Nationalization of Banks with special emphasis on R.C. Cooper v. Union of India

Click Here to download the project on Nationalisation of Banks with special emphasis on R.C. Cooper v. Union of India

State Bank of India v. Shyama Devi - An analysis

Click Here to download the analysis of State Bank Of India v. Shyama Devi

Project on State Bank of India vs Shyama Devi

Introduction

Generally, a person is liable for his own wrongful acts and one does not incur any liability for the acts done by others. In certain cases, however, vicarious liability, that is the liability of one person for that done by another person, may arise. For such a liability to arise, there should be a relationship between the two, that is, the wrongdoer and the person who is made liable. The law of tort has been used for many centuries to protect personal interests such as property, reputation, body etc. It ensures justice is done by looking into the claimant's need for compensation, which is paid by the defendant who has committed a breach of duty. The general rule in tort law is that liability is personal, i.e., liability is generally linked to a breach of one’s own duty and a person is liable for the wrongs committed by him only. However, in certain scenarios, the law makes one person being liable for the harm caused by another, because of some legally relevant relationship between the two. This is known as the doctrine of vicarious liability. The doctrine of vicarious liability generally operates within the law of torts. It has become well-established in English law and historically has been called ‘Master and Servant liability’. Vicarious liability means liability which is incurred for or instead of another. A person is usually responsible for his own acts. But there are circumstances where liability attaches to him for the wrongs committed by others. The most common instance is the liability of the master for wrongs, committed by his servant. In these cases liability is joint as well as several.

The other common example of vicarious liability is the liability of an employer for the torts of his employees committed in the course of employment. It is not necessary in such circumstances for the employer to have breached any duty that was owed to the injured party, and therefore it operates as strict or no-fault liability. It is possible that the injured party could be either an employee or a stranger, and the employer can be held vicariously liable in both situations. The most important element to establishing a case for vicarious liability is that the wrongdoer be acting as a servant or employee, and that the wrong done be connected to the employee’s course of employment. Vicarious liability can only be imposed if it is proved that the employee was acting in the course of employment. This criterion is essential, and requires a clear connection between the employment duties and the employee’s acts complained of. A reason for vicarious responsibility of employers is that employers usually are, while their servants usually are not, financially capable of the burden of civil liability. This principle is best illustrated in the case of Leesh River Tea Co. Ltd. & Ors. v. British India Steam Navigation Co., Ltd. & Lloyd v. Grace, Smith & Co.

Doctrine of Respondeat Superior

"Respondeat superior[1]" is a legal doctrine which states that, in many circumstances, an employer is responsible for the actions of employees performed within the course of their employment. This rule is also called the "Master-Servant Rule", recognized in both common law and civil law jurisdictions. In a broader scope, respondeat superior is based upon the concept of vicarious liability. This doctrine also derives its validity from the maxim ‘qui facit per alium facit per se[2].’

STATE BANK OF INDIA VS SHYAMA DEVI[3]

Facts:-

On September 17, 1945, the respondent opened a Savings Bank Account, with the appellant's predecessor, the imperial Bank of India at its Allahabad Branch. She was introduced to the Bank by one Kapil Deo Shukla, who was an employee of the Bank, and admittedly a close neighbour of the respondent and a friend of her husband, Bhagwati Prasad.

On November 30, 1948, the respondent made a petition in forma pauperis for the recovery of Rs. 15,547 together with pendente lite and future interest from the Imperial Bank. This petition was later registered as a regular suit in 1950.

The plaintiff had, apart from 1,932 admitted by the defendant-Bank, also deposited from time to time a sum of Rs.12205 in the Bank. The 12205 was deposited in the manner given below.


-Rs.105 deposited on September 17, 1945

-Rs.4000 deposited on September 17, 1945

-Rs.8000 deposited on December 7, 1945

-Rs.100 deposited on June 20, 1946

These amounts were entered in the respondent's Pass Book by the employees of the Bank which had been confirming and ratifying those entries from time to time.

There was a permanent clerk named Kapil Deo Shukla in the employment of the defendant Bank, who exercised much influence on other employees of the Bank and used to work at different counters. The Bank viewed his actions with approval and acted with negligence. The plaintiff as well as other constituents regarded him as an employee and a responsible person of the Bank, send letter of instructions to him, while this clerk used to obtain the signature of the officer on the Pass Book as usual. The plaintiff used to believe that the money had been deposited and she was satisfied on perusal of the Pass Book. She had never any occasion for suspicion.

In August 1946, the plaintiff's husband felt some suspicion in the Bank's affairs. She thereupon sent a notice, dated August 13, 1948 to the defendant Bank. The Bank replied by letter, dated August 14, 1948, in which it accepted the deposit of Rs. 1,932 and denied the other deposits. The defendant-Bank was responsible for the acts and omissions of its employees which they did during their service, and if Shukla or any other employee of the Bank had committed embezzlement and defrauded the plaintiff, the Bank was responsible for making good that loss.

