R.C COOPER V.

UNION OF INDIA

SUBMITTED BY
DEEPALI SINGH
ROLL NO. 1408, 8TH SEMESTER, B.B.A.LL.B (Hons.)
SUBMITTED TO
DR. AJAY KUMAR SIR
FACULTY OF BANKING LAW

FINAL DRAFT SUBMITTED IN FULFILLMENT OF THE COURSE OF BANKING LAW FOR

FEBRUARY, 2019.
CHANAKYA NATIONAL LAW UNIVERSITY
PATNA (BIHAR)

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT ............................................................................................................................ 3
DECLARATION .......................................................................................................................................... 4
OBJECTIVE ................................................................................................................................................. 5
HYPOTHESIS .............................................................................................................................................. 5
SCOPE .......................................................................................................................................................... 5
RESEARCH METHODOLOGY .................................................................................................................. 5
1. BACKGROUND OF THE CASE ........................................................................................................ 6
2. ISSUES FOR CONSIDERATION ....................................................................................................... 8
3. CONTENTION OF THE PARTIES ..................................................................................................... 9
3.1 CONTENTION OF THE PETITIONER ........................................................................................... 9
3.2 CONTENTION OF THE RESPONDENT ....................................................................................... 11
4. JUDGEMENT OF THE COURT ....................................................................................................... 12
4.1 DISSENTING JUDGMENT OF A.N.RAY, J. ................................................................................. 13
5. CRITICAL ANALYSIS ..................................................................................................................... 15
5.1 AFTERMATH OF R.C. COOPER ................................................................................................... 17
5.2 25TH AMENDMENT OF THE CONSTITUTION OF INDIA ......................................................... 17
6. CONCLUSION ................................................................................................................................... 19
BIBLIOGRAPHY ....................................................................................................................................... 20

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 ACKNOWLEDGEMENT

The researcher take this opportunity to express her profound gratitude and deep regards to her
guide DR. AJAY KUMAR for his exemplary for his exemplary guidance, monitoring and
constant encouragement throughout the course of this project. The blessing, help and guidance
given by him time to time shall carry the researcher a long way in the journey of life on which the
researcher is about to embark. Lastly, the researcher would like to thank almighty, her parents,
brother, sisters and friends for their constant encouragement without which this assignment would
not be possible.

THANK YOU,
DEEPALI SINGH.

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 DECLARATION

I hereby declare that the work reported in the B.B.A.LL.B (Hons.) Project Report entitled “R.C
COOPER V. UNION OF INDIA” submitted at Chanakya National Law University, Patna is
an authentic record of my work carried under the supervision of DR. AJAY KUMAR SIR. I have
not submitted this work elsewhere for any other degree or diploma. I am fully responsible for the
contents of our project report.

DEEPALI SINGH
CHANAKYA NATIONAL LAW UNIVERSITY, PATNA
FEBRUARY, 2019

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 OBJECTIVE

The objective of this project is to analyze the concept of Bank Nationalization

HYPOTHESIS

The hypothesis of the researcher is that this case has changed the legal position of
right to property, from fundamental right to legal right. It also become one of the
leading case of the nationalization of the banks.

SCOPE

This project will delve upon the concept of bank nationalization in India. The paper
will also analyze the development of this case law with respect to bank
nationalization and the aftermath of this famous judgement.

RESEARCH METHODOLOGY

The researcher while constructing this project, have relied on both primary and
secondary sources for research while placing main reliance on primary sources. The
researcher has looked into various books, articles, documents and cases relating to
the banking nationalization. Cases will be analyzed so as to find what is the extent
and current position of bank nationalization in this regard.

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 1. BACKGROUND OF THE CASE

The Preamble and various constitutional provisions of the Constitution of India obligate the state
to build an egalitarian society for the people of India. These obligations are in detail discussed in
Part IV of the Constitution under the heading Directive Principles of State Policy. The Part IV
starts with Article 371 declaring the part not enforceable in the courts of law is however
fundamental in the governance of the country. Therefore, while making laws the Parliament must
apply these provisions. State control of industries was seen as a great means to achieve the ends
of Socialism. After Independence of the nation transport undertakings, electricity, insurance sector,
oil refineries etc., were nationalized in order to achieve the goals of Socialism.

