Author: Swastika Dauthal, a student of ILS Law College, Pune
To the Point
In Rustom Cavasjee Cooper v. Union of India, the Supreme Court of India examined the constitutional validity of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, which nationalized 14 major private banks. The petitioner, R.C. Cooper, a shareholder in one of the nationalized banks, challenged the Act under Article 32 of the Constitution, alleging violations of his fundamental rights under Articles 14, 19(1)(f), 19(1)(g), and 31(2).
The Court addressed key issues, including the right to property, equality before law, freedom of trade, and the effect of legislative action on individual rights. A landmark ruling, the Court struck down the Act, holding that the effect of legislation, rather than its object, determines its constitutionality. It emphasized that adequate compensation is mandatory for the acquisition of private property and that shareholders can seek redress if their personal rights are impaired.
Relevant Provisions
Constitutional Provisions
Article 14: Equality before the law and equal protection of the law
Article 19(1)(f): Right to acquire, hold, and dispose of property (now repealed).
Article 19(1)(g): Grants the right to practice any profession or to engage in any occupation, trade, or business.
Article 31(2): Protection against deprivation of property without compensation (now repealed).
Article 32: Right to constitutional remedies for enforcement of fundamental rights.
Article 123: Allows the President to issue Ordinances when Parliament is not in session.
Article 301: Freedom of trade, commerce, and intercourse throughout India.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969: The central legislation challenged in the case, providing for the nationalization of 14 major commercial banks.
Seventh Schedule: Union List and State List, for determining Parliament’s legislative competence.
Rustom Cavasjee Cooper vs Union of India on 10 February, 1970 AIR 564
Petitioner:
Rustom Cavasjee Cooper
Vs.
Respondent:
Union of India
Date of Judgement: 10/02/1970
Facts
In the case of Rustom Cavasjee Cooper v. Union of India (1970), the petitioner, R.C. Cooper, a shareholder in one of the 14 major private banks nationalized under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, challenged the constitutional validity of the Act. He argued that the nationalization of banks by the Central Government violated his fundamental rights under Article 19(1)(f) (right to property) and Article 31 (protection from deprivation of property without compensation) of the Indian Constitution. Cooper contended that the Act unfairly deprived shareholders of their property without ensuring fair compensation and arbitrarily targeted specific banks, thereby also violating Article 14, which guarantees equality before the law. The case raised critical questions about whether the government’s power to nationalize industries could override the constitutional rights of individuals.
Issues Involved
Whether the Bank Nationalization Ordinance and the subsequent Act of 1969 were constitutionally valid, especially under Article 123, due to lack of emergency justifying their promulgation.
Whether the Act encroached on the State List under the Seventh Schedule, making it beyond the legislative competence of Parliament.
Violation of Fundamental Rights:
Article 14 (Right to Equality), by selectively targeting only certain banks;
Article 19(1)(f) (Right to Property) and 19(1)(g) (Right to Practice Any Profession or Business), by depriving shareholders and banks of property and operations;
Article 31(2), by not ensuring fair compensation for compulsory acquisition.
Whether the Act infringed upon the freedom of trade guaranteed under Article 301.
Whether giving retrospective effect to the Act was constitutional, particularly when the Ordinance that preceded it was allegedly invalid.
Whether a shareholder, who does not own the company’s assets, could maintain a writ petition under Article 32 for violation of fundamental rights when State action impairs both the rights of the company and its shareholders.
What constitutes “compensation” under Article 31(2), and what is the scope of judicial review in compulsory acquisition cases.
Ratio
The Supreme Court, by a majority, held that the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 was unconstitutional as it violated the fundamental rights guaranteed under the Constitution. The key legal principles established in this case are:
Primacy of Fundamental Rights Over Directive Principles:
The Court ruled that Directive Principles do not have supremacy over fundamental rights. Nationalization may be a Directive Principle goal, but it must comply with the Constitution’s guarantee of fundamental rights.