The defendant-Bank in its written statement admitted that Kapil Deo Shukla was one of its employees and he used to work at the counter, but not at the Savings Bank counter, where the Savings account of the plaintiff was dealt with. Shukla was no longer in the service of the Bank. The Bank further pleaded that the amount of Rs. 12,205 as detailed above, was never deposited with it, nor were the alleged deposits constituting this amount ever confirmed or ratified by it. The Bank further stated that only an aggregate amount of Rs. 1,932 had been deposited by the respondent on the diverse dates, as indicated below


-Rs.50- deposited on September 17, 1945

-Rs.400- deposited on January 31, 1946

-Rs.432- deposited on February 4, 1946

-Rs.1000- deposited on April 23, 1946

-Rs.50- deposited on July 23, 1946

The Bank further averred that the plaintiff was introduced to, the Bank by the said Kapil Deo Shukla who was her close neighbour and a fast friend of her husband, Bhagwati Prasad, and that if the plaintiff-respondent selected him as her agent or instrument for depositing money in the Bank and he had defrauded her, or if Kapil Deo Shukla acting in collusion with her husband, showed wrong amounts in her Pass Book, the Bank was not liable for any loss that might have accrued to her.

The parties went to trial on these issues.

(1) Did the plaintiff deposit with the defendant the various sums of money mentioned in Para 4 of the plaint?

(2) Are these amounts mentioned in the plaintiff's Pass Book? If so, is the defendant bound by the entries therein?

(3) Did the plaintiff make any deposit in contravention of any rule of the Bank? If so, to what effect?

On Issues (1) and (2), the trial court found that, except for the items of Rs. 105/- and Rs. 4,000/- entered in the Pass Book, the respondent had deposited the other amounts mentioned in it and that the Bank was bound by those entries. On Issue No. (3), it was held that the Rules were not strictly enforced by the Bank, and if the Bank had accepted an amount larger than the sum of Rs. 5,000/in contravention of its Rules, the respondent was not debarred from claiming such deposit.

In the result, the trial court, on July 8, 1952, decreed the respondent's suit (in respect of two items) for Rs. 10,040, together with simple interest on this amount from January 1 1946, to August 14, 1947 @ Rs. 1-8 per cent per annum, and from, August 15, 1947 to December 1948 @ Rs. 7 per cent per annum. It was further ordered that the respondent would get simple interest on the decretal amount (after deducting Rs. 1,986 which had been paid during the pendency of the suit) @ 6% per annum. Proportionate costs were also awarded to the respondent.

Aggrieved, the Bank carried an appeal to the High Court of Judicature at Allahabad, and the respondent filed cross- objections in respect of the amounts of Rs. 4,000 and Rs. 105, disallowed by the trial court.

The High Court observed that the disputed amount of Rs. 8,000 shown in the Pass Book consisted of two items, the bigger of which was an amount of Rs. 7,000 in the form of a cheque drawn by Bhagwati Prasad on the account of Bhagwati Prasad & Sons in Bharat Bank Ltd., Allahabad, and that Bharat Bank paid the amount of the cheque to Dass Bank Ltd., Allahabad, who credited it to the account of Lala Babu alias Kapil Deo Shukla, the aforesaid employee of the Imperial Bank. On these premises, the High Court found that the amount of the cheque was not actually deposited, first, in the account of Bhagwati Prasad & Sons, nor later in the Savings Account of the respondent, and that Kapil Deo Shukla had fraudulently taken the money of the cheque and credited it in his own account in the Dass Bank Ltd., Allahabad. "Therefore, the respondent had to suffer because of the action of Kapil Deo Shukla, an employee of the Imperial Bank."

Repelling the contention of the appellant-Bank, the High Court held on the basis of the evidence of the appellant's witnesses Mahadeo Prasad and Narbada Prasad-that "it could not be said that Kapil Deo Shukla was not acting in the course of his employment in the Bank".

Regarding the entry of Rs. 100 the High Court held that the initials against this entry purporting to be of L. Anthony, had not been proved to be forged inasmuch as L. Anthony had not been examined, and that if any fraud had been committed by Kapil Deo Shukla, the Bank was liable for the same.

In respect of the disputed deposit of Rs. 4,000, the High Court held that the appellant had not, disproved the statement of Bhagwati Prasad. The respondent could not be made to suffer for the fraud committed by Kapil Deo Shukla in the course of his employment in the Bank.

With regard to the item of Rs. 105 also, the High Court accepted Bhagwati Prasad's statement that this amount had been deposited by him on September 7, 1945.