Since Independence the distribution of credit in rural areas was at a great low. This was because
of the inaccessibility of banks and other financial institutions in the rural areas. Therefore, in order
to target the rural area, the government schemed a plan to target the needy sectors. This solution
they devised was Nationalization.

Earlier in 1955, Imperial bank of India was taken under the SBI Act and just in four years its 7
subsidiaries were also amalgamated into the SBI branch. The Reserve Bank of India also played a
pro-active role in regulating the banking sector and reduced the number of commercial banking
institutions from 569 in 1951 to 89 in 1969.

The Indira Gandhi government in 1969 at the instance of the then Acting President M. Hidayatullah
promulgated the Banking Companies (Acquisition & Transfer of Undertaking) Ordinance, 1969
nationalizing the 14 banks. These 14 banks were chosen on the basis that they had deposits
exceeding 50 crores. The ordinance was promulgated just two days before the Session of
Parliament. The ordinance w.e.f. 19 July 1969 broght more than 75% banking sector under state
control along with its assets, liabilities, entire paid-up-capital.

The most horrific and controversial part of the Ordinance was the second schedule it contained.
The second schedule provided that:

1. Where an amount of compensation could be fixed by an agreement; it would be determined

1
Article 37 of the Constitution of India.

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 2. Where no such agreement could be reached in the provided time, the matter would be
referred to tribunal. The compensation fixed by the tribunal will be awarded after 10 years
from the date when the agreement failed.

2 days later when Parliament came in session it enacted the Banking Companies (Acquisition &
Transfer of Undertaking) Act, 1969 with the same provisions as were in the Ordinance. Therefore,
Rustom Cavasjee Cooper the majority shareholder of Central Bank of India & Bank of Baroda
filed a writ petition in Supreme Court u/a 32 for the violation of his Fundamental Rights mentioned
under articles 14, 19(1)(f) & 31(2).

However, before the petitions could be heard by the Supreme Court, a bill to enact provisions
relating to acquisition and transfer of undertaking of the existing banks was introduced in
Parliament and was enacted on 09.08.1969 as the Banking Companies (Acquisition and Transfer
of Undertakings) Act 22 of 1969. The long title of the Ordinance and the Act was identical and by
Section 27(1) of the Act, Ordinance 8 of 1969 was repealed. This Act was to be retrospectively
applicable from 19.07.1969 and the 14 private banks were to be nationalized as similar to the
Ordinance.

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 2. ISSUES FOR CONSIDERATION

These are the issues which were put forward for consideration in this case. These are:-

1. 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.
2. Whether the Ordinance was properly promulgated.
3. Whether the Parliamentary Act was within Parliamentary Competence.
4. Whether the impugned Parliamentary Act was violative of Article 19(1)(f) & 31(2) of
Constitution of India.
5. Whether the method of ascertaining compensation was valid.2

2
These are the issues which were taken up by the court in deciding this case.

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 3. CONTENTION OF THE PARTIES

In this case, contentions were presented by both the side on the issued mentioned above:-

3.1 CONTENTION OF THE PETITIONER

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.3 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.
6. That the Act violated the guarantee of freedom of trade under Article 301.

3
Article 123 of the Constitution of India1950.

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7. Lastly, it was contended that retrospective operation given to Act 22 of 1969 was ineffective,
since there was no valid ordinance in existence and further that the provision in the act
retrospectively validating infringement of the fundamental rights of citizens was not within
the legislative competence of the Parliament.

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 3.2 CONTENTION OF THE RESPONDENT

1. The writ petition is not maintainable because the petitioner is seeking the protection of
Fundamental Rights of the Company which is not a citizen as per the Indian Citizenship
Act, 1955. The rights mentioned under Article 19 are only available to the Citizens of the
nation whereas company is only a juristic person and not a citizen.
2. The President’s power to promulgate an Ordinance u/s 123 is a subjective power and the
President cannot be asked to adduce his reasons before the courts as to why the ordinance
was promulgated.
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 K. Gopalan v. Union of India4 the court held that each Fundamental Right is
exclusive of one another and distinct.
5. Further, the Attorney General submitted that the condition of satisfaction of President was
purely subjective and the Union of India was under no obligation to disclose the existence
of circumstances of the necessity to take action.
6. The Attorney General submitted that Parliament had the legislative competence within
Entry 45 of List I of the Seventh Schedule i.e. “banking” and within Entry 42 of List III
i.e. “acquisition and requisitioning of property”.
7. It was pleaded by the Attorney General that compensation under Article 31(2) does not
mean a “just equivalent” and that the courts could not determine the adequacy or the
reasonableness of the compensation. He also contended that there was no infringement of
the fundamental rights as claimed by the petitioners and therefore the act was valid.

