RC Cooper V. Union of India AIR 1970 SC 564 : (1970) 1SCC 248

The Bank Nationalization Case:

A Turning point in the Interpretation of Fundamental Rights.

Ideological and Political Backgrounds

• Pandit Nehru had a firm belief that socialism was the economic model most suited to India, and needless to mention that after his demise, his daughter Mrs. Indira Gandhi effectively continued the legacy of her father’s belief.

• In fact, Fabian Socialism was popular in several developing countries. State control of important industries was seen as the means to achieve the objective of the greatest good of the greatest numbers.

• After independence several states nationalized transport undertakings; electricity was made a state monopoly and the insurance sector was nationalized. In the late 1960s, several refineries and oil companies were nationalized.

The Initial Proposal For Nationalization.

• In fact, the proposal to nationalize banks was mooted by AICC (All India Congress Committee) in the year 1948 itself.

• R.K Shanmugham Chetty, the first Finance Minister wanted to nationalize the Imperial Bank but the suggestion was dropped at the behest of Sardar Patel.

• In 1955, the Imperial Bank of India was taken over under the State Bank of India Act, and four years later, seven of its subsidiaries were also taken over. With this partial nationalization, one third of commercial banking in the Country had already come under the State Control.

• The RBI took a pro-active role in regulating the banking sector and reduced the number of commercial banking institutions from 566 in 1951 to 89 in 1969.

Opposition to Nationalization.

• There were some leaders who were not in favor of nationalization when Indira Gandhi made up her mind to nationalize 14 banks. They were of the opinion that the amount of compensation (Initially estimated at Rs.85 crores) could be used to stimulate the economy.

• Moraraji Desai, who was then the Deputy Prime Minister and also the Finance Minister, was of the view that instead of paying Rs. 85 crores as compensation, they could control the banks and channel the credit to the social sectors by amending the banking laws.

• The serious differences of opinions between both of them resulted in the dismissal of Moraraji Desai as Finance Minister on 17th of July 1969. The next day i.e. on 18th of July 1969, Moraraji Desai voluntarily resigned from the post of Deputy Prime Minister of the Country.

The Promulgation of Ordinance.

• The President of India on July 19, 1969 promulgated the ‘Banking Companies (Acquisition and Transfer of Undertaking) Ordinance’ 1969, nationalizing 14 banks having deposits exceeding Rs.50 crores. This was in utter disregard to the existing Constitutional conventions and norms which became the hallmark of 1970s as Parliament was about to start its monsoon session just after 2 days.

• The ordinance, at one stroke, brought more than 75% of the banking sector under State Control.

• All directors of the 14 nationalized banks would vacate their respective offices but the services of other employees were to continue with the nationalized banks.

The Provision For Compensation

• The most shocking part of the ordinance was the second schedule which spelt out the compensation to be paid. To determine the quantum of compensation, two methods were specified:

• Where the amount of compensation could be fixed by an agreement, it would be determined in accordance with such agreement;

• Where no such agreement could be reached, the Central Govt. had to refer the matter to a Tribunal within a period of 3 months from the date on which the Central Government and the existing bank failed to reach an agreement regarding the amount of compensation.

• The compensation so determined was to be given not in cash but in marketable Central Govt. securities payable after 10 years. This was the most unfair provision.

Filing of Petition by RC Cooper

• Less than 48 hours after the ordinance was promulgated, R.C Copper, filed a petition in the Supreme Court, through advocate Nani A Palkhiwala.

• RC Cooper was then a director of the Central Bank of India Ltd. He held shares in this bank, Bank of India Ltd. And Bank of Baroda Ltd.

• This Writ Petition was filed on July 21, 1969 and the interim application was heard on July 22, 1969; an interim order restraining the removal of the chairmen of the banks were granted.

Legal Issues

• There were several legal issues raised in this case, which can be summarized as:

• Whether a shareholder could file a petition for violation of his fundamental rights when the company in which the shares are held had been taken over.?

• Whether the ordinance was validly promulgated?

• Whether the Banking Companies (Acquisition and Transfer of Undertaking) Act, which replaced the Ordinance, was within the legislative competence of the Parliament?

• Whether the said Act was violative of Articles 19(1)(f) and 31(2) – provisions pertaining to fundamental rights to acquire, hold and dispose of property.?

• Whether the quantum or method adopted for payment of compensation was valid?

Maintainability of the Petition

• The attorney General at first argued that the petition was not maintainable. He contended that a shareholder, depositor or director was not entitled to move the petition for infringement of the rights of the Companies as the Fundamental right to business was available only to citizens and not to Companies.