The High Court dismissed the Bank's appeal and allowed the plaintiff-respondent's cross-objections, decreeing the suit for Rs. 14,145, together with simple interest thereon from January 1, 1946 to August 1947 to December 1, 1948 @ 6 per cent per annum. The appeal filed by the bank on a certificate granted by the High court under Article 135 of the Constitution read with sections 109 and 110 of the Code of Civil Procedure. The Supreme Court allowed the defendants appeal and dismissed the Plaintiff’s claim with regard to Rs.11,000 (consisting of the items of Rs.4,000 plus Rs.7,000) and interest thereon. The Supreme Court ordered the decretal amount granted by the High Court shall stand reduced by Rs.11,000 and interest thereon.

The main issue in the case

The main issue in the case was whether the amounts, in question, were handed over by the plaintiff or on her behalf by her husband, Bhagwati Prasad, to K. D. Shukla in the course of the Bank's business? In other words, was K. D. Shukla, while receiving these amounts from the plaintiff, acting as an agent of the plaintiff or of the Bank in the course of his employment? This question, further resolves into the issue whether these amounts in question were handed over in the usual course of business in the Bank?

Principle governing this case

Vicarious Liability

The first of the principles which govern the vicarious liability of the employer for the loss caused to a customer through the misdemeanour or negligence of an employee is that the employer is not liable for the act of the servant if the cause of the loss or damages arose without his actual fault or privity and without the fault or neglect of his agents or servants in the course of their employment. Thus a master is liable for his servant’s fault perpetrated in the course of master’s business whether the fraud was for master’s benefit or not if it was committed in the course of his employment. There is no difference in the liability of a master for wrong whether for fraud or any other wrong committed by a servant in the course of his employment, and it is a question of fact in each case whether it was committed in the course of his employment.[4]

Where a client of the bank paid certain amount to an employee of the bank for crediting it to her account, the onus was on the client to show that she paid the amount to the employee of the bank which was received by that employee in the course of his employment with the bank. In such a case the false and fraudulent entry about the deposit of the amount in the pass book, of the client, could not shift the onus on the bank to prove the contrary. So also, whether husband of the client gave a cheque drawn on his bank account to the bank employee for crediting it to the account of the client by endorsing on its back and the employee cashed the cheque and misappropriated the amount, the act of the employee which caused the loss to the client could not be said to have been committed by the employee in the course of the employment with the bank. In such a case, the fact, the false and fictitious entries to cover up his fraud were made by the employee in the pass book of the client and in the ledger account of the husband could not make the embezzlement committed by the employee an act committed in the course of his employment with the bank. Consequently, the bank was not liable to make good the loss caused to the client by the act of the employee because the latter in such a case would be deemed to have acted as an agent of the client and not within the scope of his employment with the bank.

In Leesh River Tea Co. Ltd. & Ors. v. British India Steam Navigation Co[5]., Ltd, the facts of that case were that during her voyage a ship called at an intermediate port to discharge part of her original cargo and load some fresh cargo. The shipowners engaged a stevedore company to discharge and load. A servant of the stevedore company stole a brass plate, which was a cover that could be removed to the access to a storm valve. Its removal rendered the ship unseaworthy as sea water could enter when the ship rolled. The resulting hole in the ship was concealed by part of the fresh cargo loaded. On her voyage after leaving the port the ship encountered heavy weather. Water entered through the hole end damaged part of the original cargo. In an action for damages by the owners of the damaged cargo, the shipowners contended that they were excepted from liability by Art. IV. Rule 2(q) of the Hague Rules, because the cause of the damage arose without their actual fault or privity and "without the fault or neglect of the agents or servants" of the shipowners.

The vital point in the case is whether the theft of the brass plate was made by the stevedore, at Port Sudan, in the course of his employment by the ship- owners. He was to be regarded as the agent of the shipowners for the purpose of unloading and loading cargo. There is no doubt that this gave him the opportunity to effect the theft of the plate; but the stevedore was concerned with cargo and not with the ship or parts of the ship. When he deliberately stole the plate he was acting in a way which was completely outside the scope of his employment on behalf of the shipowners. The theft could not have been prevented by any reasonable diligence of the shipowners through the officers and crew of the ship.

Salmon, L.J., speaking in a similar strain emphasised that the fact that the thief's employment on board presented him with the opportunity to steal does not suffice to make the shipowners liable. The conclusion drawn was

"For an employee to, be liable, however, it is not enough that the employment merely afforded the servant or agent an opportunity of committing the crime."

It must be shown that, the damage complained of was caused any wrongful act of his servant or agent done within the scope or course of the servant's or a s employment,even if the wrongful act amounted to a crime. For this proposition, Salmon, L.J. referred to Lloyd V. Grace, Smith & Co.

