CASE ANALYSIS – RUSTOM CAVASJEE COOPER V. UNION OF INDIA

Walia Nazir, Student, Jamia Millia Islamia

Facts of the Case

The state is required under the Preamble and other constitutional articles of the Indian Constitution to create an equal society for all Indian citizens. Under the heading Directive Principles of State Policy in Part IV of the Constitution, these duties are covered in depth. Part IV begins with Article 37, which states that although the section is not enforceable in court, it is essential to the nation’s governance. Therefore, the Parliament must use these clauses while enacting laws. Industry management by the state was viewed as a fantastic way to further socialist goals.

After independence, transport, power, insurance, and oil industries were nationalized to achieve socialist objectives. Rural credit distribution was low due to a lack of banking access in rural areas, prompting the government to focus on needy sectors through nationalization. The Imperial Bank of India was restructured into the State Bank of India (SBI) in 1955, merging its seven subsidiaries by 1959. The Reserve Bank of India streamlined the banking sector, reducing commercial banks from 569 in 1951 to 89 in 1969.

At the request of Hidayatullah, the then-acting president, the Indira Gandhi administration nationalized 14 banks in 1969 with the Banking Companies (Acquisition & Transfer of Undertaking) Ordinance, 1969. The selection of these 14 banks was based on their deposits exceeding 50 crores. Only two days prior to the Parliamentary Session, the decree was issued. With effect from July 19, 1969, the ordinance placed over 75% of the banking industry, including its assets, liabilities, and total paid-up capital, under state control. 

The Ordinance’s second schedule was its most horrifying and contentious feature. According to the second schedule, where a compensation amount could be agreed upon, that agreement would decide it. The dispute would be brought to a tribunal if no such agreement could be achieved within the allotted period. After ten years from the day the agreement failed, the tribunal’s determined compensation will be given out.
When Parliament reconvened two days later, it passed the Banking Companies (Acquisition & Transfer of Undertaking) Act, 1969, which contained the identical clauses as the Ordinance. As a result, Rustom Cavasjee Cooper, the primary shareholder of Bank of Baroda and Central Bank of India, filed a writ suit in Supreme Court u/a 32 alleging that his fundamental rights under articles 14, 19(1)(f), and 31(2) had been violated.

Issues Raised

  • Whether the Act of 1969 violated the provisions of Article 14?
  • Whether the Act of 1969 infringed Article 31(2)?
  • Whether the power of the President in Article 123 is open to judicial scrutiny?
  • Whether a shareholder can file a petition for remedy against violation of his fundamental rights when the company in which the shares are held is taken over?
  • Whether the Ordinance was properly promulgated? 

Arguments

Petitioner’s Arguments: 

  1. The writ petition is maintainable because the petitioner has filed it for enforcement of his Fundamental Rights and not that of company. Since Company is not a citizen within the context of Indian Citizenship Act, 1955 and the Constitution of India, a company cannot claim the protection of those FR’s which are solely available to citizens of India.
  2. Since in just two days the Parliament was coming in monsoon session the President promulgated an ordinance which is in direct contravention of condition precedent for promulgation of Ordinance. Therefore, the President’s promulgation of Ordinance is invalid and that the SC has power to annul an invalid Ordinance.
  3. The three lists under Schedule VII of the Constitution Union, State & Concurrent List clearly demarcate the area of operation of Union Parliament, State Legislature and areas where both can operate respectively. The Parliament can only legislate in the matters of “Banking” as defined in the Section 5(b)of Banking Regulation Act, 1949 by the virtue of Entry 45 of List I. Further, the legislature by the virtue of Entry 42 of list III can only make laws for effectuating laws under List I. Therefore, the Parliament did not possess the required valid competence to initiate the acquisition process.
  4. The impugned act of 1969 is violative of Fundamental Rights mentioned in Article 19(1)(f) and Article 31. Therefore, the act is in direct contravention of Article 13 which clearly provides that any law which is in violation of the said provision will be unconstitutional and the courts are bound to strike it down.
  5. The Schedule II of the impugned act that provides for the procedure in which the Compensation is to be given to the shareholders is draconian in its entirety. The said provision is too much irrational and vague. No valid law can make a person realize the fruits of the agreement after 10 years. Such illogical and illegal condition must be struck down.

Respondent’s Arguments: 

  1. Since the petitioner is requesting protection for the company’s fundamental rights, which are not a citizen under the Indian Citizenship Act of 1955, the writ petition cannot be maintained. While a firm is merely a legal entity and not a citizen, the rights outlined in Article 19 are exclusive to the nation’s citizens.
  2. The authority granted to the President to promulgate an Ordinance under Article 123 is subjective, and the President is not required to state in court why the ordinance was issued.
  3. The courts must see the Socialist obligations upon the state to make an egalitarian society in which there is no sort of inequality. Therefore, the court should, keeping in perspective these obligations, must construe the word “Banking” under Entry 45 of List I to mean all the activities which the respondent ought to undertake.
  4. The act is not violative of Article 19(1)(f) since it falls within the provisions of Article 31 and since in A. K. Gopalan v. Union of India the court held that each Fundamental Right is exclusive of one another and distinct.

