Supreme Court settles the rights of Nominees in Company Shares in succession matters: Shakti Yezdani vs. Jayanand Jayant Salgaonkar (2023) INSC 1076 (14 December 2023)

Date of the Judgment: 14 December 2023
Citation: (2023) INSC 1076
Judges: Hrishikesh Roy, J., Pankaj Mithal, J.
Can a nominee of shares in a company become the absolute owner of those shares upon the death of the shareholder, or do the laws of succession still apply? The Supreme Court of India recently addressed this crucial question, clarifying the rights of nominees versus legal heirs in matters of company shares and other securities. This judgment settles a long-standing debate about the interpretation of nomination clauses under the Companies Act, 1956 and the Depositories Act, 1996. The judgment was delivered by a two-judge bench comprising Justice Hrishikesh Roy and Justice Pankaj Mithal.

Case Background

The case revolves around the estate of Jayant Shivram Salgaonkar, who passed away on 20th August 2013. Mr. Salgaonkar had executed a will on 27th June 2011, outlining the distribution of his properties. However, he also had substantial fixed deposits (FDs) and mutual fund investments (MFs). For the FDs, respondent nos. 2, 4, and appellant no. 2 were nominated. For the MFs, the appellants and Jay Ganesh Nyas Trust (respondent no. 9) were nominated. A dispute arose among the legal heirs regarding the ownership of these FDs and MFs, specifically whether the nominees would become the absolute owners or if the assets would be subject to the laws of succession.

Timeline

Course of Proceedings

The respondent no. 1 filed a suit in the Bombay High Court seeking administration of the testator’s properties under court supervision. The appellants, being the nominees for the MFs and FDs, argued that they were absolutely vested with the securities upon the testator’s death, relying on Section 109A and 109B of the Companies Act, 1956 and bye-law 9.11.7 of the Depositories Act, 1996. The single judge of the Bombay High Court rejected the appellants’ contentions, holding that the nomination does not override the law of succession. The single judge also declared the decision in the case of Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited and Others as per incuriam for not considering binding precedents. This decision was appealed to a Division Bench of the Bombay High Court, which upheld the single judge’s decision. The Division Bench held that the nominee does not get absolute title to the property and that the law of succession is not displaced by the nomination. The Supreme Court was then approached by the appellants.

Legal Framework

The core legal provisions at the heart of this case are:

• Section 109A and 109B of the Companies Act, 1956: These sections deal with the nomination of shares and debentures. Section 109A(3) states that on the death of a shareholder, the shares shall vest in the nominee.
• Bye-law 9.11.7 of the Depositories Act, 1996: This bye-law provides for the transmission of securities in case of nomination, stating that the nomination shall have effect notwithstanding anything contained in any other law.
• Section 72 of the Companies Act, 2013: This is the equivalent provision to Section 109A and 109B of the Companies Act, 1956, in the current legislation.
• Indian Succession Act, 1925: This act governs the laws of testamentary and intestate succession in India.

The Supreme Court noted that the Companies Act, 1956 is rooted in Entry 43, List I of the Seventh Schedule of the Constitution, which deals with the incorporation, regulation, and winding up of corporations. There is no mention of nomination or succession within the provisions or the statement of objects and reasons of the Companies Act, 1956. On the other hand, the Indian Succession Act, 1925, relates to Entry 5 in List III, Schedule VII of the Constitution, which pertains to succession and inheritance.

Arguments

Appellants’ Arguments:

• The appellants argued that the scheme of nomination under the Companies Act, 1956, is unique due to the presence of the term ‘vesting’ and a non-obstante clause, making it different from other legislations. They contended that Section 109A and 109B of the Companies Act, 1956, clearly indicate that a nominee secures full and exclusive ownership rights upon the death of the shareholder.
• They argued that the hierarchy laid down under the provision, i.e., individual shareholder, joint shareholder, and then the nominee, indicates that the nomination would trump any other disposition, whether testamentary or otherwise.
• They submitted that Section 187C and Section 109A(3) of the Companies Act, 1956, must be read together to mean that the shares shall vest with the nominee to the exclusion of all other persons unless the nomination is varied or cancelled.
• The appellants also referred to Bye-law 9.11 of the Depositories Act, 1996, which contains a non-obstante clause, implying that the nomination would vest complete title in the nominee, notwithstanding any testamentary disposition.
• They further argued that the nomination form under the Companies (Share Capital & Debentures) Rules, 2014, indicates that the nominee is intended to have all rights of the holder, suggesting complete ownership.
• The appellants also referred to Regulation 29A of the SEBI (Mutual Funds) Regulations, 1996, which requires asset management companies to provide an option for unit holders to nominate a person in whom all rights shall vest, arguing that this further supports their case.
• They argued that the interpretation of the High Court would render the ease of succession planning, intended by the legislature, useless.