In Llyod V. Grace, Smith & Co[6]., Mrs Lloyd, who owned two cottages but was not satisfied with the income therefrom, approached the office of Grace, Smith & Co., a firm of solicitors, to consult them about the matter of her property. The managing clerk of the company attended her and advised her to sell the two cottages and invest the money in a better way. She was asked to sign two documents, which were supposed to be sale deeds. In fact, the documents got signed were gift deeds in the name of the managing clerk himself. He then disposed of the property and misappropriated the proceeds. He had acted solely for his personal benefit and without the knowledge of his principal. It was held that since the agent was acting in the course of his apparent or ostensible authority, the principal was liable for fraud.

Also in United Africa Company Ltd. v. Saka Owoade[7], the Privy Council laid down that a master is liable for his servant's fraud perpetrated in the course of master's business, whether the fraud was for the master's benefit or not, if it was committed by the servant in the course of his employment. There is no difference in the liability of a master for wrongs whether for fraud or any other wrong committed by a. servant in the course of his employment, and it is a question of fact in each case whether it was committed in the course of the employment. In that case, the appellant-company, general merchants, had expressly committed to servants of the respondent, a transport contractor, at his request, goods for carriage by road, and the servants stole the goods, and the evidence established that that conversion took place in the course of their employment. The respondent was held liable to the appellants for the value of the goods - The rule in Lloyd v. Grace, Smith & Co. was applied.

The principle used in the above two cases can be applied in the present case also. The plaint was that the various amounts had been handed over in cash or in cheque by her to K. D. Shukla, an employee of the Bank for crediting in her Savings Bank- account with the defendant- Bank. But Shukla fraudulently misappropriated or converted the same to his own use.

Procedure to be followed while depositing money by a customer:

When a depositor comes to deposit money in his or her Savings Bank account, the related voucher together with cash is tendered by him at the cash department counter in the Bank. The receiving Cashier counts and checks up the amount tendered, enters the items in the cash scroll maintained by him, certifies the voucher on, the back by his signature in token of having received the money and passes the voucher on to the Cashier for his signature. The Head Cashier after certifying the voucher sends it to the official in the Banking Department who enters the voucher in his cash scroll after branding, the voucher with the big 'received' round rubber stamp bearing the date of transaction. The voucher then goes to the ledger Keeper for entry in the relative account after which it is passed on to the Day-Book writer for entry. If the depositor had on that date lodged his pass-book with the Ledger-Keeper then the entry is also made in his pass-book and the pass-book together with the voucher and Ledger is sent to the official for attestation. The passbook need not necessarily be lodged with the Bank at the time of making the deposit but it must be produced when a withdrawal is effected. In the cash voucher that is tendered, the ledger's signature is invariably taken before the money is accepted by the Cashier.

Conclusion:

The point to be noted in this case is that the plaintiff has given the money to K. D. Shukla not in the usual course of business as per the facts of the case. Moreover the procedure mentioned above while depositing money in the bank by a customer was not followed by her. So the question which arises is that whether K.D.Shukla acts as an agent of the bank or that of the customer. K. D. Shukla, instead of depositing it with the Bank, manipulated to appropriate it himself in such a situation, the act which caused the loss to the customer could not be said to have been committed by Shukla in the course of his employment with the Bank. At the most, it could be said that the fact of his being an employee of the Bank and a friend of Bhagwati Prasad, gave him an opportunity to commit this fraud.

The rule in Leesh River Tea Co.'s case, squarely applies to this situation. The appellant-Bank was therefore, not liable to make good the loss caused to the Respondent, by the act of K. D. Shukla, while the latter was acting as an agent of the customer and not within the scope of his employment with the Bank. Nor could the fact that false and fictitious entries to cover up his fraud, were made by K. D. Shukla in the Pass Book of the respondent and in the Ledger Account of Bhagwati Prasad & Sons, make the embezzlement committed by Shukla an act committed in the course of his employment with the Bank.

Bibliography



Books referred:-
Banking law and practice in India

- Tannan
Laws of Banking and Negotiable instruments

- Avtar Singh
Supreme Court on Banking Law

- S.N.Gupta

Net source:-

· www.indiankanoon.org

[1] It is a Latin term which means “let the master answer”

[2] He who does an act through another is deemed in law to do it himself

[3] AIR 1978 S.C. 1263

[4] S.N.Gupta, Supreme Court on Banking Law (Universal Law Publishing, 4th edition), P.265

[5] [1966] 3 All E.R. 593

[6] 1912 A.C. 716

[7] 1955 A.C. 130

Project on Nationalisation of Banks - R.C.Cooper vs Union Of India

Introduction:

Nationalization is the process of taking a private industry or private assets into public ownership by a national government or state, that is., taking over of privately owned corporations, industries, and resources by a government with or without compensation. Common reasons for nationalization include

· prevention of unfair exploitation and large-scale labour layoffs,

· fair distribution of income from national resources,

· to keep means of generating wealth in public control.


