Law Maker

Rustom Cavasjee Cooper v. Union of India

Supreme Court of India · 10 February 1970 · 11 judges · 1970 AIR 564; 1970 SCR (3) 530; 1970 SCC (1) 248

The majority struck down the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, which nationalised 14 banks, for hostile discrimination, unreasonable restriction on business and failure to provide compensation under Article 31(2) on relevant principles.

Facts

On 19 July 1969 the Vice-President, acting as President, promulgated Ordinance 8 of 1969 under Article 123, transferring the undertakings of 14 named commercial banks, each with deposits above Rs. 50 crores, to new corresponding banks. Parliament then enacted Act 22 of 1969 to replace the Ordinance. The petitioner, a shareholder in four of the named banks, a director of one of them and a holder of current and fixed deposit accounts with them, petitioned under Article 32. He challenged the Ordinance and the Act as beyond legislative competence and as violating Articles 14, 19(1)(f) and (g), 31(2) and 301, and attacked the retrospective operation of the Act. The Attorney-General objected that the petitioner had no locus standi because the property acquired belonged to the banks.

Questions before the Court

  1. Can a shareholder, director or depositor maintain a petition under Article 32 against a law acquiring the company's undertaking?
  2. Are Articles 19(1)(f) and 31(2) mutually exclusive, so that a law of compulsory acquisition is not tested under Article 19?
  3. Did the Act practise hostile discrimination or unreasonably restrict the named banks' right to carry on business?
  4. Did the Act provide 'compensation' within Article 31(2) as it then stood?

What the Court held

  • A shareholder may seek relief where State action impairs his rights as well as the company's; the test is qualitative, not formal. The Act was within Parliament's competence, and the validity of the repealed Ordinance was academic.
  • The extent of protection of a fundamental right depends on the direct effect of State action on the individual's right, not on its object or form. The Gopalan assumption that each Article deals exclusively with its own subject cannot be accepted, and a law of compulsory acquisition may be tested under Article 19(1)(f).
  • Barring the named banks from banking while other Indian and foreign banks could continue was flagrantly hostile discrimination under Article 14. Leaving them a theoretical right to other business, while taking all assets, staff, premises and names, was an unreasonable restriction.
  • Compensation in Article 31(2) is the money equivalent of the property acquired. The principle chosen by Parliament is not conclusive: it must be relevant and appropriate to the class of property. Schedule II excluded important assets and used irrelevant principles, so the guarantee was impaired.
  • Sections 4, 5 and 6 and Schedule II were void and not severable, so the whole Act was invalid. Petitions 300 and 298 were allowed and action under the Act was declared unauthorised; Petition 222 was dismissed.

Why it matters

The majority rejected the A.K. Gopalan approach that each fundamental right is a separate code, holding instead that a law is judged by its direct effect on the rights affected, so that Articles 19(1)(f) and 31(2) operate together. It also held that compensation under Article 31(2) must be determined on relevant and appropriate principles, and that a shareholder whose rights are affected may challenge action taken against the company.

In the Court's words

Copied from the official judgment; each passage links to its page.

“But it is not the object of the authority making the law impairing the right of a citizen, nor the form of .action that determines the protection he can claim: it is the effect of the law and of the action upon the right which attract the jurisdiction of the Court to grant relief.”
Shah, J.Page 41 of the judgment
“In our judgment, the assumption in A. K. Gopalan's case(1) that certain articles in the Constitution exclusively deal with specific matters and in determining whether there is infringement of the individual's guaranteed rights, the object and the form of the State action alone need be considered, and effect of the laws on fundamental rights of the individuals in general will be Ignored cannot be accepted as correct.”
Shah, J.Page 43 of the judgment
“We are unable to hold that a principle specified by the Parliament for determining compensation of the property to be acquired is conclusive. If that view be accepted, the Parliament will be invested with a charter of arbitrariness and by abuse of legislative process, the constitutional guarantee of the right to compensation may be severely impaired.”
Shah, J.Page 59 of the judgment
“The test in determining whether the shareholder's right is impaired is not formal: it is essentially qualitative: if the State action impairs the right of the shareholders as well as to the Company, the Court will not, concentrating merely upon the technical operation of the action, deny itself jurisdiction to grant relief.”
Shah, J.Page 26 of the judgment

Provisions interpreted

Related judgments

Case and bench

Parties
Rustom Cavasjee Cooper v. Union of India
Case
Writ Petitions Nos. 222, 300 and 298 of 1969
Decided
10 February 1970
Bench
Shah, J.C., Sikri, S.M., Shelat, J.M., Bhargava, Vishishtha, Mitter, G.K., Vaidyialingam, C.A., Hegde, K.S., Grover, A.N., Ray, A.N., Reddy, P. Jaganmohan, Dua, I.D.
Opinions
Majority 10:1. The judgment of Shah, Sikri, Shelat, Bhargava, Mitter, Vaidialingam, Hegde, Grover, Jaganmohan Reddy and Dua, JJ. was delivered by Shah, J.; Ray, J. dissented and would have dismissed all the petitions.