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50 Years to Bank Nationalisation Case: Rustom Cavasjee Cooper v. Union of India

Abhinav Kumar & Chetan Nagpal
17 Jun 2020 9:03 AM GMT
50 Years to Bank Nationalisation Case: Rustom Cavasjee Cooper v. Union of India

In the wake of the COVID-19 lockdown, the hardest hit is the agrarian sector and the poorest strata of the society. Since the earnings have been low, induction of credit in the accounts of people seemed the only viable option in order to overcome the plight of the distressed. Many social security schemes have come to the rescue of the poors, but in the midst of all this what we need...

In the wake of the COVID-19 lockdown, the hardest hit is the agrarian sector and the poorest strata of the society. Since the earnings have been low, induction of credit in the accounts of people seemed the only viable option in order to overcome the plight of the distressed. Many social security schemes have come to the rescue of the poors, but in the midst of all this what we need to understand is that whatever schemes we hear today wouldn't have been of much relevance had the banking culture not been promoted in India. In this respect 50 years ago, the Indra Gandhi government took a giant stride of Nationalisation of the Bank whose significance can be seen now in contemporary times when the current Government's first five years were targeted to achieve financial inclusion through schemes like Jan Dhan Yojana.

The decade of the 1960s was a phase of hardships for India. There was serious contemplation regarding the unity of the nation post Nehru's death. The 1962 war with China and 1965 war with Pakistan adversely affected the nation. This was followed by severe droughts and the economy of the country was suffering. Low literacy rate was another problem and it was the first time since independence when the baton of leadership was being passed from Nehru to someone else.

The Nationalisation was done with the aim of providing the more priortised sector with credit when most of the commercial banks preferred big businesses. Being such a big step for the economic betterment of the country it could not remain unaffected from giant speculations and controversies. In the year 1970 Hon'ble Supreme Court of India decided the most controversial Bank Nationalisation Case. After the Golaknath case, this was the second occasion where a case was decided by an 11-judge bench. This case was filled with many twists and turns.


After about two decades of India being officially called a democratic republic, the acting President of India, M. Hidaytullah in the year 1969 passed an ordinance to undertake 14 commercial banks with deposits more than 50 crores under its domain. Two days later, the Indra Gandhi government passed an act called Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 with the same objectives as the ordinance with the sole purpose of benefiting the economy and to promote banking culture in India. Thus, through this act, the undertaking, rights and liabilities were hence transferred. Under Section 15(2) (e) of the Act, the Banks were entitled to carry on business other than banking. The new banks undertook the vacant possession of the 14 banks. Section 6 read with Section 11 of the Act provided for compensation of the takeover which was to be decided by an agreement, in the absence of which the matter would be heard by a tribunal and the compensation would be paid in securities over a course of 10 years.


This is another classical case where Nani Palkhivala- 'The Courtroom Genius' mesmerised the bench with his brilliant erudition and eloquence. Rustom Cavasjee Cooper, the petitioner, was a shareholder in the Central Bank of India Ltd., the Bank of Baroda Ltd., the Union Bank of India Ltd., and the Bank of India Ltd., challenged the Act on several grounds. First, he claimed that the Legislature was not competent to pass the act as the state legislature had power to legislate on the matter and also acquisition of property did not include acquisition of an undertaking. Secondly, the act was violative of freedom guaranteed under Article 19(1)(f) and 19(1)(g) [Freedom to practise any profession], Article 301 and also of Article 31(2) of the Indian Constitution [Guarantee of compensation]. The Government was of the view that the petition was not maintainable because a shareholder cannot move a petition for infringement of rights of the company. The Petitioner was of the view that there was some ill intent behind promulgating an ordinance two days before Parliament came in session.