4
A.K. Gopalan v. Union of India, A.I.R. 1950 S.C. 27.

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 4. JUDGEMENT OF THE COURT

The court delivered this landmark judgment on February 2, 1970 & speaking in 10:1 majority held
that the shareholder or director cannot move to the courts for the protection of infringement of
Fundamental Right’s of the company unless it is proved that by the impugned action his rights are
also violated. The majority opinion was written by Justice Shah for himself and on the behalf of
Grover, Vaidialingam, Mitter, Dua, Shelat, Hegde, Reddy, Sikri and Bhargava, JJ. while justice
A.N. Ray wrote the dissenting opinion.

The major findings of the majority bench were as follows:

1. The apex court overruled the 20 years law laid down by K. Gopalan rejecting the mutual
exclusivity theory. The court held that we cannot overlook the violation of citizens of the
nation on mere technicalities. If due to state action the fundamental rights of a citizen are
violated the court is bound to prohibit such violation. The court by holding this laid down
the Effect test and overruled the Object test. Therefore, now the courts won’t look into the
objects of the impugned act and rather they will look into the effect of the impugned act.
In case effect of such act violates the FR’s of citizens it would be violative of Constitution
and liable to be struck down.
2. Since the Ordinance was already replaced by the act of Parliament therefore, the court held
that deciding the validity of the said impugned Ordinance is fruitless. This discussion is
relevant for academic purposes only.
3. The court rejected both the Petitioner’s & Respondent’s argument on legislative
competence to acquire banking Companies. The court held that the term Property in itself
constitutes the rights, liabilities, organization etc. that accrue to the property. The power to
acquire property was held to be an independent power of Parliament and it required no
separate legislation under List II or List III.
4. The court found the impugned act in contravention of the Article 31 since the act failed to
comply with said provision. The said provision provided that the in case any property is
acquired by the government then they have to provide compensation to the property owner.
Since there was clear violation of the said provision therefore, the court struck down the
said act.

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 5. However, the court upheld the validity of the act in the context of Article 19(1)(f). The
court said that the act is not violative of the freedom to carry trade & business. The
justification for the said ruling that the state can always create a partial and absolute
monopoly.
6. But the court held the said act in clear violation of Article 14c since only these 14 banks
were restrained from conducting banking business in the future while other banks including
the foreign banks were allowed to continue Banking in India. The court this discrimination
as a flagrant hostile discrimination.

4.1 DISSENTING JUDGMENT OF A.N.RAY, J.

1. Ray, J. held that there can be retrospective legislation affecting acquisition of property and
therefore the Act was not invalid on the ground of retrospective operation.
2. Further, Ray, J. held that the Act does not violate Article 31(2) because it referred to
authority of a law but did not include any words of limitation or restriction as to law being
in force at the time and therefore held that the act was valid and as a corollary the act need
not be struck down.
3. He agreed with the majority view that Parliament had legislative competence to effect
nationalisation under Entry 45 of List I and Entry 42 of List III of the Seventh Schedule.
4. Ray, J. opined that Article 19(6) conferred a power on the State to have a valid monopoly
business and therefore Article 19 (1) (g) was not violated and also that the Act did not
violate Article 14 of the Constitution.
5. As far as the issue relating to the promulgation of the Ordinance was concerned, Ray, J.
opined that the satisfaction of the President was subjective and therefore there was no
necessity required to be established by the Union of India and the only way in which the
Ordinance making power by the President could be challenged was by establishing bad
faith or mala fide or corrupt motive by the Petitioners.

Justice Ray’s opinion was the sole dissent in the judgment. However, he agreed with the majority
in two instances which were as follows:

1. That the said act is not in violation of Article 19(1)(f) i.e. freedom to carry trade &
occupation.

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 2. That the Parliament was competent to legislate on the acquisition of banking and that the
said law was valid as far as Legislative Competence is considered.

