Landmark Judgement: RC Cooper vs. Union of India

INTRODUCTION 

The RC Cooper vs Union of India case, heard by the Supreme Court of India in 1970, was a crucial legal battle concerning the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance of 1969. This ordinance led to the nationalization of 14 major Indian banks, including the prominent Imperial Bank of India. The ordinance was contested on the grounds that it infringed upon the fundamental rights of the banks' shareholders. Specifically, the challenge was that the ordinance deprived them of their property without adequate compensation, which the challengers argued was unconstitutional.

Brief details of R.C. Cooper v. Union of India

  • Name of the case:-

 Rustom Cavasjee Cooper v. Union of India 

  • Date of the judgement:-

10 February 1970   

  • Parties to the case:-

Petitioner

Rustom Cavasjee Cooper (R.C. Cooper)

  • Respondent:-

Union of India

  • Represented by:-

Petitioner

Mr. N.A. Palkhivala

Respondent

Attorney-General Niren De 

  • Equivalent citations:-

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

  • Type of the case:-

Writ Petition No. 222, 298 and 300 of 1968 filed before the Supreme Court under Article 32 of the Constitution of India, 1950 

  • Court:-

The Supreme Court of India

  • Referred:-

Articles 14, 19 and 31 of the Constitution of India, along with the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969

  • 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

Justice I.D. Dua.

BACKGROUND 

The Indian Constitution's Preamble and various sections, especially Part IV, known as the Directive Principles of State Policy, mandate the creation of an equitable society. Although these principles are not legally enforceable, Article 37 emphasizes their fundamental importance in governance, guiding legislative processes. The nationalization of key sectors such as transportation, electricity, insurance, and oil refineries was seen as crucial for achieving socialist goals. To address the issue of inadequate credit distribution in rural areas, the government nationalized banks, starting with the incorporation of the Imperial Bank of India into the State Bank of India (SBI) in 1955 and merging seven subsidiaries with SBI within four years. The Reserve Bank of India regulated the banking sector, reducing the number of commercial banks from 569 in 1951 to 89 by 1969. In 1969, under Indira Gandhi and Acting President M. Hidayatullah's suggestion, the Banking Companies (Acquisition & Transfer of Undertaking) Ordinance nationalized 14 banks with deposits exceeding 50 crores, bringing over 75% of the banking sector under government control.

- The second schedule of the Ordinance was highly controversial and horrific.

- It stated that:

  - Compensation could be agreed upon through negotiation.

  - If no agreement was reached within the specified time, the matter would go to a tribunal.

  - Compensation determined by the tribunal would be awarded 10 years after the failure to reach an agreement.

- Two days later, Parliament passed the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1969, which had the same provisions as the Ordinance.

- Rustom Cavasjee Cooper, the majority shareholder of Central Bank of India and Bank of Baroda, filed a writ petition in the Supreme Court under Article 32.

- His petition claimed that his Fundamental Rights under Articles 14, 19(1)(f), and 31(2) were violated.

FACTS OF THE CASE

After India gained independence, several crucial industries were nationalized to promote the country's development and societal welfare. This included the Reserve Bank of India, Air India, insurance companies, the coal industry, and the oil and gas sector.

R.C. Cooper, the petitioner, held shares in the Central Bank of India and served as a director there. Additionally, he owned stock in the Union Bank of India, Bank of India, and Bank of Baroda.

The Indian National Congress government, under Prime Minister Mrs. Indira Gandhi, enacted a decree on July 19, 1969, to nationalize 14 banks. This decision was approved by the acting president of India. The selection of these banks was based on the criterion that any bank with deposits exceeding Rs. 50 crores would be subject to nationalization.

According to the Banking Companies (Acquisition and Transfer of Property) Ordinance of 1969, 14 banks were designated for nationalization.

All directors of banks are mandated to resign, though bank employees can continue working for the Indian government. The ordinance provides for compensation to the banks either as per a pre-agreed amount or, if no agreement exists, to be determined by the Tribunal within three months.

