1970 (2) TMI 130 - SC - Companies Law

Court Invalidates Banking Companies Act 1969, Citing Discrimination and Compensation Violation

The Court declared the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969 invalid, citing hostile discrimination against named ... Compulsory acquisition of undertaking - compensation under Article 31(2) - reasonable restrictions on right to carry on business (Article 19) - hostile discrimination and equality before the law (Article 14) - legislative competence of Parliament in respect of banking and acquisition - locus standi of a shareholder to challenge State actionLocus standi of a shareholder to challenge State action - Maintainability of petitions by the shareholder-director-depositor. - HELD THAT: - The Court held that the petitioner, though a shareholder, director and depositor, had a sufficient personal interest to challenge the Ordinance and the Act when State action directly impaired his individual rights as a result of taking over the banks' undertakings. A company is distinct from its members, but where State action affects the company and also materially and directly impairs the shareholders' rights, the shareholder may maintain a petition under the Constitution. The preliminary objection that no fundamental right of the petitioner was directly impaired was therefore rejected and the petitions were entertained on merits.The Attorney-General's preliminary objection as to maintainability was dismissed; the petitioner had locus to challenge the measures.Legislative competence of Parliament in respect of banking and acquisition - Whether Parliament had competence to enact the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. - HELD THAT: - The Court held that the Act fell within the legislative powers of Parliament. Entry 45, List I (banking) authorised legislation relating to banking and matters incidental thereto; Entry 42, List III authorised legislation for acquisition and requisitioning of property (including undertakings). The concept of 'undertaking' was accepted as a going concern (assets, rights, liabilities and organisation) and therefore transferable/ acquisitable under Entry 42. The impugned Act, in pith and substance, regulated banking and effected acquisition of undertakings and thus lay within Union competence.Parliament was competent to enact the Act.Hostile discrimination and equality before the law (Article 14) - Whether the Act unlawfully discriminated against the named banks in violation of Article 14. - HELD THAT: - The Court found that the Act singled out fourteen banks (those with deposits of not less than Rs. 50 crores as per the returns) for special treatment by transferring their undertakings and prohibiting them from carrying on banking business, while other banks (including newly formed banks and foreign banks) were permitted to carry on banking. That selection operated as a penalising and hostile discrimination: depriving those selected banks of their undertakings but permitting others to continue in business had no rational explanation shown in the record. The provision (notably s.15(2)(e)) which, by clear implication, prohibited the named banks from carrying on banking business was held to be discriminatory and thus violative of the equality guarantee.The Act made hostile discrimination against the named banks and therefore impaired the guarantee of equality.Reasonable restrictions on right to carry on business (Article 19) - Whether the Act's restrictions on the named banks' capacity to carry on business (banking and non-banking) violated Articles 19(1)(f) and 19(1)(g). - HELD THAT: - Although Article 19 permits reasonable restrictions, the Court examined the practical operation of the Act. By transferring the entire undertakings (including assets, staff, premises and names) to the corresponding new banks and providing compensation in forms and on terms that made funds unavailable in practice, the Act rendered the named banks incapable of conducting non-banking activity despite a theoretical reservation of that right. Where statutory restrictions are so stringent as effectively to nullify the right to carry on business, they are unreasonable. The Court concluded that the Act, while purporting to reserve non-banking business, in substance and effect prevented the named banks from engaging in any commercial activity and thus unreasonably infringed the freedoms under Article 19.The Act imposed unreasonable restrictions and thus infringed Articles 19(1)(f) and 19(1)(g) in their practical effect.Compensation under Article 31(2) - compulsory acquisition of undertaking - Whether the Act complied with Article 31(2) by providing compensation appropriate to compulsory acquisition of the undertakings of the named banks. - HELD THAT: - The Court examined Sch. II and the valuation scheme for compensation and found multiple defects. The schedule attempted to value an undertaking by aggregating selected component assets and subtracting specified liabilities, but omitted important elements (notably goodwill and the value of unexpired leasehold interests), employed valuation rules inappropriate to many items (for example, a capitation of rent formula and deductions that rendered building valuations unrealistically low), and included principles that were irrelevant or inadequate for valuing an integrated going concern. The Court emphasised that Article 31(2) requires a law providing for compensation by specifying principles relevant and appropriate to the property and its valuation; principles