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The case of Rustom Cavasjee Cooper v. Union of India is usually known as the Bank Nationalization Case. It is one of the better-known cases in the history of Indian Banking laws. The Hon’ble Supreme Court of India held in this case that the right to receive compensation for a loss suffered was an inherent right that is enshrined in the Constitution of India (hereinafter referred to as ‘the Constitution’). The right so enshrined in the Constitution provides that the person shall be given money equivalent to the value of the property which has been compulsorily acquired.
There were no regulations to effectively govern the Banking Sector in India, keeping this in mind the then Vice President of India, while acting as the President, promulgated the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance in 1969 (hereinafter referred as ‘the Ordinance’). This was done by the Vice President in pursuance of the powers enshrined in Article 123(1) of the Constitution. After this ordinance was promulgated, 14 private sector banks were nationalized. These banks had a deposit base of over 50 crores, and the ownership of these private banks was then vested in the hands of the Government. The ordinance stated that all the undertakings would stand transferred i.e. the 14 banks were transferred and would be vested into a corresponding new bank owned by the Government. It means that all the assets, powers, authorities and the privileges etc. of the 14 banks would be vested into the hands of a new bank. However, the provisions of the Ordinance also stated that the Central Government would have to pay compensation to the banks acquired by the government, although such amount of compensation would be decided by negotiations between the bank and the government.
The petitioner, in this case, was one of the many petitioners who challenged the authority of the acting President to promulgate this ordinance. Mr. R.C. Cooper was the director of the Central Bank of India.. Additionally, he also held shares in the Central Bank of India, Bank of Baroda as well as the Union Bank of India. All these banks were nationalized by the Government of India.
However, before the petitions could be heard by the Supreme Court, a bill was passed titled the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (hereinafter referred as ‘the Act’). The language used in the bill was the same as that of the ordinance, although the ordinance was later repealed by the provisions of this Act. The effect of the Act was the same as that of the Ordinance. The constitutional validity of the act was challenged by the petitioner on several grounds before the Supreme Court, stating that the act was violative of the rights enshrined under Part III of the Constitution.
The court in Rustom Cavasjee Cooper v. Union of India was concerned with the question-Whether the Banking Companies (Acquisitions and Transfer of Undertakings) Act was constitutionally valid or not?
By the majority judgment, the contentions of the petitioners were accepted by the Court. The Court decided to strike down the Act. The rationale of the Court was that the Government had failed in providing the compensation to the banks as per the provisions of the Act itself. The Court held that the rights of the banks under Article 31 of the Constitution had been violated. The Court did not delve deeper into the question as to whether the Act violated the freedom of trade and commerce under Article 301 of the Constitution. The claims of the respondents, in this case, that the petitioners were not holders of the property, or that the jurisdiction should be denied by the Court, were not allowed to stand.
As for the unconstitutionality of the Act against the Part III of the Constitution, the Court held the Act is not violative of the right under Article 19(1)(g) of the Part III of the Constitution, but held that the Act was in contravention of the right under Article 14 of the Constitution, as it impaired the right to equality since it prevented the banks from pursuing any business which was not related to banking.
Rustom Cavasjee Cooper v. Union of India was a radical change in the field of regulation of the Banking Sector. In this case, the judges favoured the rights of the petitioners enshrined under Part III of the Constitution. The petitioners argued that the impugned act was violative of Article 14 and Article 31 of the Constitution. The Court held that the provisions of the Act related to the award of compensation to the banks upon being nationalized had not been followed, and thus, the Act was liable to be struck down. The Court also noted that the Act did not allow the nationalized banks to have the opportunity to pursue any business other than the business of banking,. This impaired their right to equality as well.
In Rustom Cavasjee Cooper, the Court rejected the contentions made by the Attorney general of India regarding the jurisdiction of the Court and struck down the Act as unconstitutional.