Further, he held that the Ordinance promulgation power vested within the President of India is a
subjective power that cannot be challenged in courts. However, he rejected the majority’s opinion
that the shareholder can approach the apex court for the violation of his rights which were directed
against a company i.e. a non-citizen. He also affirmed the mutual exclusivity theory as was
propounded in Gopalan judgment.5

5
Retrieved from : https://lawbriefs.in/r-c-cooper-v-union-of-india1970-nationalisation-of-banks-impaired-the-right-
to-compensation-under-article-312-of-the-constitution-of-india-and-consequently-was-struck-
down/(18.02.2019;02:00pm).

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 5. CRITICAL ANALYSIS

The importance of this judgment is often misunderstood in the sense that it is contradictory to
Socialist ideals of the Constitution. In actuality the power of Nationalization was upheld by the
Supreme Court. The court however just expanded the horizons of the protection of Fundamental
Rights after which even a shareholder whose rights are indirectly violated by the legislative act
can approach the courts. The court clearly held that they would not bar the remedies that exist in
the Constitution for the protection of citizens on mere trifling technicalities. The court decided not
to interfere in the Government’s objective of Socialism and provided them enough levy to achieve
them. This case is also important as it was a turning point in the interpretation of Fundamental
Rights which was later applied in subsequent SC decisions.

The decision should not be misunderstood because the apex court respecting the obligations upon
the respondent to make India a socialist state. Although, socialism in retrospect had been disastrous
to Indian economy and eventually led to India’s bankruptcy. However, it was a popular philosophy
at that time and the government had every right to pick a socialist path.

The court also apart from upholding the respondent’s power to Nationalize also upheld
respondent’s competence to enact such laws. The court also relieved the Parliament from the
lengthy procedure of making such laws by first making specific laws under List I. Thus, if now
the Parliament desires to nationalize airlines then it need not first make laws specifically under
Entry 29 List I for aircrafts. Rather they can directly make laws under the Entry 42 of List III since
they expanded the meaning of “property” to mean rights, liabilities, organization etc.

The majority bench in order to protect the rights of the citizens of the nation from such a draconian
law tried to expand the horizons of the protection. After the pronouncement of the decision the
shield was broadened and as a result now if a legislative act violates a citizen’s fundamental rights
though indirectly it will be liable to struck down. The court did away with the object test that was
used to ascertain the validity of the legislative act & now the effects test was used in order to
ascertain this validity. This was a huge incentive in the favor of citizens of the nation. Following

15
this decision, the apex court again in Bennett Coleman v. Union of India 6held that FR’s of a citizen
are not last when they associate to form a company.

The court however also succeeded in protecting the Fundamental Rights of the citizens of the
nation by holding the impugned act in violation of Article 31(2). The court held that compensation
to be awarded 10 years later that too in bonds is too much illogical and detrimental to the affected
parties. It is probable that some citizens will not be able to realize the fruits of the agreement due
to the reasons of emergency situations such as death. The court relied on the principle laid down
in State of West Bengal v. Bela Bannarjee7that 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, Madras8affirmed 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 Mangaldas9 . However, rejecting the opinion in Shantilal
Mangaldas and clearing all confusion upheld the ratio of Bela Bannarjee.

This decision is also important in the sense it was the main driving force to the bench who sat to
decide the landmark case that changed the interpretation of Right to life & liberty i.e. Maneka
Gandhi v. Union of India10. The mutual exclusivity theory that was propounded by the bench in
Gopalan was rejected in R.C. Cooper and it was held that each FR is dependent on one another for
its survival. This interlinking of FR’s was late r used in Maneka Gandhi.

The court also in its judgment dwelled on the aspect of Principles of Natural Rights vis-à-vis FR’s
and held that if the statutory provision which eliminates any Principle of Natural Rights, then the
court cannot ignore such elimination and is duty bound to make the state follow them.

6
Bennett Coleman v. Union of India, (1972) 2 S.C.C.788.
7
State of West Bengal v. Bela Bannarjee, [1954] S.C.R. 538
8
P. VajraveluMudaliar v. Special Deputy Collector, Madras, [1965] 1 S.C.R. 614.
9
State of Gujarat v. ShantilalMangaldas. (1969) 1 S.C.C. 509
10
Maneka Gandhi v. Union of India,(1978) 1 S.C.C. 248.