that are irrelevant or that produce an illusory result do not satisfy the constitutional guarantee. Because the method in Sch. II failed to provide compensation as required, the scheme impaired the Article 31(2) guarantee. Further, compensation payable in long-dated Government securities and subject to conditions that made the amounts practically unavailable reinforced the inadequacy.The principles and method in Sch. II and the provisions giving effect to statutory transfer and vesting (notably ss. 4, 5 and 6 read with Sch. II) failed to provide constitutionally required compensation and thus violated Article 31(2).Severability and ultimate validity of the Act - Whether the invalidity of the compensation and transfer provisions necessitated striking down the entire Act. - HELD THAT: - Section 4 (transfer and vesting of undertakings), sections 5 and 6 (effect of vesting and compensation), together with Sch. II, were held to be the kingpin of the Act's mechanism. Because those provisions were constitutionally infirm for the reasons stated (improper valuation principles, exclusion of material assets, and provision of compensation in forms and by methods that impaired the guarantee), and because they were integral and not severable from the remainder of the Act, the Court concluded that the Act could not stand in part. The defects went to the central design of the statute so that severance was not possible.Sections 4, 5 and 6 read with Schedule II are void for impairment of Article 31(2); they are inseverable from the Act and accordingly the entire Act is invalid.Final Conclusion: The Court upheld petitioner's standing to sue, held the Parliament competent to legislate for banking and acquisition, but found that the Act discriminated against the named banks, unreasonably deprived them of practical capacity to carry on business, and-critically-failed to prescribe relevant and appropriate principles for compensation for compulsory acquisition of their undertakings. Sections 4, 5, 6 and Schedule II of the Act (and the Act in its entirety, being inseverable) were declared void; the petitions challenging the Act were accordingly allowed (except one petition which was dismissed). Issues Involved:1. Validity of the Ordinance under Article 123 of the Constitution.2. Legislative competence of the Parliament to enact the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969.3. Infringement of fundamental rights under Articles 14, 19(1)(f) & (g), and 31(2) of the Constitution.4. Violation of the guarantee of freedom of trade under Article 301.5. Validity of the retrospective operation given to the Act.Detailed Analysis:I. Validity of the Ordinance under Article 123 of the ConstitutionThe petitioner challenged the competence of the President to promulgate the Ordinance under Article 123, arguing that the condition precedent to the exercise of this power did not exist. The Attorney-General contended that the satisfaction of the President is subjective and the Union is not obligated to disclose or justify the circumstances necessitating immediate action. The Court did not express an opinion on the extent of its jurisdiction to examine the President's satisfaction due to the invalidity of the Act for other reasons.II. Legislative Competence of the Parliament to Enact the ActThe petitioner argued that the Parliament overstepped its legislative competence by enacting the Act, which allegedly encroached upon the State List. The Court held that the Parliament has exclusive legislative power under Entries 43, 44, and 45 of List I and Entry 42 of List III. The Court found no evidence that the named banks were carrying on non-banking business distinct from banking business. The Court concluded that the acquisition of the undertakings of the named banks did not trespass upon the State List, and the Act was within the legislative competence of the Parliament.III. Infringement of Fundamental RightsThe petitioner claimed that the Act impaired his fundamental rights under Articles 14, 19(1)(f) & (g), and 31(2). The Court opined that the rights under Articles 19(1)(f) and 31(2) are not mutually exclusive and must be reconciled. The Court held that the Act imposed unreasonable restrictions on the named banks by preventing them from carrying on banking business and practically prohibiting them from carrying on non-banking business. The Act was found to violate the guarantee of compensation under Article 31(2) as it failed to provide compensation determined according to relevant principles.IV. Violation of the Guarantee of Freedom of Trade under Article 301The petitioner argued that the Act violated the guarantee of freedom of trade under Article 301. The Court did not deem it necessary to decide this issue due to the finding that the Act impaired the guarantee under Article 31(2).V. Validity of the Retrospective Operation Given to the ActThe petitioner contended that the retrospective operation of the Act was invalid. The Court did not consider this argument due to the invalidity of the Act on other grounds.Conclusion:The Court declared the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969 invalid. The Act was found to make hostile discrimination against the named banks and violate the guarantee of compensation under Article 31(2). Sections 4, 5, 6, and Schedule II of the Act were deemed void, leading to the invalidation of the entire Act. Petitions Nos. 300 and 298 of 1969 were allowed, and Petition No. 222 of 1969 was dismissed. There was no order as to costs in these petitions.