Author: Drushti Jayesh Shah , Adv. Balasaheb Apte College Of Law
To The Point
The Indira Gandhi government is recognized for its resolute actions aimed at uplifting India and establishing its presence on international platforms. However, it is also noted for its authoritarian measures, such as the state of emergency. One significant action was the nationalization of banks under. This decision faced legal scrutiny in the R.C. Cooper v. Union of India case in 1970, where R.C. Cooper contested the nationalization of banks, arguing that the act violated fundamental rights.
Abstract
Following India’s independence, there was a pressing need to develop various sectors to uplift the nation. Consequently, multiple sectors were nationalized by different governments, as they played a crucial role in the country’s development. Key entities such as the Reserve Bank of India, Air India, insurance companies, the coal industry, and the oil and gas sector were all nationalized to promote national growth and societal welfare.
In addition, there was a recognition of the necessity to nationalize the banking sector to ensure its reach across different parts of India, facilitating swift transactions and safeguarding money. As a result, the government nationalized 14 banks through the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1969. This decision was later challenged in the Supreme Court by R.C. Cooper, a case that we will explore in detail in this article.
The Proof
Since the necessity was felt to nationalize the banking sector to ensure its reach across different parts of India, facilitating swift transaction and safeguarding money. The government aimed to nationalized banks which had deposits of more than 50 crore rupees. As a result on 19 July 1969 government by the consent of the president to ordinance nationalized 14 banks under Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 which included Central bank of India and Bank of Baroda. The directors of all the banks were asked to leave their post from the banks but the employees of the bank would be able to continue their job under the Government of India. The ordinance provides the compensation to the banks either by the amount fixed by the agreement or if there is no such agreement then the Tribunal will decide the amount of compensation within period of three months. R.C. Cooper was the director of the Central Bank of India and was holding the shares in the same bank. He also held the shares in Bank of Baroda, Bank of India and Union Bank of India. Rustom Cavasjee Cooper, filed writ petitions under Article 32 of the Constitution in the Supreme court, challenging the constitutionality of the Act and the Ordinance. The primary contentions of the petition revolved around the violation of their fundamental rights, particularly the right to property (Article 19(1)(f) and Article 31) and the right to carry on business (Article 19(1)(g).
The issues which were raised in the court are as follow:
Whether the writ petitions filed by the petitioners were maintainable.
Whether impugned Ordinance was invalid because the condition precedent to the exercise of the power under Article 123 of Constitution did not exist?
Whether impugned Act was not within the legislative competence of Parliament, because, (a) to the extent to which the Act vested in the corresponding new Banks the assets of business other than Banking the Act trenched upon the authority of the State Legislature and (b) the power to legislate for acquisition of property in entry 42 List III did not include the power to legislate for acquisition of an undertaking
Whether Articles 19(1)(f) and 31(2) of the Constitution are not mutually exclusive? Whether a law providing for acquisition of property for a public purpose could be tested for its validity on the ground that it imposed limitations on the right to property which were not reasonable?
Whether provisions of the impugned Act which transferred the undertaking of the named Banks and prohibited those Banks from carrying on business of Banking and practically prohibited them from carrying on non-banking business, impaired the freedoms guaranteed by Articles 19(1)(f) and (g) of the Constitution?
Whether provisions of the impugned Act which prohibited the named Banks from carrying on banking business and practically prohibited them from carrying on non-banking business violated the guarantee of equal protection and were, therefore, discriminatory?
Whether the impugned Act violated the guarantee of compensation under Article 31(2) of the Constitution?
Arguments By the Petitioner
The argument was made by the petitioner that the fundamental rights of shareholders, directors, depositors has been violated by the nationalisation. They contended that since they had a direct interest in the property, their writ petitions were maintainable under Article 32 of the Constitution. Further it was argued that the Ordinance was invalid because the conditions required for its promulgation under Article 123 were not met. They contended that there was no immediate necessity or urgency to justify the exercise of the President’s power. The petitioners contended that the Act exceeded Parliament’s competence because it encroached upon the State List under the Seventh Schedule of the Constitution. Specifically, they argued that the Act dealt with the acquisition of property that was not related to banking, which was beyond Parliament’s legislative authority. Petitioner added that the act violated their rights under Articles 14, 19(1)(f), and 19(1)(g) by depriving them of their property and livelihood without adequate compensation. They also claimed that the Act imposed unreasonable restrictions on their right to carry on business. The compensation provided under the Act was not just, fair, or adequate as required by Article 31(2) of the Constitution. The compensation was to be paid in government securities over ten years, which they argued was not an acceptable form of compensation.
