Therefore, the Parliament did not possess the required valid competence to initiate the acquisition process.
  4. The impugned act of 1969 is violative of Fundamental Rights mentioned in Article 19(1)(f) and Article 31. Therefore, the act is in direct contravention of Article 13 which clearly provides that any law which is in violation of the said provision will be unconstitutional and the courts are bound to strike it down.
  5. The Schedule II of the impugned act that provides for the procedure in which the Compensation is to be given to the shareholders is draconian in its entirety. The said provision is too much irrational and vague. No valid law can make a person realize the fruits of the agreement after 10 years. Such illogical and illegal condition must be struck down.

Respondent’s Arguments

  1. The writ petition is not maintainable because the petitioner is seeking the protection of Fundamental Rights of the Company which is not a citizen as per the Indian Citizenship Act, 1955. The rights mentioned under Article 19 are only available to the Citizens of the nation whereas company is only a juristic person and not a citizen.
  2. The President’s power to promulgate an Ordinance u/a 123 is a subjective power and the President cannot be asked to adduce his reasons before the courts as to why the ordinance was promulgated.
  3. The courts must see the Socialist obligations upon the state to make an egalitarian society in which there is no sort of inequality. Therefore, the court should, keeping in perspective these obligations, must construe the word “Banking” under Entry 45 of List I to mean all the activities which the respondent ought to undertake.
  4. The act is not violative of Article 19(1)(f) since it falls within the provisions of Article 31 and since in K. Gopalan v. Union of India[2]the court held that each Fundamental Right is exclusive of one another and distinct.

Judgment

The court delivered this landmark judgment on February 2, 1970 & speaking in 10:1 majority held that the shareholder or director cannot move to the courts for the protection of infringement of Fundamental Right’s of the company unless it is proved that by the impugned action his rights are also violated. The majority opinion was written by Justice Shah for himself and on the behalf of Grover, Vaidialingam, Mitter, Dua, Shelat, Hegde, Reddy, Sikri and Bhargava, JJ. while justice A.N. Ray wrote the dissenting opinion.

The major findings of the majority bench were as follows:

  1. The apex court overruled the 20 years law laid down by K. Gopalan rejecting the mutual exclusivity theory. The court held that we cannot overlook the violation of citizens of the nation on mere technicalities. If due to state action the fundamental rights of a citizen are violated the court is bound to prohibit such violation. The court by holding this laid down the Effect test and overruled the Object test. Therefore, now the courts won’t look into the objects of the impugned act and rather they will look into the effect of the impugned act. In case effect of such act violates the FR’s of citizens it would be violative of Constitution and liable to be struck down.
  2. Since the Ordinance was already replaced by the act of Parliament therefore, the court held that deciding the validity of the said impugned Ordinance is fruitless. This discussion is relevant for academic purposes only.
  3. The court rejected both the Petitioner’s & Respondent’s argument on legislative competence to acquire banking Companies. The court held that the term Property in itself constitutes the rights, liabilities, organization etc. that accrue to the property. The power to acquire property was held to be an independent power of Parliament and it required no separate legislation under List II or List III.
  4. The court found the impugned act in contravention of the Article 31 since the act failed to comply with said provision. The said provision provided that the in case any property is acquired by the government then they have to provide compensation to the property owner. Since there was clear violation of the said provision therefore, the court struck down the said act.
  5. However, the court upheld the validity of the act in the context of Article 19(1)(f). The court said that the act is not violative of the freedom to carry trade & business. The justification for the said ruling that the state can always create a partial and absolute monopoly.
  6. But the court held the said act in clear violation of Article 14c since only these 14 banks were restrained from conducting banking business n the future while other banks including the foreign banks were allowed to continue Banking in India. The court this discrimination as a flagrant hostile discrimination.

Justice Ray’s opinion was the sole dissent in the judgment. However, he agreed with the majority in two instances which were as follows:

  1. That the said act is not in violation of Article 19(1)(f) i.e. freedom to carry trade & occupation.
  2. That the Parliament was competent to legislate on the acquisition of banking and that the said law was valid as far as Legislative Competence is considered.

Further, he held that the Ordinance promulgation power vested within the President of India is a subjective power that cannot be challenged in courts. However, he rejected the majority’s opinion that the shareholder can approach the apex court for the violation of his rights which were directed against a company i.e. a non-citizen. He also affirmed the mutual exclusivity theory as was propounded in Gopalan judgment.

Critical Analysis

The importance of this judgment is often misunderstood in the sense that it is contradictory to Socialist ideals of the Constitution. In actuality the power of Nationalization was upheld by the Supreme Court. The court however just expanded the horizons of the protection of Fundamental Rights after which even a shareholder whose rights are indirectly violated by the legislative act can approach the courts. The court clearly held that they would not bar the remedies that exist in the Constitution for the protection of citizens on mere trifling technicalities. The court decided not to interfere in the Government’s objective of Socialism and provided them enough levy to achieve them. This case is also important as it was a turning point in the interpretation of Fundamental Rights which was later applied in subsequent SC decisions.

The decision should not be misunderstood because the apex court respecting the obligations upon the respondent to make India a socialist state. Although, socialism in retrospect had been disastrous to Indian economy and eventually led to India’s bankruptcy. However, it was a popular philosophy at that time and the government had every right to pick a socialist path.

