Case Study: Rustom Cavasjee Cooper and Ors. v. Union of India

“The Supreme Court declared the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, unconstitutional, ruling that the compulsory acquisition of banks’ assets violated fundamental rights and did not comply with the Constitution’s provisions on property rights and compensation.” 

Citation: AIR 1970 SC 564, (1970) 1 SCC 248

Date of Judgment: 10th February 1970

Bench: J.C. Shah (J), A.N. Grover (J), S.M. Sikri (J), C.A. Vaidialingam (J), V. Bhargava (J), J.M. Shelat (J), K.S. Hegde (J), A.N. Ray (J), I.D. Dua (J), P. Jaganmohan Reddy (J), G.K. Mitter (J)

Facts

• The petitioner, Rustom Cavasjee Cooper, a shareholder in multiple banks, filed a writ petition under Article 32 of the Constitution challenging the validity of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. This Act nationalized 14 major commercial banks, effectively transferring their ownership and management to the government.
• The petitioner contended that the Act violated fundamental rights guaranteed under Articles 14, 19(1)(f), 19(1)(g), 31, and 301 of the Constitution, asserting that it led to inadequate compensation for the compulsory acquisition of property and imposed restrictions on freedom of trade.
• The ordinance for nationalization was initially promulgated in July 1969 and later replaced by the Act in August 1969. The petitioner argued that the Act’s provisions for compensation were unjust, failing to reflect the actual value of the banks’ assets, and thus violated the Constitution's guarantee of property rights.

Decision of the Supreme Court

The Supreme Court declared the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, unconstitutional, citing its failure to provide adequate compensation and its infringement upon fundamental rights. The Court held that the Act did not meet the constitutional requirements for property acquisition and was discriminatory.

Key legal issues discussed

1. Whether the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, violated Articles 14, 19, and 31 of the Constitution?

Yes

The Supreme Court’s primary focus was on whether the Act ensured fair and just compensation for the nationalization of banks, as mandated by Article 31. The Constitution requires that any law authorizing the compulsory acquisition of property must provide clear principles for determining compensation, ensuring it is fair to property owners. The petitioners argued that the compensation offered under the Act was based on the book value of the banks’ assets rather than their market value, significantly undervaluing the banks’ actual worth.

The Court agreed with this contention, emphasizing that fair compensation is not merely a statutory obligation but a fundamental right under Article 31. The Act’s method of calculating compensation was found to be arbitrary, as it excluded important components like goodwill, anticipated profits, and other assets, thereby failing to compensate shareholders adequately. The right to property, though later diluted as a fundamental right in subsequent amendments, was still a core constitutional guarantee at the time of this judgment. The Court ruled that the Act’s approach compromised this right by providing less than fair market compensation, making it unconstitutional.

Declaring the Act as unconstitutional, the court held in Para 248 that “In accordance with the opinion of the majority Petitions Nos. 300 and 298 are allowed, and it is declared that the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969 is invalid and the action taken or deemed to be taken in exercise of the powers under the Act is declared unauthorised.”

Additionally, the Court observed that the Act created discriminatory treatment among banks, violating Article 14. The Act allowed certain banks to continue operations while nationalizing others, without any clear or rational basis for this distinction. This lack of uniformity in the application of the law led to unequal treatment, thereby breaching the equality clause of the Constitution.

The Court also examined the impact on Article 19, which protects the right to acquire, hold, and dispose of property. It noted that the Act imposed unreasonable restrictions on the shareholders' rights to manage and operate their banking businesses. Since the law did not provide a compelling public interest justification for its restrictive measures, it was considered a violation of Article 19(1)(f) and 19(1)(g), which guarantee the right to property and the freedom to conduct business, respectively. The Act’s provisions failed to maintain a balance between the public interest and individual rights, a balance that is essential for any law affecting fundamental rights. 

2. Whether the Act violated the guarantee of freedom of trade, commerce, and intercourse under Article 301?

Yes

The petitioner argued that the Act violated Article 301, which ensures the freedom of trade, commerce, and intercourse throughout the territory of India. By nationalizing the banks, the Act created a State monopoly in the banking sector, restricting the ability of private entities to engage in banking activities. This, in turn, limited competition and affected the overall economic landscape.

The Supreme Court acknowledged that Article 301 guarantees not just the freedom of individuals to trade but also ensures that economic activities remain open to fair competition. The Court noted that nationalization, while permitted under the Constitution, must be conducted in a manner that does not impose unjustifiable restrictions on trade. The Act’s sudden transfer of assets and management to the State was seen as an infringement on the freedom to conduct banking business, a significant component of national trade and commerce.