Arguments by the respondent
The Union argued that the petitioners, as shareholders or directors of the affected banks, did not have a direct proprietary interest in the assets of the banks. They contended that the company, as a legal entity, was the proper party to challenge the acquisition, not the individual shareholders or directors. The attorney on behalf of union further said the President’s satisfaction regarding the need for immediate action was subjective and non-justiciable. They further contended that the President’s power under Article 123 was within the bounds of the Constitution, and there was no need for the Court to question the exercise of this power. He added Parliament had the authority to legislate on banking under Entry 45 of List I (Seventh Schedule), and the power to legislate on property acquisition under Entry 42 of List III. The Union also contended that the acquisition of a banking company’s undertaking, including its assets and liabilities, was within Parliament’s competence. The Union argued that the compensation provisions were within the legislative competence of Parliament and that adequacy of compensation could not be judicially reviewed. The compensation provided under the Act was consistent with the principles established by the Banking Regulation Act, 1949. It was contended that the classification of banks based on deposit sise was rational and had a legitimate basis. They argued that the fourteen banks chosen for nationalisation were selected based on their significant role in the economy, and the differentiation was not discriminatory.
Legal Jargon
In this case, the landmark judgment was delivered by a majority of 10:1, with Justice A.N. Ray presenting a dissenting opinion. The ruling established that a shareholder is entitled to approach the Supreme Court to claim Fundamental Rights on behalf of the company when their rights are infringed upon by governmental actions.
The majority judgment struck down the Banking Companies (Acquisition and Transfer of Undertakings) Act. The court introduced the ‘Effect’ Test, rejecting the ‘Object’ Test, emphasizing that the focus should be on the consequences of any legislative act rather than its intended objectives.
Regarding the validity of the ordinance’s promulgation, the Court concluded that since Parliament had already enacted the ordinance into law, interference by the Supreme Court was neither appropriate nor necessary.
The Court declared that the Act infringed upon Article 14 and Article 31. Article 14 addresses Equality, highlighting that the government restricted only 14 banks from conducting banking business while not prohibiting others. Article 31 concerns Compensation, noting that fair and just compensation was not to be provided. As a result, the Act was invalidated. Concerning Article 19 (1) (f), the Court ruled that the Act does not violate this article, as the State possesses the authority to maintain an absolute monopoly. [Akadasi Padhan Vs State of Orissa (1962)]. In his dissent, Justice A.N. Ray argued that the compensation set by the Legislature cannot be challenged in court and asserted that an ordinance could only be contested when the President acts with malice or deceitful intent.
Conclusion
The R.C. Cooper v. Union of India case marked a significant turning point in constitutional jurisprudence, especially regarding the interpretation of fundamental rights and the role of individuals in corporate structures. While the nationalization of banks was intended to promote socio-economic equality and extend banking services to underserved regions, the Supreme Court emphasized that such objectives must not come at the cost of violating constitutional protections. By striking down the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, the Court reinforced the importance of the “effect” of legislation over its intended “object,” thus broadening the scope of judicial review. This judgment not only safeguarded individual rights against arbitrary state action but also laid the groundwork for a more nuanced understanding of corporate rights and state power. Despite the setback to the government’s immediate plans, the ruling prompted subsequent legal reforms, eventually leading to a more constitutionally compliant nationalization framework. Ultimately, this case remains a landmark for asserting that economic policy must align with constitutional principles.
FAQs
What is nationalization of Banks?
Nationalization of banks means government taking over the control of private banks.
What is Article 31?
Article 31 dealt with right to property as a fundamental right which was later repealed.
What is Article 123?
Article 123 grants power to the president to promulgate ordinances when both Houses of Parliament are not in session.
What does the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1969 dealt with?
The Banking Companies (Acquisition and Transfer of Undertakings) Act of 1969 nationalized 14 major commercial banks in India. The act aimed to bring these banks under public ownership to better serve the needs of the economy and align with national policies