R.C. Cooper challenged this ordinance by filing a writ petition under Article 32 of the Constitution, claiming it violated his fundamental rights under Articles 14, 19, and 21. On July 22, 1969, the Supreme Court granted a temporary injunction, preventing the government from removing the bank chairmen.

ISSUES RAISED IN THIS CASE 

• Whether a shareholder could file a Writ petition for the violation of his fundamental rights when the company in which he is a shareholder is acquired by the Government?
• Whether the Ordinance in question had been properly made or not?
• Whether the Act was within the jurisdiction of the Parliament to get formulated or not?
• Whether the impugned Act was violative of Article 19(1)(g) and Article 31(2) of the Constitution of India or not?
• Whether the method of ascertaining the compensation was valid or not? 
• Whether Schedule II of the Ordinance was justified?  

ARGUMENT OF PETITIONER 

1. The Ordinance was challenged on grounds that Article 123 of the Indian Constitution wasn't properly applied.

2. The Act was argued to violate the free trade guarantee under Article 301.

3. It was claimed that the Act encroached on State List subjects, making it beyond Parliament's authority.

4. Ordinance Invalidity: The ordinance enacted under Article 123 of the Indian Constitution is void because the requirements for its exercise were not fulfilled.

5. Parliamentary Authority: The Act exceeds Parliament's authority as it contravenes Entry 42 of List III in the State List.

6. Fundamental Rights Infringed: The Act infringes on rights protected by Articles 14, 19(1)(f)(g), and 31(2) of the Indian Constitution.

7. Unconstitutional Retrospective Action: The Act’s retrospective provisions are unconstitutional due to the lack of a legitimate ordinance and violations of fundamental rights that do not fall under the scope of Act 22 of 1969.

ARGUMENT OF RESPONDENT 

1. The writ petition is not valid because the petitioner is seeking Fundamental Rights protection for a company, which is not a citizen under the Indian Citizenship Act, 1955. Article 19 rights apply only to citizens, not to companies.

2. The President's power to issue an Ordinance under Article 123 is subjective, and the courts cannot demand reasons from the President for the ordinance's issuance.

3. Courts must consider the state’s Socialist duty to create an egalitarian society with no inequality. Thus, the term "Banking" in Entry 45 of List I should be interpreted to encompass all relevant activities required of the respondent.

4. The act does not violate Article 19(1)(f) because it aligns with Article 31 provisions, and the K. Gopalan v. Union of India case established that Fundamental Rights are distinct and exclusive.

JUDGEMENT 

1. In this landmark judgement, the court's majority of 10:1, with Justice A.N. Ray dissenting, decided that shareholders have the right to approach the Supreme Court to claim Fundamental Rights on behalf of the company when their rights are infringed by government actions.

2. The court, by a majority decision, invalidated the Banking Companies (Acquisition and Transfer of Undertakings) Act. It introduced the ‘Effect’ Test, focusing on the impact of legislative acts, as opposed to the previously used ‘Object’ Test which considered the intention behind the legislation.

3. Regarding the validity of the ordinance's promulgation, the court concluded that since Parliament had already passed the ordinance as an Act, it was not appropriate or necessary for the Supreme Court to intervene.

4. The court ruled that the Act violated Article 14, which ensures equality, because it discriminated by restricting only 14 banks from conducting business while leaving others unaffected. It also breached Article 31, which guarantees fair compensation, as the Act did not provide just compensation. Therefore, the Act was declared unconstitutional.

5. On the matter of Article 19 (1) (f), the court found that the Act did not breach this provision, as the state has the authority to establish a monopoly if necessary.

6. In his dissenting opinion, Justice A.N. Ray argued that the compensation set by the legislature could not be challenged in court. He also asserted that an ordinance could only be contested if it was shown to have been issued with mala fide intentions by the President. Thus, he dismissed the petitions.

CONCLUSION 

The RC Cooper vs Union of India case, decided in 1970, primarily addressed the constitutionality of the nationalization of banks. The Supreme Court's ultimate ruling upheld the government's action, deeming it consistent with the directive principles of state policy. This decision confirmed that nationalization was within the government's powers to ensure equitable distribution of wealth and financial stability, thereby reinforcing the state's role in regulating economic activities to achieve socio-economic justice.