It is true that a shareholder or director cannot move such a petition on behalf of the company however it can move a petition if the fundamental rights of the person through that action are infringed. Thus, the petition was held maintainable. Secondly, the right to make laws on 'banking' was held within the legislative competence of the Parliament under Schedule 7 Entry 54 List I. The Parliament has the right for expropriation, and the right to acquire a "property" when given widest interpretation can include organisations etc. under schedule 7 Entry 42 List III. In the judgment, the judges gave preference to effect test rather than object test which means the effect of the legislation should be seen rather than the object with which it was passed overruling the 20-year-old A. K. Gopalan case theory of mutual exclusivity. Other than that, the Section 15(2)(e) of the Act was termed as 'unreasonable' by the court because it deprived the named banks from indulging in business related to 'banking'. The court called it unreasonable because firstly the expropriation took away the assets and undertaking of the bank such that they are in a position to not even start a non-banking business and secondly the compensation to be paid was not on immediate basis under Section 6. The court even called the part as 'discriminatory' since other banks were allowed to operate normally.

The court was however of the view that the said Act is not violative of Article 19(1)(f) i.e freedom to carry trade and business as the State always has the right to create an Absolute Monopoly. In Akadasi Padhan v. State of Orissa, the Supreme Court held that if the State creates a monopoly that "indirectly impinges on any other right", it cannot be challenged.

The other issue that needed to be addressed was regarding Article 31(2) of the Constitution which talked of the right to compensation for acquiring a property. The court post citing fourth amendment of the Constitution which gave for 'fair' and 'just equivalent' compensation, cited a 1969 case called, Tile State of Gujarat v. Shantilal Mangaldas wherein it said that the compensation paid must not be my principles of 'just' or 'equivalent' that is principles on which the compensation is determined may seem 'just' prima facie but it has got to be 'adequate'. Thus, an appropriate principle should be established to determine the value of property. In the present scenario, the banks were not provided compensation according to any principles. The court said that the principle of valuation must be according to value of property in addition to other advantages connected with it.


Justice Ray was the only dissenting judge in the panel of 11 judges. The judgement came in the ratio 10:1. Firstly J. Ray said that the fact that ordinance was promulgated two days before Parliament came in session has nothing to do with the point that the President's intention was mala fide. He further agreed with all the judges that the Act was not in violation of Article 19(1)(f) that is freedom to carry trade and occupation. Interestingly, he also had the view that the petitioner cannot approach the court since on behalf of a non-citizen (bank) whose rights have been violated.


By the decision rendered in the case, the Supreme Court declared the ordinance and the Banking Companies (Acquisition and Transfer of Undertaking) Act of 1969 as invalid and the action taken or deemed to have been taken in exercise of the powers under them was unauthorized. The court announced the judgement on 10th February, 1970, the effect of which was that the undertaking of the 14 banking companies, whose burners have been acquired by the Central Government reverted to the banking companies. Interestingly, with a view to resume control over the business of the banking companies, four days after the judgement the President again promulgated a similar ordinance modifying the provisions of the Act which were struck down by the Court.


Post the judgement, an amendment to the constitution was made in the year 1971 which was proposed by H.R. Gokhale. Article 31 of the Indian Constitution underwent changes wherein the word 'compensation' was substituted with the word 'amount'. Courts while defining the word 'compensation' considered it as the market value of the property however it was changed, by stating that the amount provided for acquiring the property must be 'adequate' and 'just'.

Secondly, Article 31C was added to the constitution which said that if directive principles of state policy contravene the fundamental rights, especially Article 19, then on this basis it cannot be challenged in court. It was indeed a very controversial point, however, in Kesavananda Bharati v. State of Kerala, this part was declared unconstitutional.

In conclusion, this case is another classical example where Nani Palkhivala baffled everyone by his exceptional articulative skills in the courtroom which ultimately convinced the court to strike down the Banking Companies Act, 1969 and hence ensured the citizens that anything arbitrary or unjust cannot find a place in the Indian Laws. 50 years of this judgement shades various contours of ensuring constitutionalism in India.

Views are personal only.

 (Abhinav Kumar is Delhi based public policy expert & teaching at Law Centre, University of Delhi & Chetan is a pursuing BA LL.B from USLLS, IP University, Views expressed are personal, Email Id- [email protected] )

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