The court also apart from upholding the respondent’s power to Nationalize also upheld respondent’s competence to enact such laws. The court also relieved the Parliament from the lengthy procedure of making such laws by first making specific laws under List I. Thus, if now the Parliament desires to nationalize airlines then it need not first make laws specifically under Entry 29 List I for aircrafts. Rather they can directly make laws under the Entry 42 of List III since they expanded the meaning of “property” to mean rights, liabilities, organization etc. 

The majority bench in order to protect the rights of the citizens of the nation from such a draconian law tried to expand the horizons of the protection. After the pronouncement of the decision the shield was broadened and as a result now if a legislative act violates a citizen’s fundamental rights though indirectly it will be liable to struck down. The court did away with the object test that was used to ascertain the validity of the legislative act & now the effects test was used in order to ascertain this validity. This was a huge incentive in the favor of citizens of the nation. Following this decision, the apex court again in Bennett Coleman v. Union of India[3]held that FR’s of a citizen are not last when they associate to form a company.

The court however also succeeded in protecting the Fundamental Rights of the citizens of the nation by holding the impugned act in violation of Article 31(2). The court held that compensation to be awarded 10 years later that too in bonds is too much illogical and detrimental to the affected parties. It is probable that some citizens will not be able to realize the fruits of the agreement due to the reasons of emergency situations such as death. The court relied on the principle laid down in State of West Bengal v. Bela Bannarjee[4]that the word “Compensation”in Article 31(2) means full indemnification. After the decision of Bela Bannarjeethe Parliament enacted 4th Constitutional (Amendment) Act, 1955 which provided that inadequacy of compensation cannot be a ground to challenge the acquisition of private property. Despite this the court in P. Vajravelu Mudaliar v. Special Deputy Collector, Madras[5]affirmed the ratio of Bela Bannarjee. However, confusion was caused when the court reversed its stance and overruled the earlier judgments in State of Gujarat v. Shantilal Mangaldas[6] . However, rejecting the opinion in Shantilal Mangaldas and clearing all confusion upheld the ratio of Bela Bannarjee.

This decision is also important in the sense it was the main driving force to the bench who sat to decide the landmark case that changed the interpretation of Right to life & liberty i.e. Maneka Gandhi v. Union of India[7]. The mutual exclusivity theory that was propounded by the bench in Gopalan was rejected in R.C. Cooper and it was held that each FR is dependent on one another for its survival. This interlinking of FR’s was late r used in Maneka Gandhi.

The court also in its judgment dwelled on the aspect of Principles of Natural Rights vis-à-vis FR’s and held that if the statutory provision which eliminates any Principle of Natural Rights, then the court cannot ignore such elimination and is duty bound to make the state follow them.

Aftermath of R.C. Cooper

The Parliament in order to make its position more profitable enacted the 25th Constitutional (Amendment) Act, 1971 after the decision of R.C.  Cooper that proved contrary to its intention. Earlier the word “Compensation” in Article 31(2) was interpreted as Parliament is liable to a just & equitable indemnification. This interpretation was further affirmed by the apex court in Bela Bannarjee, P. Vajravelu&finally in R.C. Cooper Therefore, to negate all these judgments and to make their intention the law, Parliament amended the Constitution by enacting the 25th Constitutional (Amendment) Act, 1971.

25th Amendment

  1. The parliament in order to clarify their stance that they are not bound to adequately compensate the landowners amended Article 31(2) in case their property is acquired by the state. The word “amount” was placed instead of compensation in the provision.
  2. Article 19(1)(f) was delinked from Article 31(2).
  3. Article 31 C, a new provision was added to the Constitution to remove all difficulties that

i. Articles 14, 19 & 31 are not to be applied to any law enacted under the fulfillment of objectives laid down under Article 39(b) & 39(c).

ii. Any law to give effect to Article 39(b) & 39(c) will be immunized from court’s intervention.

The word amount can be interpreted as any figure of money and that is not necessarily an adequate, equitable amount.

Conclusion

The myth surrounding the judgment must be cleared by a thorough reading of the judgment. In its essence the judgment everywhere upheld the legislature’s goals of achieving the seeds of Socialism. However, at the same time the court was also protecting the rights of citizens which were violated by the impugned act.

The judgment expanded the scope of protection of FR’s in the sense that it allowed the shareholders to challenge the impugned act. The court when it ruled that the rights of the citizens would not be ignored on just mere technicalities saved the rights that were earlier violated an the affected parties had no remedy.

The use of Effect test in the decision to ascertain the validity of the act was a commendable step taken by the judiciary to lift the veil and see behind the masks. Therefore, the judgment is landmark in its every sense. This judgment was further used in other landmark decisions such as Bennett Coleman & Maneka Gandhi which were successful in shaping the constitution’s liberal approach.


[References]

[1]INDIA CONST. art. 123.

[2]A.K. Gopalan v. Union of India, A.I.R. 1950 S.C. 27.

[3]Bennett Coleman v. Union of India, (1972) 2 S.C.C.788.

[4]State of West Bengal v. Bela Bannarjee, [1954] S.C.R. 538.

[5]P. VajraveluMudaliar v. Special Deputy Collector, Madras,1965] 1 S.C.R. 614.

[6]State of Gujarat v. ShantilalMangaldas. (1969) 1 S.C.C. 509.

[7]Maneka Gandhi v. Union of India,(1978) 1 S.C.C. 248.