“Effect Test” over “Object Test”:
The Court rejected the “object” test (i.e., examining the intention behind legislation) and introduced the “effect” test, stating that what matters is the actual impact of a law on an individual’s rights, not merely its stated objective.
If the effect of a legislation violates fundamental rights, even if the objective is public interest, the law can be struck down.
Right to Property is Enforceable by Shareholders:
Though shareholders do not own the company’s assets directly, the Court ruled that they can still file writ petitions under Article 32 if state action impairs their personal rights.
Requirement of Fair Compensation (Article 31(2)):
The Act failed to provide fair and adequate compensation for the acquisition of banks, thus violating Article 31(2). The Court stressed that compensation should be genuine and not merely nominal.
Violation of Article 14 (Equality before Law):
The law selectively targeted 14 banks, without any rational classification or justification, thus violating the principle of equality under Article 14.
The ratio of the case established that a law resulting in the violation of fundamental rights can be struck down based on its effect, irrespective of its stated intent. It also clarified that shareholders can challenge laws if their own rights are affected, and that compulsory acquisition must involve real compensation and meet standards of equality and fairness under the Constitution.
Case Laws
Maneka Gandhi v. Union of India (1978): This landmark ruling applied Cooper’s “effect test” and affirmed that fundamental rights are interconnected rather than separate. Articles 14, 19, and 21 must be read together, rejecting the older exclusive interpretation approach.
Union of India v. Tulsiram Patel (1985): The Court rejected the notion that one fundamental right (e.g., Article 22 on preventive detention) stands alone. Relying on Cooper, it emphasized that a law must satisfy all applicable rights (e.g., Article 19) irrespective of its subject.
Shambhu Nath Sarkar v. State of West Bengal (1973) and Haradhan Saha v. State of West Bengal (1975): These rulings built on Cooper by explicitly reaffirming that Articles in Part III of the Constitution must be interpreted holistically, not in isolation.
A.K. Roy v. Union of India (1981): This case referenced Cooper in the context of restraining legislative overreach and reinforcing judicial scrutiny of laws that impact fundamental rights.
Shri Krishna Gyanoday Sugar Ltd. v. State of Bihar (2003): The decision cited Cooper on assessing legislative competence and the rights affected when regulatory laws impinge on trade and property.
Conclusion
The Supreme Court held that the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 was unconstitutional as it violated Articles 14, 19(1)(f), and 31(2) of the Indian Constitution. The Court ruled that the effect of the legislation, rather than its stated object, determines whether it infringes fundamental rights. It emphasized that property can only be acquired by the State with fair and adequate compensation, and that arbitrary targeting of specific banks violated the principle of equality.
The judgment also clarified that a shareholder can directly approach the Court under Article 32 if their individual fundamental rights are affected, even when the company’s rights are also impaired. This landmark decision reinforced the enforceability of fundamental rights against legislative action and became a foundation for later constitutional rulings, including Kesavananda Bharati v. State of Kerala.
Frequently Asked Questions (FAQs)
What core legal rule or doctrine was laid down in this case?
The Court introduced the Effect Test, ruling that the impact of legislation on fundamental rights matters more than the government’s stated objective. If the effect violates fundamental rights, the law can be struck down.
Can a shareholder file a writ petition for violation of rights affecting a company?
Yes. The Court held that if a shareholder’s own fundamental rights are impaired by State action, even if the company is also affected, they can directly approach the Supreme Court under Article 32.
What does the “Effect Test” introduced in this case mean?
Laws must be judged by their practical impact on fundamental rights (the effect), not merely by the legislature’s asserted aim (the object). If the effect infringes rights, the law can be invalidated despite a legitimate object.
Why is this case significant in Indian constitutional law?
It marked a shift from the “Object Test” to the “Effect Test”, expanded the scope for individuals to enforce fundamental rights, and laid important groundwork for later landmark judgments like Kesavananda Bharati v. State of Kerala.