Why Banks were nationalized in India?

After independence, India adopted a socialist pattern of society as its goal. This means, in non-technical language, a society with wealth distributed as equitably as possible without making the Country a totalitarian State. The goal is purported to be achieved through democratic processes. With this aim in view, a mixed pattern of panning is evolved. The two sectors, private and public, are allowed in function independently of each other. The public sector is wholly owned and controlled by the Government. The private sector is regulated through a system of regulations, licenses, controls and legislative acts. The public sector is made to grow by nationalisation of industries and institutions.

The banking institutions are the custodians of private savings and a powerful instrument to provide credit. They mobilise the resources of the country by accepting deposits and channelize them for industrial and national development by granting advances. In 1955, the Imperial Bank of India was nationalised and its undertaking was taken over by the State Bank of India. As regards the scheduled banks, there were complaints that Indian commercial banks were directing their advances to the large and medium scale industries and big business houses and that the sectors demanding priority such as agriculture, small-scale industries and exports were not receiving their due share. This was one of the chief reasons for the imposition of school control by amending the Banking Regulation Act with effect from 1-2-1969.[1]

Although steps had been taken in January, 1969, by amending the Banking Regulation Act, for the purposes of imposing “social control” with a view to remedy the basic weaknesses of the Indian banking system and to ensure that banks would cater to the needs of the hitherto neglected and weaker sections of the community instead of big businesses and those connected with them, it was felt that the imposition of “social control” had not changed the position very much and there were complaints that the Indian commercial banks continued to direct their advances to large and medium scale industries and that sectors demanding priority such as agriculture, small – scale industries and imports were not receiving the attention due to them of the banks.

On 19th July, 1969 fourteen major banks viz., The Central Bank of India Ltd., The Bank of India Ltd., The Punjab National Bank Ltd., The Bank of Baroda Ltd., The United Commercial Bank Ltd., Canara Bank Ltd., United Bank of India Ltd., Dena Bank Ltd., Syndicate Bank Ltd., The Union Bank of India Ltd., Allahabad Bank Ltd., The Indian Bank Ltd., The Bank of Maharashtra Ltd., The Indian Overseas Bank Ltd., each having deposits of more than Rs. 50 crores and having between themselves aggregate deposits of Rs. 2,632 crores with 4,130 branches were nationalized and taken over. The nationalisation of the commercial banks was a “revolution” in the Indian banking system. This “revolution” did not merely signify a change of the ownership of these banks but it was the beginning of a co-ordinated endeavour to use an important part of the financial mechanism for the country’s economic development.

Therefore, the Government of India issued an ordinance “Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969” and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country. Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India.

Arguments for nationalisation of banks:

The reason for the sudden step was stated officially to be that “public ownership of the major banks will help most effectively the mobilization and development of national resources and its utilization for productive purposes in accordance with the plans and priorities.” The ordinance adopted expressly said that “in order to serve better the needs of development of the economy in conformity with the national policy and objectives.”

The purpose is to expand bank credit to priority areas which have hitherto been somewhat neglected. It also includes,

(i) The removal of control by a few,

(ii) Provision of adequate credit facilities to agriculture, small industry and exports,

(iii) The giving of professional bent to bank management,

(iv) The encouragement of new classes of entrepreneurs, and

(v) The provision of adequate training as well as reasonable terms of service for bank staff

· Efficiency issue:

Nationalisation will increase the efficiency of commercial banks as given below

(i) Deposits will increase because of increasing confidence in public sector bank. In­crease in bank resources will lead to economics of scale.

(ii) The government can appoint experienced personnel to run and manage the banks.

(iii) Govt. has the countrywide administrative network. Hence, it can make suitable changes in the banking policies according to the prevailing trends in the economy.

(iv) Nationalised banks can have the main motive of public service.

(v) Public sector banks can give preference to priority sectors in advancing loans. Thus, nationalisation promotes efficiency.

· Integration issue:

Central Banks are established by the Govt, for overall monetary control in the economy and is not aiming at profit. But commercial banks are started mainly to earn profit. Thus, there are contradicting objectives between Central Bank and commer­cial banks.

In this situation, the Central Bank may find it difficult to implement its policies when the commercial banks oppose them. Therefore, in the interest of co-ordination and co­operation between them, commercial banks should be nationalised.

· Socialisation issue:

When a country aims at socialistic pattern of society, then the role of public sector undertaking should be extended in all spheres of the economy. To start and run the public sector undertaking Govt. requires enormous financial requirements.