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 5.1 AFTERMATH OF R.C. COOPER

The Parliament in order to make its position more profitable enacted the 25th Constitutional
(Amendment) Act, 1971 after the decision of R.C. Cooper that proved contrary to its intention.
Earlier the word “Compensation” in Article 31(2) was interpreted as Parliament is liable to a just
& equitable indemnification. This interpretation was further affirmed by the apex court in Bela
Bannarjee, P. Vajravelu & finally in R.C. Cooper Therefore, to negate all these judgments and to
make their intention the law, Parliament amended the Constitution by enacting the 25 th
Constitutional (Amendment) Act, 1971.

5.2 25TH AMENDMENT OF THE CONSTITUTION OF INDIA

The Twenty-fifth Amendment of the Constitution of India, officially known as The Constitution
(Twenty-fifth Amendment) Act, 1971, curtailed the right to property, and permitted the acquisition
of private property by the government for public use, on the payment of compensation which
would be determined by the Parliament and not the courts.11 The amendment also exempted any
law giving effect to the article 39(b) and (c) of Directive Principles of State Policy from judicial
review, even if it violated the Fundamental Rights.

In 1970, the Supreme Court, in its judgement on Rustom Cavasjee Cooper v. Union of India,
popularly known as the Bank Nationalization case, held that the Constitution guarantees the right
to compensation, that is, the equivalent money of the property compulsorily acquired. The Court
also held that a law which seeks to acquire or requisition property for public purposes must satisfy
the requirement of Article 19(1)(f). The 25th Amendment sought to overcome the restrictions
imposed on the government by this ruling.

Legal expert V.G. Ramachandran described the 24th and 25th Amendments as "not 'tinkering' with
the Constitution. It is a veritable slaughter of the Constitution."12 He stated that the 25th
Amendment "smacks of totalitarianism and hurry to achieve socialism instantly overnight".13

11
G. G. Mirchandani (1 January 1977). Subverting the Constitution. Abhinav Publications. pp. 37–41, 183. Retrieved
18 February 2019.
12
V.G. Ramachandran. "The Constitution 24th Amendment Act And 25th Amendment Bill". Retrieved 17 February
2019.
13
"Texts of the Constitution Amendment Acts" (PDF). Lok Sabha Secretariat. pp. 448–449. Archived from the
original (PDF) on 3 December 2013. Retrieved 19 February 2019.

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Section 2(a) and 2(b), and the first part of section 3 of the 25th Amendment were upheld by the
Supreme Court in Kesavananda Bharati v. State of Kerala in 1973. as valid. However, the second
part of section 3, which prevented judicial review of any law that gives effect to Directive
Principles, was declared unconstitutional.

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 fulfillment 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.

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

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 6. CONCLUSION

The myth surrounding the judgment must be cleared by a thorough reading of the judgment. In its
essence the judgment everywhere upheld the legislature’s goals of achieving the seeds of
Socialism. However, at the same time the court was also protecting the rights of citizens which
were violated by the impugned act.

The judgment expanded the scope of protection of FR’s in the sense that it allowed the shareholders
to challenge the impugned act. The court when it ruled that the rights of the citizens would not be
ignored on just mere technicalities saved the rights that were earlier violated and the affected
parties had no remedy.

The use of Effect test in the decision to ascertain the validity of the act was a commendable step
taken by the judiciary to lift the veil and see behind the masks. Therefore, the judgment is landmark
in its every sense. This judgment was further used in other landmark decisions such as Bennett
Coleman & Maneka Gandhi which were successful in shaping the constitution’s liberal approach.

In 1970, the Supreme Court, in its judgement on Rustom Cavasjee Cooper v. Union of India,
popularly known as the Bank Nationalization case, held that the Constitution guarantees the right
to compensation, that is, the equivalent money of the property compulsorily acquired. The Court
also held that a law which seeks to acquire or requisition property for public purposes must satisfy
the requirement of Article 19(1)(f). The 25th Amendment sought to overcome the restrictions
imposed on the government by this ruling.

19
 BIBLIOGRAPHY
BOOKS
1. Tannan’s Banking Law and Practice in India, Vinod Kothari, 26th Edition 2017.
2. P.N Varshney, Banking Law and Practice, Sultan Chand & Sons, 24th Edition, 2010.

WEBSITES
1. https://lawtimesjournal.in/r-c-cooper-v-union-of-india-bank-nationalization-case-case-
summary/.
2. https://www.jurisedge.com/r-c-cooper-v-union-india/
3. http://notesforfree.com/2018/01/24/corporate-law-case-brief-rc-cooper-v-union-india/

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