Judgement

Speaking in a 10:1 majority, the court handed down this historic ruling on February 2, 1970, holding that a director or shareholder cannot petition the court for protection of the company’s fundamental rights unless it can be demonstrated that the contested action also violates his rights. Justice A.N. Ray authored the opposing opinion, while Justice Shah authored the majority opinion for himself and on behalf of Grover, Vaidialingam, Mitter, Dua, Shelat, Hegde, Reddy, Sikri, and Bhargava, JJ.

The major findings of the majority bench were as follows: 

The apex court overruled the 20-year-old K. Gopalan precedent, rejecting the mutual exclusivity theory and introducing the “Effect test” over the “Object test.” The court held that any state action violating fundamental rights (FRs) must be prohibited, focusing on the effect of the law rather than its object. It deemed the validity of the replaced ordinance irrelevant for adjudication.

On legislative competence, the court upheld Parliament’s independent power to acquire property, rejecting arguments requiring separate legislation under specific lists. However, the impugned act violated Article 31 as it failed to provide compensation for acquired property, leading to its invalidation. The court upheld the act under Article 19(1)(f), affirming that it did not violate the right to trade or business, as the state can create monopolies. However, the act was struck down under Article 14 for discriminatory treatment, as it targeted only 14 banks while exempting others, including foreign banks.

Justice Ray dissented, affirming Parliament’s legislative competence and the act’s compliance with Article 19(1)(f). He upheld the President’s ordinance power as non-justiciable and supported the mutual exclusivity theory from K. Gopalan, disagreeing with the majority on shareholder rights claims.

Legal Principles Established

  1. The parliament in order to clarify their stance that they are not bound to adequately compensate the landowners amended Article 31(2) in case their property is acquired by the state. The word “amount” was placed instead of compensation in the provision.
  2. Article 19(1)(f) was delinked from Article 31(2).
  3. Article 31 C, a new provision was added to the Constitution to remove all difficulties that i. Articles 14, 19 & 31 are not to be applied to any law enacted under the fulfilment of objectives laid down under Article 39(b) & 39(c).

ii. Any law to give effect to Article 39(b) & 39(c) will be immunized from court’s intervention.

  1. The word amount can be interpreted as any figure of money and that is not necessarily an adequate, equitable amount.

Critical Analysis

The judgment upheld nationalization, expanded Fundamental Rights’ protection, and allowed shareholders to seek remedies for indirect violations. It emphasized protecting rights over technicalities while supporting the government’s socialist objectives. This decision was a turning point in interpreting Fundamental Rights in future cases. The apex court upheld the government’s right to pursue socialism and nationalize industries, considering it a legitimate objective at the time. It simplified the legislative process by expanding the definition of “property” to include rights, liabilities, and organizational structures, enabling direct legislation under Entry 42 of List III without requiring specific laws under List I.

The court also broadened the protection of Fundamental Rights, ensuring that any legislative act indirectly violating these rights could be invalidated. By replacing the object test with the effects test, the court prioritized the impact of laws on citizens’ rights over their intended purpose. This marked a significant shift in safeguarding constitutional rights. This was a huge incentive in the favour of citizens of the nation. Following this decision, the apex court again in Bennett Coleman v. Union of India held that FR’s of a citizen are not last when they associate to form a company. 

The court protected citizens’ Fundamental Rights by ruling the impugned act violated Article 31(2). It deemed delayed compensation, payable in bonds after 10 years, illogical and harmful, as some affected parties might not benefit due to emergencies like death. The court relied on the principle laid down in State of West Bengal v. Bela Bannarjee that the word “Compensation” in Article 31(2) means full indemnification. After the decision of Bela Bannarjee the Parliament enacted 4th Constitutional (Amendment) Act, 1955 which provided that inadequacy of compensation cannot be a ground to challenge the acquisition of private property. 

Despite this the court in P. Vajravelu Mudaliar v. Special Deputy Collector, Madras affirmed the ratio of Bela Bannarjee. However, confusion was caused when the court reversed its stance and overruled the earlier judgments in State of Gujarat v. Shantilal Mangaldas .  However, rejecting the opinion in Shantilal Mangaldas and clearing all confusion upheld the ratio of Bela Bannarjee. The R.C. Cooper decision rejected the mutual exclusivity theory from Gopalan, establishing that Fundamental Rights are interdependent, later influencing Maneka Gandhi v. Union of India. The court emphasized that statutory provisions violating Principles of Natural Justice must be corrected to uphold citizens’ rights.

Conclusion

The R.C. Cooper judgment stands as a landmark decision in the evolution of constitutional law in India. It rejected the mutual exclusivity theory of Fundamental Rights, emphasizing their interdependence and marking a pivotal shift toward broader rights protection. By replacing the object test with the effects test, the court prioritized the impact of laws on citizens’ rights, ensuring that legislative actions violating these rights, even indirectly, could be invalidated. The ruling upheld the government’s power to nationalize industries, supporting socialist objectives while safeguarding individual rights. 

It also established that shareholders could seek remedies for violations of their rights, reinforcing the principles of natural justice. The decision influenced future landmark cases, including Maneka Gandhi v. Union of India, and solidified the judiciary’s role as a guardian of Fundamental Rights. By balancing socialism with constitutional safeguards, the judgment shaped the trajectory of India’s legal and socio-economic framework, leaving a lasting legacy.

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