R.C. Cooper v Union of India(1970): Nationalisation of banks impaired the right to compensation under Article 31(2) of the Constitution of India and consequently was struck down.

CaseRustom Cavasjee Cooper v. Union of India along with T.M.Gurubuxani v. Union of India, AIR 1970 SC 564
CourtBefore Supreme Court of India
BenchA.N.Grover, A.N.Ray, C.A. Vaidialingam, G.K.Mitter, I.D.Dua, J.C.Shah, J.M.Shelat, K.S.Hegde, P. Jagmohan Reddy, S.M. Sikri and Vashishtha Bhargava, JJ.
Author of the judgementJ.C. Shah, A.N.Ray, JJ.
Decided On10.02.1970
Advocate for the petitionersNani Palkhivala, M.C.Chagla, A.J.Raja, N.N.Palkhivala and R.N.Bannerjee.
Advocate for the respondentsNiren De, Attorney General, Jagdish Swarup, Solicitor General, M.C.Setalvad, C.K.Daphtary, and R.H.Dhebar.

This is a landmark judgment of 11 judges where the Constitutional Validity of bank nationalisation by the Indira Gandhi Government was challenged. While declaring the nationalisation to be invalid, SC by a majority of 10:1 observed that the nationalisation of banks impaired the right to compensation under Article 31(2) of the Constitution of India and consequently was struck down primarily on the ground of violation of Article 31(2). However, A.N.Ray, while writing a dissenting judgment upheld the validity of Nationalisation.

Author of the briefDarshan Patankar
KeywordsBanking Law, Privatisation, Ordinance, Constitution of India, Constitutional validity, Legislative Competence, Freedom of Trade.

Brief Facts and Procedural History:

(1) On 19.07.1969, then Vice- President of India V.V.Giri (acting as President) promulgated the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 8 of 1969 in exercise of the power conferred by Article 123(1) of the Constitution of India. This Ordinance had the effect of nationalizing 14 private sector banks having a deposit base of over INR 50 Crore and thereby vesting the ownership of the private banks with the government.

(2) The principal provision of this Ordinance was that every undertaking (i.e. the 14 banks) would stand transferred and would vest in the corresponding new bank which would be owned by the government. This included transfer of all assets, rights, powers, authorities and privileges and all movable and immovable properties of the old bank which would be vested in the corresponding new bank. For this purpose, the Central Government was supposed to pay compensation to the banks. The total amount of compensation could be determined by consensus between the bank and the government. However, if achieving consensus was not possible, the Central Government would refer the matter to a Tribunal to determine the compensation payable in marketable government securities which would mature post 10 years.

(3) Thereafter, on 21.07.1969, petitions challenging the competence of the President to promulgate the Ordinance were filed in the Supreme Court. The lead petitioner was one Rustom Cavasjee Cooper, who was a director of the Central Bank of India which was one of the nationalised banks and he held shares in the Central Bank of India, Bank of Baroda and the Union Bank of India.

(4) However, before the petitions could be heard by the Supreme Court, a bill to enact provisions relating to acquisition and transfer of undertaking of the existing banks was introduced in Parliament and was enacted on 09.08.1969 as the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969. The long title of the Ordinance and the Act was identical and by Section 27(1) of the Act, Ordinance 8 of 1969 was repealed. This Act was to be retrospectively applicable from 19.07.1969 and the 14 private banks were to be nationalized as similar to the Ordinance.

Petitioners Contention:  The Petitioners challenged the Constitutional Validity of the Ordinance and consequently the Act on the following principal grounds: –

(1) That the Ordinance promulgated under Article 123(1) of the Constitution was invalid, because the condition precedent to the exercise of the Ordinance making power did not exist. Nani Palkhivala, while appearing for the petitioner submitted that the President was not the final arbiter of the existence of conditions on which the power to promulgate an ordinance may be exercised. Moreover, it was submitted that the necessity to take immediate action should be established by the Respondents Union of India considering the fact that the Ordinance was enacted on 19.07.1969 while the Parliament supposed to commence on 21.07.1969 i.e. just two days later.

(2) That the Parliament did not have any legislative competence to enact the ordinance and consequently the act and that the Parliament encroached upon the State List in the Seventh Schedule of the Constitution. Palkhivala argued that Act was devoid of any legislative competence and therefore was liable to be struck down.