Private commercial banks may obstruct such policies and may not finance public sector undertak­ings and above all they may discriminate against them. Therefore, the nationalisation of commercial banks will be necessary if the government wants to establish socialism.

Initially, a few leading industrial and business houses had close association with commercial banks. The directors of these banks happened to be the same industrialists who established monopoly control on the bank fi­nance.

They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses. Nationalisation of banks, thus, prevents the spread of the monopoly enterprise.

· Help to agriculture:

If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population de­pends upon agriculture. Thus, for providing increased finance to agriculture banks have to be nationalised.

· Balanced Regional development:

In a country, certain areas remained backward for lack of financial resource and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helps to pro­vide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.

· Greater control by the Reserve Bank:

In a developing country like India there is need for exercising strict control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring about co-ordinated credit control. This necessitated the nationalisation of banks.

· Greater Stability of banking structure:
Nationalised banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalised banks will impart greater stability for the banking structure.

Arguments against Nationalisation:

The various criticisms against nationalisation of banks can be summarised as follows:

· Political purpose rather than for Productive purpose:

The government has acquired the strength of a giant and there is the danger of using the financial resources for political pur­poses rather than for productive purpose.

· Beginning of state capitalism:

Such a drastic step of nationalisation of about 90% of the banking resources is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank of India for controlling banks' resources.

It is considered as the beginning of state capitalism and not socialism in India.

· Scope for inefficiency:

Some are of the opinion that after nationalisation banks will degenerate to the level of agricultural co-operatives, which are known for their inefficiency and corrupt practices. Some fear that the officers who manage these big banks also have to bow down to the politicians in course of time.

· India's prestige abroad:

The political prestige of India in foreign countries was dam­aged by this act of nationalisation. Doubts are expressed especially in countries which are rendering large-scale financial assistance to India, about the assurances and promises given by the government with regard to freedom of foreign enterprise in India. This may ad­versely affect the foreign assistance which India was receiving then.

· Less attractive customer's service:

The nationalised banks are sure to join the ranks of other public undertakings which are known for their working to losses. Inefficiency, indeci­sion, corruption, and lack of responsibility are the evils with which the government under­takings are suffering. A government bank may not care to attach importance to the cus­tomer service.

· Secrecy of customer's accounts:

In spite of the assurances given and provisions made in the Act, businessmen still fear about the maintenance of the secrecy of the customer's accounts. As such, they may be forced to withdraw their deposits and go to some bank in the private sector and foreign banks. Thus nationalisation of big Indian banks .will diverts some of the deposits of Indian banks to the foreign banks which is not at all desirable.

· Industry and trade may suffer:

Diversion of large sums of finances from the indus­try and trade to agricultural is sure to starve the large-sized industries and business for finance. We cannot ignore the fact that the big industries and business are providing employment to millions of people and largely contributing to the production of wealth. To starve them for finance simply because they are 'big' will be upsetting the job opportunities and production in these concerns.

R C Cooper Vs Union of India[2]

Facts:-

The petitioner holds shares in the Central Bank of India Ltd., the Bank of Baroda Ltd., the Union Bank of India Ltd., and the Bank of India Ltd., and has accounts-current and fixed deposit -with those Banks. He is also a director of the Central Bank of India Ltd. The petitioner claims a declaration that the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 8 of 1969 promulgated on July 19, 1969, and the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969 which replaced the Ordinance with certain modifications impair his rights guaranteed under Arts. 14, 19 and 31 of the Constitution, and are on that account invalid.

In India there was till 1949 no comprehensive legislation governing banking business and banking institutions. The Central Legislature enacted the Banking Companies Act 10 of 1949 (later called "The Banking Regulation Act") to consolidate and amend the law relating to certain matters concerning banking.

There were in June 1969 14 commercial banks operating in India each having deposits exceeding Rs. 50 crores. Late in the afternoon of July 19, 1969 (which was a Saturday) the Vice-President (acting as President) promulgated, in exercise of the power conferred by cl. (1) of Art. 123 of the Constitution, Ordinance 8 of 1969 transferring to and vesting the undertaking of 14 named commercial banks in corresponding new banks set up under the Ordinance. The long little of the Ordinance read as follows "An Ordinance to provide for the acquisition and transfer of the undertakings of certain banking companies in order to serve better the needs of development of the economy in conformity with national policy and objectives and for matters connected therewith or incidental thereto." By S. 2 "banking company" was defined as not including a foreign company within the meaning of S. 591 of the Companies Act, 1956. An "existing bank" was defined by s. 2(b) as meaning " a banking company specified in column 1 of the First Schedule, being a company the deposits of which, as shown in the return as on the last Friday of June, 1969, furnished to the Reserve Bank under section 27 of the Banking Regulation Act, 1949, were not less than rupees fifty crores". In the Schedule to the Act were included the names of fourteen commercial banks which included The Central Bank of India Ltd., The Bank of India Ltd., The Punjab National Bank Ltd., The Bank of Baroda Ltd., The United Commercial Bank Ltd., Canara Bank Ltd., United Bank of India Ltd., Dena Bank Ltd., Syndicate Bank Ltd., The Union Bank of India Ltd., Allahabad Bank Ltd., The Indian Bank Ltd., The Bank of Maharashtra Ltd., The Indian Overseas Bank Ltd.