• The Supreme Court, rejecting the argument of the Govt. said that RC Cooper had challenged the infringement of his own rights and not of the bank of which he was the shareholder and director. The Court held that an executive or legislative measure may impair the rights not only of the Company but also of its shareholders. The Court could grant relief if the State action impaired the right of the shareholders as well as of the Company.

• The correct view was subsequently expressed in another landmark judgment, Bennett Coleman & Co. V. Union of India, AIR 1973 SC 106.

• In the end, the petition filed by Cooper was held to maintainable.

Validity of Ordinance

• RC Cooper, through advocate Nani Palkhiwala, contended using the language of Article 123 of the Constitution that the President was not the sole arbiter on whether the conditions necessitating an ordinance existed. He argued that the Supreme Court had the power to annul the Ordinance if it found that there were no circumstances rendering it necessary for the President to take immediate action.

• The attorney General argued that the Presidential satisfaction under Article123 was purely subjective, and could not be questioned in a Court of Law.

• However, majority did not deal with this interesting question as the Ordinance had by then been replaced by an Act of the Parliament which was eventually held to be unconstitutional.

Legislative Competence of the acquisition Process.

• RC Cooper, challenged the legislative competence of the Parliament to enact the acquisition Act. While conceding that Parliament could validly legislate in respect of acquisition of that part of the undertaking which related to the business of banking as defined in section 5(b) of the Banking Regulation Act, 1949. He contended that the competence in respect of any other business carried on by these banks prior to the date of acquisition fell within entry 26 of List II which says, “Trade and Commerce within the State subject to the provisions of entry 33 of List III.” As a corollary, the power to legislate in respect of acquisition under Entry 42 of List III could be exercised by Parliament only for effectuating legislation under any Entry falling in List I or List III of the schedule VII. Palkhivala argued that Parliament had the power to acquire only the banking business; other trading activities could be acquired only by the respective State legislatures. He contended that the power of acquisition under Entry 42 of List III could not be exercised unless basic legislation was enacted under Entry 45 of List I or Entry 26 of List II.

Legislative Competence of the acquisition Process….Continued…

• The attorney General on the other hand pushed for an expansive construction to the term ‘banking’ as used in Entry 45 of List I.

• The majority rejected this plea of the attorney General and held that if such an expansive construction is permitted then it would create substantial ambiguity.

• However, they also expressly rejected the limitations suggested by Palkhivala to the legislative competence f the Parliament under Entry 42 of List III, and held that the power to legislate for acquisition of property was exercisable only under this Entry, and not as an incident of the power to legislate in respect of a specific head of legislation in any of the tree lists.

• This was an important principle laid down by the Supreme Court. The power to acquire property was held to be an independent power and there was no need to have ant basic or separate legislation under one of the Entries of List I or List II.

The Overruling of the ‘Mutual Exclusivity Theory’

• The most important legal contribution of this case was the overruling of the ‘Mutual Exclusivity theory’ which was judicially developed in the much talked-about case of ‘AK Gopalan v. State of Madras AIR 1950 SC 27’

• At the outset, the stand taken by the Central Government was that the Acquisition Act could not be tested for violation of all fundamental rights, but only for the violation of Article31, which specifically dealt with acquisition of property for public purpose. This contention was based on the theory of ‘mutual exclusivity’ of rights, propounded by the Supreme Court in ‘‘AK Gopalan v. State of Madras AIR 1950 SC 27’

• The majority of the Supreme Court had held in this case that the various fundamental rights operated in separate compartments and were mutually exclusive – each article enacting a code relating to protection of distinct rights. This theory was followed for 20 years in various judgments till it was overruled in the present Bank Nationalization Case.

Compensation: The Achilles’ heel of the Govt’s Case.

• Article 31(2) placed two major restrictions on the power of the State to acquire private property: first, such acquisition had to be for a public purpose and, secondly, compensation had to be paid for them.

• The Bank Nationalization Case was not the first case where the issue of compensation was fatal to the Government. In ‘State of West Bengal v. Bela Benerjee AIR 1954 SC 170’ the Supreme Court interpreted the expression ‘Compensation ’ as used in Article 31(2) to mean ‘full indemnification’. The Parliament responded to this judgment with the Constitution (Fourth) Amendment Act 1955, thereby clarifying that inadequacy of compensation could not be used to challenge laws providing for acquisition of private property.

Compensation: The Achilles’ heel of the Govt’s Case ……..Continued…….