(3) That by enactment of the Act, fundamental rights of the petitioners guaranteed under Articles 14, 19(1)(f), 19(1)(g) and 31(2) were impaired and therefore the act was invalid. As far as the right to compensation under Article 31(2) was concerned, it was contended that compensation means a “just equivalent” in money of the property acquired and that the law providing for compulsory acquisition must aim at a just equivalent in terms of compensation. Further, it was submitted that the Act should be struck down for not satisfying the test of compensation under Art.31 (2) and for not providing relevant principles for determining such compensation.

(4) That the Act violated the guarantee of freedom of trade under Article 301.

(5) Lastly, it was contended that retrospective operation given to Act 22 of 1969 was ineffective, since there was no valid ordinance in existence and further that the provision in the act retrospectively validating infringement of the fundamental rights of citizens was not within the legislative competence of the Parliament.

Respondents Contention:

(1) The Learned Attorney General firstly contended that the petitions were not maintainable because no fundamental rights of the petitioners were directly impaired and the petitioner was only a director, shareholder and holder of deposit and current account with the banks but was not the owner of the property sought to be nationalised considering that a Company is a legal person, separate and distinct from its individual members and that the property of the company is not the property of the shareholders.

(2) Further, the Attorney General submitted that the condition of satisfaction of President was purely subjective and the Union of India was under no obligation to disclose the existence of circumstances of the necessity to take action.

(3) The Attorney General submitted that Parliament had the legislative competence within Entry 45 of List I of the Seventh Schedule i.e. “banking” and within Entry 42 of List III i.e. “acquisition and requisitioning of property”.

(4) It was pleaded by the Attorney General that compensation under Article 31(2) does not mean a “just equivalent” and that the courts could not determine the adequacy or the reasonableness of the compensation. He also contended that there was no infringement of the fundamental rights as claimed by the petitioners and therefore the act was valid.

Decision of the Court:

A. Judgment of J.C.Shah, J. (He wrote the majority judgment for himself and 9 other judges)

(1) Firstly, the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1969 was struck down as the act failed to provide compensation to the banks according to relevant principles and therefore impaired the fundamental right under Article 31(2) of the Constitution. Due to this striking down of the Act, the Court did not delve into the issue as to whether the Act violated freedom of trade and commerce under Article 301.

(2) It was held that the petitions would not fail on the ground that the shareholders were not holders of the property and that jurisdiction would not be denied by the court when the individual right of the shareholders were impaired and therefore the preliminary objection raised by the Attorney General against the maintainability of the petitions failed.

(3) Shah, J. observed that the Ordinance had been repealed by the Act and therefore opined that the question of its validity was purely academic and not exactly relevant.

(4) Shah, J. held that Parliament had the legislative competence to enact the law under Entry 45 of List I of the Seventh Schedule and within Entry 42 of List III i.e. for acquiring the undertaking of the named banks.

(5) Further, it was held that the Act was not violative of Article 19(1)(g) of the Constitution of India, however, the act was held to contravene Article 14 of the Constitution since the guarantee of equality was  impaired by virtually preventing the banks from carrying on the non-banking business.

B. Dissenting Judgment of A.N.Ray, J.

(1) Ray, J. held that there can be retrospective legislation affecting acquisition of property and therefore the Act was not invalid on the ground of retrospective operation.

(2) Further, Ray, J. held that the Act does not violate Article 31(2) because it referred to authority of a law but did not include any words of limitation or restriction as to law being in force at the time and therefore held that the act was valid and as a corollary the act need not be struck down.

(3) He agreed with the majority view that Parliament had legislative competence to effect nationalisation under Entry 45 of List I and Entry 42 of List III of the Seventh Schedule.

(4) Ray, J. opined that Article 19(6) conferred a power on the State to have a valid monopoly business and therefore Article 19 (1) (g) was not violated and also that the Act did not violate Article 14 of the Constitution.

(5) As far as the issue relating to the promulgation of the Ordinance was concerned, Ray, J. opined that the satisfaction of the President was subjective and therefore there was no necessity required to be established by the Union of India and the only way in which the Ordinance making power by the President could be challenged was by establishing bad faith or mala fide or corrupt motive by the Petitioners.

Aftermath:  By a majority of 10:1, the Supreme Court of India struck down the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1969 mainly on the ground that the proposed compensation to be provided to the 14 banks failed the test of Article 31(2). Thereafter, the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 was enacted by the Parliament but with inclusion of a specific amount of compensation to be paid to each of the 14 banks. This amount was clearly specified in Schedule II of the 1970 Act unlike the impugned Act of 1969 which provided for Constitution of a tribunal by the Central Government in case compensation could not be arrived at through consensus. Therefore, notwithstanding the striking down of the Act of 1969, Nationalisation of Banks prevailed and subsequently in 1980, 6 additional banks were nationalized.