Bank Nationalization Case – A Critical Analysis

Author: Nickkita Shome Amity Law School, Kolkata

Introduction : –

Rustom Cavasjee (R.C.Cooper) V. Union of India,1970[1], which is famously known as ‘The Bank Nationalization Case’, is one of the most important landmark judgements of Indian Banking Law. It is also based on many principles of the Indian Constitution. The case is so-called because the petitioner, R.C.Cooper, who was the director of Central Bank of India (One of the 14 banks in the list) and had shares in Bank of Baroda, filed a petition against the Union of India in the year 1969 when many of the banks were being nationalized.

He challenged many important provisions of The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, one of them being Schedule II which mentioned that when the government will acquire any bank then, the compensation would be decided through an agreement. And if the agreement fails then such matter shall be discussed in a tribunal.

Moreover, after the verdict of the tribunal, the company would get the compensation amount after ten years. These ten years would be counted from the date on which the agreement would be declared failed. Senior Counsel Nani Phalkhivala fought the case in favor of R C Cooper whereas, the Union was represented by the then-Attorney General, Niren De, and Solicitor General, Jagdish Swarup.[2] The case was decided by 11 bench judges and the case went against the ordinance by 10:1.

Background : –

In the year 1955, when the SBI Act was passed, the government had already acquired the Imperial Bank of India, and then all of its seven subsidiaries were merged into the State Bank of India (SBI). The reason behind this action was Article 37 of Part IV of the Indian Constitution, which mentions the Directive Principles of State Policy (DPSP). It states that “ The provisions contained in this Part shall not be enforceable by any court, but the principles therein laid down are nevertheless fundamental in the governance of the country and it shall be the duty of the State to apply these principles in making laws such as Electricity, Insurance, Oil, etc.”

Indian Constitution has a term called ‘Socialist’ which is covered in the DPSP. It mentions that the government will follow the directive principles during its governance. After Independence, the banking facilities were not available in all parts of India and thus, at that point, the government tried to promote banking facilities to all over India via many reformative steps and among those steps, one of them was nationalization. Through these steps, insurance companies, oil refineries, electrical companies, etc. were nationalized by the government. Thus, the main motive of the government behind all these was to promote the banks to every corner of India. There was one serious reason behind all these. That is, earlier, moneylenders used to charge huge interest from poor people and the folks thought that banks were meant for the rich. Therefore, after nationalization, it was made clear to them that bank charges less interest than moneylenders and their money is also in safe hands if they wish to store them in accounts.

Also, during 1969, the 14 Commercial Banks had 5% of the total deposits among them. The minimum deposits of any of these banks were 50 crores. There was a great risk of financial control by the private segment and moreover, the rural, agricultural, small or medium scale industries were not the priority of those banks.

Bank Nationalization Ordinance : –

Thus, due to all of the above-mentioned reasons, on 19th July 1969, the President of India promulgated an Ordinance under Article 123(1) of the Constitution of India called – “The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969”[3] and as per this ordinance, 14 banks with more than rupees 50 crores deposits got nationalized.

The Central Bank of India and the Bank of Baroda were the two banks among those 14 banks whose shareholder was R. C. Cooper ( who is the petitioner of this BANK NATIONALIZATION CASE[4].)

An ordinance is basically, introduced under Article 123 in such cases when a law is needed to be passed immediately but there is no parliamentary session within that time frame. It states that – “ If at any time, except when both Houses of Parliament are in session, the President is satisfied that circumstances exist which render it necessary for him to take immediate action, he may promulgate such Ordinance as the circumstances appear to him to require.” Hence, after taking permission and orders from the President, an ordinance can be passed. In the same manner, The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 was passed but the difference, in this case, was that the parliamentary session was only after two days from the date on which the ordinance is passed. And thus, this issue was raised by R. C. Cooper in the case that what was the emergency that compelled the Indira Gandhi government to introduce the ordinance when they could have easily introduced it as a bill in the parliamentary session.

When this incident took place, the acting President of India was c who was an ex-Chief Justice of India as well as an ex-Vice- President of India. He was due to office on 20th July 1969 and the ordinance got promulgated on 19th July 1969, Saturday, and Lok Sabha would begin its monsoon session on 21st July 1969 but still, V. V. Giri passed the ordinance.

Issues And Judgement : –

  1. C. Cooper filed a writ petition in the Supreme Court of India against UOI and some major issues were taken up. Some of the issues and the comments of the Supreme Court on the same were –

  2. Whether a shareholder can file a petition on behalf of the company?

In this issue, the agreement put forth by R. C. Cooper was that the company does not have any fundamental rights so it cannot get violated but, due to the said ordinance, as a shareholder of the company, his rights were getting violated and thus, he filed a petition for the same.

