This Case Commentary is written by Anshveer Nath, a Third-Year Law Student of Indian Institute of Management, Rohtak

Case Details

Court: Supreme Court of India

Equivalent citations : 1970 AIR 564, 1970 SCR (3) 530, 1970 SCC (1) 248

Bench: Justice J.C. Shah, Justice S.M. Sikri, Justice J.M. Shelat, Justice Vishishtha Bhargawa, Justice G.K. Mitter, Justice C.A. Vaidyialingam, Justice K.S. Hegde, Justice A.N. Grover, Justice A.N. Ray, Justice P.J. Reddy, and Justice I.D. Dua.

Decided on: 10th February 1970

Parties to the case

Petitioner: Rustom Cavasjee Cooper (R.C. Cooper)

Respondent: Union of India

Abstract:

In 1970, the Indian Supreme Court analyzed the constitutionality of bank nationalization through the case R.C. Cooper v. Union of India: a very important judgment that altered the way fundamental rights- especially rights concerning property and acquisition compensation- are construed. This case involved important legal and constitutional considerations since it threw light on the possible ways in which the government can strike the balance between individual rights and socio-economic purposes.

Introduction:

Then in the year 1969, through an ordinance later repealed by a Parliamentary Act, nationalized by the Prime Minister's cabinet 14 major commercial banks of India. R.C. Cooper was the director of the Central Bank of India, who held many shares of the Bank of Baroda and who, in 1969, filed a suit with the Supreme Court of India. It was at this stage that several banks were nationalized and R.C. Cooper challenged the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, enacted at the time. One of the several provisions was Schedule II which inter alia provided that when the government acquires the banks, the compensation will be reckoned in an agreement. This action was intended to strengthen government control over the banking industry and guarantee more fair loan distribution. It was a component of the socialist program. Nonetheless, R.C. Cooper, a director and shareholder in a few of the impacted institutions, contested this decision in the Supreme Court, claiming it went against the fundamental liberties protected by the Constitution.

Brief Facts:

The case began in July 1969 when the Indian government decided to nationalize fourteen large commercial banks. The Banking Companies (Acquisition and Transfer of Property) Ordinance was issued on July 19 by President V.V. Giri, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 swiftly followed. The Act established a compensation plan, removed directors from banks with deposits over 50 crores, and nationalized such banks. With positions in multiple affected banks, R.C. Cooper filed a writ petition in the Supreme Court challenging the constitutionality of the Act and the Ordinance.

Issues Raised:

1. Whether a shareholder can file a Writ petition when the company in which he is a shareholder is acquired by the Government for violation of his fundamental rights?

2. Was or was not the Ordinance in question validly enacted?

3. Was the Act within the jurisdiction of the Parliament which got framed 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. Is the mode by which the compensation was determined valid or invalid?

6. Is Schedule II of the Ordinance justified?

Arguments from the Petitioner

The petitioner, represented by Mr. A. Palkhivala, challenged the validity of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, and the ordinance promulgated under Article 123 of the Indian Constitution. The petitioner argued that the ordinance was invalid as the necessary conditions for its promulgation had not been met, particularly given that it was passed just two days before the monsoon session of Parliament. He also claimed that the Act violated Article 301 (free trade) and encroached on matters in the State List (Entry 42, List III), making it outside the Parliament’s legislative competence. The Act was further challenged because it violated fundamental rights under Articles 14, 19(1)(f) and (g), and 31(2), particularly by diminishing the value of the petitioner’s shares and causing financial losses. Additionally, the petitioner contended that the nationalization of banks did not serve a valid public purpose and involved hostile discrimination and that the retrospective effect given to the Act was invalid.

The petitioner also emphasized that shareholders’ rights had been impaired, irrespective of the company’s rights, and argued that the court should not dismiss the petition on technical grounds. Palkhivala asserted that the Act interfered with the freedom of trade and was not in the public interest. He further contended that the Parliament had exceeded its jurisdiction by legislating beyond banking activities, as the business of banking falls under Entry 45, List I, and the Act’s provisions were arbitrary and irrational, especially regarding the compensation provided to the banks.

Argument from the Respondent

The Attorney General contended that the writ petitions were not maintainable, as the petitioner, being a shareholder, director, or creditor, did not have a direct proprietary interest in the property that was transferred to the new banks. The company itself, being a legal entity, owned the property, not the shareholders or directors. The respondent argued that the petitioners could only seek relief for their rights, and there was no direct violation of fundamental rights under Articles 14 or 19. Additionally, the Attorney General maintained that the President’s power to promulgate the ordinance was valid and that the need for such an ordinance was subjective, as recognized in previous cases. The respondent also defended the Parliament’s legislative competence, arguing that the term “banking” in Entry 45 was broad enough to include all business activities undertaken by banks, and the acquisition of banking property was well within Parliament’s power. The respondent cited precedents like A.K. Gopalan v. State of Madras and Ram Singh v. The State of Delhi to assert that the Act was not violative of Articles 19(1)(g) or 31A, and the restrictions on property were justified under existing laws for achieving a socialist objective.

Provisions Applied:

The case primarily involved Articles 14, 19(1)(f), 19(1)(g), and 31(2) of the Constitution of India. It also examined the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, and considered the legislative lists in the Seventh Schedule of the Constitution.

Judgment and Analysis:

The majority of the Supreme Court held: that it had locus standi to challenge the Act, their rights being directly affected. It agreed that the Act infringed Article 31(2) because the amount of compensation provided was neither just not fair. But it held the Act was within Parliament's legislative competence. Curiously, it held that it did not offend Article 19(1)(g), upholding the right of the state to make a monopoly. However, it declared that the Act offended Article 14 as it was discriminatory between Indian and foreign banks. The R.C. Cooper judgment brought into Indian constitutional law a great sea change. It overruled the article exclusivity doctrine of mutual and distinct between Articles 19 and 31 as evolved in the A.K. Gopalan case. This expanded the scope of protection of the fundamental rights of shareholders and decreed the principle that the effect as well as the object of a law would have to be looked into for ascertaining its constitutionality. The judgment has cautiously equalized the social-economic objectives of the state and the protection of the rights of the individual; therefore, it has determined the power of the state to confer monopolies but insisted on adequate recompense in the situations of expropriation of properties.

Conclusion:

Even now the R.C. Cooper v. Union of India case remains an exemplary case for Indian constitutional jurisprudence. It went beyond the immediate striking down of the Bank Nationalisation Act and extended to the interpretation of fundamental rights, esp. relating to property rights and compensation for acquisition. Consequent constitutional amendments followed with substantial changes furthering after the judgment in cases that deal with the interrelation of these fundamental rights. This case continues to guide India's developing constitutional framework in creating a more fine-balanced approach towards the exercise of state power and individual rights, as well as drawing the line where the judiciary adapts the Constitution of India to change socio-economic realities while safeguarding fundamental rights.