In several cases of Dwarkadas Shrinivas v. The Sholapur Spinning & Weaving Co. Ltd. and Ors.^[1]  and Chiranjit Lal Chowduri v. The Union of India^[2], this Court held that adequate compensation would be required in such kinds of curtailments.

The court recognized that the monopolization of trade cannot be challenged but herein the casse was different. Referring to para 188 of the judgment, “Article 19(6) in the two limbs and in the two sub-articles of the second limb deals with separate matters and in any event State monopoly in respect of trade or business is not open to be reviewed in Courts on the ground of reasonableness. This Court in the case of Municipal Committee of Amritsar v. State of Punjab^[3] held that so far as monopoly business by the State was concerned under Article 19(6) it was not open to challenge.”

The Court emphasized that while nationalization can be justified on grounds of public welfare and economic policy, it must not be used to limit fundamental freedoms arbitrarily. The restriction imposed by the Act was deemed disproportionate to the objective of improving banking operations, as it failed to demonstrate how it would enhance overall public welfare. The lack of a clear public interest justification, coupled with inadequate compensation, led the Court to conclude that the Act violated Article 301.

3. Whether the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, was within Parliament’s legislative competence?

No

The petitioners also questioned whether Parliament had the legislative authority to enact the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. The Act was introduced under Entry 45 of List I (Banking) and Entry 42 of List III (Acquisition and Requisitioning of Property) of the Seventh Schedule. While Parliament has the power to legislate on these subjects, the legislation must adhere to constitutional safeguards, particularly those concerning property rights.

The Supreme Court found that while Parliament is authorized to regulate banking and acquisition, such regulation must be constitutionally sound. The Act’s failure to ensure fair compensation meant that it did not comply with the principles laid out in Article 31. The absence of clear guidelines for determining compensation and the lack of uniformity in treatment made the Act unconstitutional, as Parliament cannot enact legislation that violates fundamental rights.

The Court further reasoned that any law regarding the acquisition of property must include principles that are fair and transparent. The 1969 Act lacked such principles, making it unconstitutional and beyond Parliament’s legislative competence. The ruling underscored that the Constitution’s framers envisaged a balanced approach, allowing Parliament to legislate on matters of public interest, provided that individual rights are not unjustly curtailed. The Act, however, failed to maintain this balance, making it exceed the permissible scope of Parliament's powers.

4. Whether the ordinance promulgated under Article 123 of the Constitution was valid?

No

The initial Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, was promulgated under Article 123 of the Constitution. This provision empowers the President to promulgate ordinances when Parliament is not in session, provided there is an urgent need for immediate action. The petitioners argued that the ordinance did not meet the required conditions of urgency and was issued hastily without sufficient justification.

The Supreme Court examined the use of the ordinance-making power and emphasized that it must be exercised with caution, strictly adhering to the conditions of urgency and necessity. The ordinance-making power is intended for extraordinary circumstances and should not be used to bypass regular legislative procedures. In this case, the Court found that the urgency claimed by the government was not genuine, as there was no imminent threat to the banking sector that warranted such immediate nationalization.

The court referred to the policy ordinance promulgated stating “The power under Article 123 relates to policy and to an emergency when immediate action is considered necessary and if an objective test is applied the satisfaction of the President contemplated in Article 123 will be shorn of the power of the President himself…”

The President’s discretion in such cases was discussed in  the case of Rohtas Industries Ltd. v. S.D. Agarwal and Anr^[4] and Barium Chemical Ltd. and Another v. The Company Law Board and Ors^[5] wherein it was held that the status of the President under the Constitution qua the Parliament is not the same as the Constitutional status of the Governor-General under the Government of India Act, 1935, the decisions cited have no bearing on the interpretation of Article 123.

The ordinance’s lack of urgency, coupled with the Act’s failure to ensure fair compensation, contributed to its overall unconstitutionality. The Court ruled that the misuse of the ordinance-making power violated the principles of Article 123, which requires ordinances to be promulgated only under exceptional circumstances. This procedural flaw, along with the substantive inadequacies of the Act, led to the striking down of the nationalization effort.

^[1] [1954]1SCR674.

^[2] [1950]1SCR869.

^[3] [1969] 3 SCR 447.

^[4] [1969] 3 SCR 108.

^[5] [1966] Supp. S.C.R. 311.

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