Whereas, the respondent argued that, according to the Indian Constitution, a company is a juristic body, and hence, it cannot claim fundamental rights. Moreover, the same point is also mentioned in The Indian Citizenship Act, 1955[5]. Thus, according to the respondent’s side, R. C. Cooper cannot claim his rights on behalf of the company.

Ultimately, in the verdict, the Supreme Court pronounced that no director or shareholder can claim his or her Fundamental Rights according to Article 32 or 226, on behalf of a company.

  1. Whether the ordinance which was passed was properly promulgated?

The Supreme Court on this issue mentions that the government has subjective power to issue ordinances. The issue of time was obviously questioning but, the court cannot interfere with the government’s power to issue ordinances.

  1. Whether Schedule II of the ordinance justified?

Schedule II of The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, provisioned that when the government will acquire any bank then the compensation would be decided through an agreement. And if the agreement fails then such matter shall be discussed in a tribunal. Moreover, after the verdict of the tribunal, the company would get the compensation amount after 10 years. These 10 years would be counted from the date on which the agreement would be declared failed.

This was the most controversial point of the ordinance ad hence, R. C. Cooper mentioned it in his petition as well. The Hon’ble Supreme Court mentioned in this issue that the concept of compensation after 10 years is completely illogical and baseless. And thus, the process of compensation as mentioned in Schedule II is completely wrong.

  1. Whether the act was violating Articles 19(1), 13, and 31(2)?

First and foremost, the government said that they are not violating any fundamental right. The Supreme Court also mentioned that a government can create a monopoly. It can be either absolute or partial but the main point is that it has a right to create a monopoly. When a government creates a monopoly because of public welfare, it is considered valid.

However, the Supreme Court in its verdict mentioned that Article 31(2) has been violated by the government through Schedule II of the Act which mentions about the compensation part. Therefore, after this judgement, the government introduced the 25th Amendment of this Act in 1971.

The Supreme Court also mentioned that Article 14 (Right to Equality) has been violated by the government. This is due to the fact that only 14 banks were acquitted. Other all banks including foreign banks were allowed to work privately.

The Major Principles Of The Verdict : –

Two major principles were laid down by Supreme Court in its verdict. Those principles were –

  1. No shareholder or director can claim his or her fundamental rights on behalf of the company unless and until his or her own rights are being affected by the same.

  2. The concept of THE EFFECT TEST[6] was taken into account. This concept was first laid down by K. Gopalan. According to this, it would be considered that the ordinance which has been passed can only be judged according to its effect and not over its motive or object.

Post Developments: –

  1. The government got the majority in both Lok Sabha and Rajya Sabha in the next election.

  2. Passed an act – Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.[7]

  3. To overcome this limitation imposed by judgement. The government of the day brought out an amendment i.e. The Constitution (Twenty-fifth Amendment) Act, 1971[8] to overcome those restrictions as imposed by the judgement.

  4. The amendment curtailed the property right, and permitted the acquisition of private property by the government for public use, on the payment of compensation.

  5. Such compensation would be decided by the Parliament and not the courts.

  6. The amendment also exempted any law giving effect to article 39(b) and (c) of Directive Principles of State Policy from judicial review, even if it violated the Fundamental Rights.

  7. Nana Palkhivala again fought one another landmark case i.e, “Keshavananda Bharti V. State of Kerala”[9] to ensure that the Judicial Review on violation of Fundamental Rights is retained.

  8. The case is also known for setting up the Basic Structure Doctrine of the Constitution[10].

[1] Rustom Cavasjee Cooper V. Union of India  [1970] AIR 564, [1970] SCR(3) 530

[2] The Bank Nationalisation Case, A Turning Point in the Interpretation of Fundamental Rights, Juris Edge (Aug. 14, 2021, 7:35 PM), http://www.jurisedge.com/wp-content/uploads/RC%20Cooper%20Presentation.pdf

[3] The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969

[4] Hemant Varshney, R.C. Cooper Vs. Union of India- Bank Nationalisation Case- Case Summary, Law Times Journal (Aug. 15, 2021, 3:41 PM), http://lawtimesjournal.in/r-c-cooper-v-union-of-india-bank-nationalization-case-case-summary/

[5] The Indian Citizenship Act, 1955

[6] Gautam Bhatia, The Andhra Pradesh Ordinances Case – Towards Substantive Judicial Review, Indian Constitutional Law and Philosophy (Aug. 15, 2021, 6:34 PM), https://indconlawphil.wordpress.com/tag/effect-based-test/

[7] Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970

[8] The Constitution (Twenty-fifth Amendment) Act, 1971

[9] Kesavananda Bharati Sripadagalvaru & Ors. v. State of Kerala & Anr., [1973] 4 SCC 225; AIR [1973] SC 1461

[10] Austin & Granville, Working a Democratic Constitution – A History of the Indian Experience, 258–277 (New Delhi: Oxford University Press)

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