• Despite this amendment, the Supreme Court, in P Vajravelu Mudaliar v. Special Deputy Collector, Madras, AIR 1965 SC 1017 as well as some other decisions held that the expression ‘Compensation’ in Article 31(2) continued to mean ‘just equivalent’.

• However, the confusion was caused when the Court in State of Gujarat v. Shantilal Mangaldas [1969] 3 SCR 341 held that the compensation which was fixed or determined using the principles specified by the legislature, was not open to challenge on the somewhat indefinite plea that it failed to meet the standard of a just or fair equivalent. Going by this judgment, only the principles for determination of compensation, could be challenged as being irrelevant.

• The majority in the Bank Nationalization Case held that the Acquisition Act was liable to be struck down as it failed to provide compensation based on relevant principles. This test according to the majority, was accepted by both P Vajravelu Mudaliar v. Special Deputy Collector, Madras, AIR 1965 SC 1017 and State of Gujarat v. Shantilal Mangaldas [1969] 3 SCR 341 .

Compensation: The Achilles’ heel of the Govt’s Case ……..Continued…….

• The majority observed that the Acquisition Act, instead of valuing the entire undertaking as a provided for determination of the value of only some of the components, that constituted the undertaking. It also prescribed different methods for valuing each such component. This method, in the opinion of the majority, was prima facie not relevant to the determination of compensation for the whole undertaking. In their view, it was an important principle of valuation that the acquired property be valued as a unit, and not as an aggregate of different components constituting this unit. They felt that the Acquisition Act was liable to be struck down purely on this ground.

Violations of rights to equality and to carry on business

• The Acquisition Act prohibited the nationalized banks from carrying on banking business. This could not be challenged as violating their right to carry on business in banking; under the Constitution, the State could always create partial or complete monopoly. But the ban on banking business violated the right to equality under Article 14. The Supreme Court observed that while the fourteen banks were prohibited from doing banking business, other banks, including foreign banks, could continue to carry on banking business in India and abroad. In the opinion of the Court, this was a ‘Flagrantly hostile discrimination’ that ‘impaired’ the ‘guarantee of equality’.

Violations of right to equality …........continued…

• The 14 banks were magnanimously permitted to carry on ‘non-banking business’. As companies, the 14 banks were prohibited from using the word ‘bank’ or ‘banking’ in their corporate name. The nationalized banks found themselves in a pathetic situation. They were deprived of their entire assets, including their premises, their corporate name. The nationalized banks found themselves in a pathetic situation. They were deprived of their entire assets, including their premises, their corporate names, their managerial and other staff and the pitiful compensation that was payable was to be received after 10 years. The Court agreed with Palkhivala’s submission that the Acquisition Act violated the right to equality under Article 14 as it prohibited these 14 banks from carrying on the business of banking, when other existent banks as well as newly created banks could very well carry on this business. Consequently, Court struck down section 15(2)(e) of the Acquisition Act as unconstitutional by holding that ‘Flagrantly Hostile Discrimination’ was being practiced.

OBJECT AND EFFECT TEST

• Another important point that was decided in this case was the ‘effect test’. The assumption in AK Gopalan’s case was that the object of the State action alone had to be considered while examining the infringement of guaranteed fundamental rights. This assumption was held to be incorrect by the majority who decided that the effect of laws on fundamental rights could not be ignored. The object and effect test also demonstrated the inter-dependence of fundamental rights.

Nationalization Upheld.

• Contrary to popular belief, the Supreme Court upheld the right of the Union and State Governments to nationalize banks, or, for that matter any industry.

• However, while opposing nationalization Palkhivala raised an extremely interesting argument. He argued that nationalization was wholly irrational as it penalized efficiency and good management. Section 36AE of the Banking Regulation Act, 1949 conferred power on the Central Government to acquire the undertaking of banking companies that were badly managed but the 14 nationalized banks had complied with all the directives of the Reserve Bank of India.

• He contended that the banks which were nationalized were just the opposite of those that were contemplated under the law to be acquired. The Supreme Court merely said to this argument of Palkhivala that, “We need express no opinion on this part of the argument”

Re-enactment of the Bank Nationalization Act.

• After this decision, the Parliament re-enacted the Bank Nationalization Act and an additional sum of Rs.58 crores was paid to the 14 banks.

• According to some jurists, the entire controversy could have been avoided in the first place even if an extraRs.50 crores had been paid to the banks or if more reasonable yardsticks to determine compensation had been adopted.

Source of the Slides.

• The entire Information contained in the preceding slides about this landmark judgment is almost a brief and systematic reproduction of the narratives mentioned in the book “Nani Palkhivala, The Courtroom Genius, Soli J Sorabjee and Arvind P Datar’.

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