These banks are hereinafter referred to as the named banks. A "corresponding new bank" was defined in relation to an existing bank as meaning "the body corporate specified against such bank in column 2 of the First Schedule". By s. 2 (g) it was provided that the words and expressions used in the Ordinance and not defined, but defined in the Banking Regulation Act, 1949, had the meaning respectively assigned to them in that Act. Thereby the definitions of "banking" and "banking company" in s. 5 (b) and s. 5 (c) of the Banking Regulation Act were incorporated into the Ordinance. The principal provisions of the Ordinance were (1) Corporations styled in the ordinance "corresponding new banks" shall be established, each such corporation having paid up capital equal to the paid-up capital of the named bank in relation to which it is a corresponding new bank. The entire capital of the new bank shall stand vested in the Central Government. The corresponding new banks shall be authorised to carry on and transact the business of banking as defined in cl. (b) of s. 5 of the Banking Regulation Act, 1949, and also to engage in one or more forms of business specified in sub-s. (1) of s. 6 of that Act. The Chairman of the named bank holding office immediately before the commencement of the Ordinance; shall be the Custodian of the corresponding new bank. The general superintendence and direction of the affairs and business of a corresponding bank shall be vested in the Custodian, who shall be the chief executive officer of that bank.

The undertaking within or without India of every named bank on the commencement of the Ordinance shall stand transferred to and vested in the corresponding new bank. The expression "undertaking" shall include all assets, rights, powers, authorities and privileges, and all property, movable and immovable, cash balances, reserve fund investments and all other rights and interests arising out of such property as are immediately before the commencement of the Ordinance in the ownership, possession, power or control of the named bank in relation to the undertaking, including -all books of accounts, registers, records and all other documents of whatever nature relating thereto. It shall also include all borrowings, liabilities and obligations of whatever kind then subsisting of the named bank in relation to the under-taking. If according to the law of any foreign country, the provisions of the Ordinance by themselves do not effectively transfer or vest any asset or liability situated in that country in the corresponding new bank, the affairs of the named bank in relation to such asset or liability shall stand entrusted to the chief executive officer of the corresponding new bank with authority to take steps to wind up the affairs of that bank. All contracts, deeds, bonds, agreements, powers of attorney, grants of legal representation and other instruments of whatever nature subsisting or having effect immediately before the commencement of the Ordinance, and to which the named bank is a party or which are in favour of the named bank shall be of as full force and effect against or in favour of the corresponding new bank, and be enforced or acted upon as fully and effectively as if in the place of the named bank the corresponding new bank is a party thereto or as if they are issued in favour of the corresponding new bank. In pending suits or other proceedings by or against the named bank, the corresponding new bank shall be substituted in those suits or proceedings. Any reference to any named bank in any law, other than the Ordinance, or in any contract or other instrument shall be construed as a reference to the corresponding new bank in relation to it.

The Central Government shall have power to frame a scheme for carrying out the provisions of the Act, and for that purpose to make provisions for the corresponding new banks relating to capital structure, constitution of the Board of Directors, manner of payment of compensation to the shareholders, and matters incidental, consequential and supplemental. Corresponding new banks shall also be guided in the discharge of their functions by such directions in regard to matters of policy involving public interest as the Central Government may give.

On the commencement of the Ordinance, every person holding office as Chairman, Managing Director, or other Director of a named bank, shall be deemed to have vacated office, and all officers and other employees of a named bank shall become officers or other employees of the corresponding new banks. Every named bank shall stand dissolved on such date as the Central Government may by notification in that behalf appoint.

The Central Government shall give compensation to the named banks determined according to the principles set out in Second Schedule, that is to say,-

· where the amount of compensation can be fixed by agreement, it shall be determined in accordance with such agreement;

· where no such agreement can be reached, the Central Government shall refer the matter to the Tribunal within a period of three months from the date on which the Central Government and the existing bank fail to reach an agreement regarding the amount of compensation.

Compensation so determined shall be paid to each named bank in marketable Central Government securities. For the purpose of determining compensation, Tribunals shall be set up by the Central Government with certain powers of a Civil Court.

The Central Government shall have power to make such orders not inconsistent with the provisions of the Ordinance which may be necessary for the purpose of removing defects. Under the Ordinance the entire undertaking of every named commercial bank was taken over by the corresponding new bank, and all assets and contractual rights and all obligations to which the named bank was subject stood transferred to the corresponding new bank. The Chairman and the Directors of the Banks vacated their respective officers. To the named banks survived only the right to receive compensation to be determined in the manner prescribed. Compensation, unless settled by agreement, was to be determined by the Tribunal, and was to be given in marketable Government securities. The entire business of each named bank was accordingly taken over, its chief executive officer ceased to hold office and assumed the office of Custodian of the corresponding new bank, its directors vacated office; and the services of the administrative and other staff stood transferred to the corresponding new bank. The named bank had thereafter no assets, no business, and no managerial, administrative or other staff, it was incompetent to use the word "Bank" in its name, because of the provisions contained in s. 7 (1) of the Banking Regulation Act, 1949, and was liable to be dissolved by a notification of the Central Government.

R. C. Cooper presented a petition on the following grounds-

• that the Act was void for lack of legislative competence, since in any event a part of the Act fell within the exclusive competence of State legislature; 
• that the Act deprived him of his office of Director of the Central Bank of India; 
• that the Act made a hostile and arbitrary discrimination between banks as a result of which the value of his interest in shares had been substantially reduced and his right to receive dividends had ceased and he had suffered financial loss; 
• that the Act was not passed for a public purpose and thus contravened the then Article 31(2); 
• that the Act violated the then Article 31(2) because it did not lay down principles for determining compensation; 
• that the petitioner did not challenge the Act on the ground that it violated the fundamental rights of the Banks, but on the ground that it violated his own fundamental rights guaranteed by Articles 14, 19 and 31. 

The Union of India was only party to the petition, and seven States intervened, presumably because the question of legislative competence had been raised.

The petition was by a single shareholder and was not a representative petition on behalf of all, or of a majority of the shareholders of the four banks. No shareholders’ meeting had been called in any of the Banks, to authorize them to support the petitioner, or to file an independent petition. No Bank was a party to the petition and none had complained that their fundamental rights had been violated.

For reasons which do not appear from the judgment, the case was heard by a bench of 11 judges. The majority judgment delivered, declared the impugned Act void. In the majority judgment, it was observed that:

the Act is within the legislative competence of the Parliament;
but it makes hostile discrimination against the named banks from carrying on banking business, whereas other banks – Indian and Foreign – are permitted to carry on banking business, and even new banks may be formed which may engage in banking business;
it, in reality restricts the named banks from carrying on business other than banking as defined in Section 5(b) of the Act violated the guarantee of compensation under Article 31(2) in that it provides for giving certain amounts determined according to principles which are not relevant in the determination of compensation of the undertaking of the named banks and by the method prescribed amounts so declared cannot be regarded as compensation.[3]

Conclusion

A Critical Evaluation of the Judgment:

It is clear that the rights of the banks were decided in their absence and without hearing them. The petitioner came to court expressly stating that he did not challenge the Act as violating the Bank’s fundamental rights but as violating his own, and the court ended up by deciding that the Act violated the Bank’s fundamental rights under Articles 14, 19 and 31. If the petitioner wanted to base the violation of the Bank’s fundamental rights, he would have had to join the Banks as respondents to the petition. But his petition showed that, that was not his case and he did not join the Banks and parties to the petition. It is submitted that the majority judgment was rendered in violation of the principles of natural justice. However, it was necessary to hear the Banks before a final decision, affecting their rights, was arrived at, and the banks were not heard. It is submitted that the majority judgment is null and void because the Supreme Court has repeatedly held that any judgment affecting the rights of parties rendered in violation of the principles of natural justice is void.

The Act impugned in the Bank Nationalization case was a special Act for the acquisition of the banking business of the 14 banks, but the Act nevertheless expressly authorized the banks, whose banking business was acquired, to carry on non-banking business which they would be entitled to do, if necessary, by suitably altering their Memorandum of Association. In other words, unlike the Acts already considered, the acquisition was partial. If a challenge under erstwhile Article 19(1)(g) was open to the banks, the reasonableness of the provisions of the Act as to the time within which the compensation was to be paid would have arisen for the first time before the Supreme Court.


Bibliography



Books referred:-
TANNAN’S BANKING LAW AND PRACTICE IN INDIA.
Protection of Foreign Investment, Property and Nationalisation in India

- Hans Raj


Net source:-

· www.indiankanoon.org

· www. finance.indiamart.com

[1] Tannan’s Banking Law and Practice in India, (Wadhwa Nagpur, 21st edition), P. 125


[2] AIR 1970 S.C. p. 564


[3] Hans Raj, Protection of Foreign Investment, Property and Nationalisation in India, (Deep and Deep, 1989) P.137