Respondents’ Arguments:

• The respondents argued that the consistent view of the Supreme Court is that ‘vesting’ under Section 109A does not create a third mode of succession. They argued that the Companies Act has nothing to do with the law of succession.
• They contended that the object of the Companies Act is limited to providing a facility for the transfer of shares and debentures, and the nomination facility aids in this process.
• The respondents argued that the Indian Succession Act, 1925, provides for a legal representative to be vested with the properties of the deceased, subject to devolution as per the applicable law.
• They submitted that the terms ‘transfer,’ ‘transmission,’ and ‘transmission by operation of law’ have distinct meanings, with ‘transmission’ referring to devolution by operation of law.
• The respondents argued that the term ‘vest’ must be understood in a limited sense and does not necessarily confer ownership. They argued that the non-obstante clause is intended to offer a discharge to the company and protect it from succession litigation.
• They submitted that the Companies Act deals with the regulation of companies, while the succession laws deal with the inheritance of property, and therefore, the Companies Act cannot override the succession laws.
• They argued that if the appellants’ contention is accepted, it would render the detailed judicial process for obtaining letters of administration or succession certificates unnecessary.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the scheme, intent, and object behind the Companies (Amendment) Act, 1999, support the argument that a nominee becomes the absolute owner of the shares.
2. What is the implication of the scheme of ‘nomination’ under the Companies Act, 1956, as well as other comparable legislations?
3. What is the effect of the use of the term ‘vest’ and the presence of the non-obstante clause within the provisions of the Companies Act, 1956?
4. How does nomination under the Companies Act, 1956, relate to the law of succession?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• The Supreme Court relied on Sarbati Devi v. Usha Devi [1984] 1 SCC 424* to reiterate that nomination does not create a third line of succession and is subject to the law of succession.
• The court followed Vishin N. Khanchandani & Anr. v. Vidya L. Khanchandani [2000] 6 SCC 724* to emphasize that a nominee is entitled to receive the sum but cannot utilize it as the absolute owner.
• The court applied Ram Chander Talwar & Anr. v. Devender Kumar Talwar & Ors. [2010] 10 SCC 671* to conclude that a nominee does not become the owner of the deposits.
• The court referred to Fruits & Vegetable Merchant Union v. Delhi Improvement Trust AIR 1957 SC 344*, Vatticherukuru Village Panchayat v. Nori Venkatarama Deekshithulu 1991 Supp (2) SCC 228* and Municipal Corpn. of Greater Bombay v. Hindustan Petroleum Corpn. [2001] 8 SCC 143* to explain that the term ‘vest’ has varied meanings, and does not automatically confer absolute title.
• The court referred to R.S. Raghunath v. State of Karnataka [1992] 1 SCC 335* and Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 1 SCC 424* to emphasize that a non-obstante clause and the clauses within a statute should be interpreted in context of the entire statute and its objectives.
• The court relied on Shanker Raju v. Union of India [2011] 2 SCC 132* to uphold the principle of stare decisis, stating that a settled principle of law should not be unsettled.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to maintain consistency in the interpretation of nomination clauses across various statutes, ensuring that the established principles of succession law are not disrupted. The court emphasized that the Companies Act is primarily concerned with corporate governance and not with succession planning. The court was also concerned that accepting the appellants’ arguments would lead to a situation where nominees could claim ownership of assets without going through the established judicial process for determining succession rights. The court also highlighted that the legislative intent behind the nomination facility was to ease the process of transfer of shares and to protect companies from protracted litigation, not to create a new mode of succession.

The court’s reasoning was based primarily on legal principles and precedents, with a relatively smaller emphasis on the specific facts of the case. The court’s ratio of fact:law is 20:80, indicating a strong reliance on legal interpretation.

Logical Reasoning:

The court considered the argument that the presence of the term ‘vest’ and the non-obstante clause in the Companies Act, 1956, would give the nominee absolute ownership, but rejected it. The court held that the term ‘vest’ has variable meanings, and the non-obstante clause is only for the limited purpose of allowing the company to deal with the securities and protect itself from litigation. The court also rejected the argument that the nomination constitutes a ‘statutory testament’, stating that the Companies Act does not deal with succession and cannot override the succession laws.

The Supreme Court quoted the following from the judgment:

• “The vesting of such property is only for the purpose of executing any improvement scheme which it has undertaken and not with a view to clothing it with complete title.”
• “The word ‘vest’ clothes varied colours from the context and situation in which the word came to be used in a statute or rule.”
• “It is a settled principle of law that a judgment, which has held the field for a long time, should not be unsettled.”

The court did not have any minority opinion, as both judges concurred in the judgment.

The court’s decision is based on a thorough analysis of the legal provisions, precedents, and the legislative intent behind the Companies Act, 1956 and the Depositories Act, 1996. The court emphasized the importance of maintaining consistency in the interpretation of nomination clauses and protecting the established principles of succession law. The court’s decision has significant implications for future cases involving the rights of nominees and legal heirs in matters of company shares and other securities.

Key Takeaways

• Nomination under the Companies Act, 1956 and the Depositories Act, 1996, does not grant absolute ownership of shares or securities to the nominee.
• The nominee holds the shares or securities in a fiduciary capacity, subject to the claims of legal heirs under the law of succession.
• The term ‘vest’ in the context of nomination does not automatically confer ownership.
• The non-obstante clause in the relevant provisions is for a limited purpose, mainly to protect the company or depository from litigation.
• The Companies Act does not create a third mode of succession, and the law of succession remains paramount.
• This judgment reinforces the settled legal position that nomination is a mechanism for facilitating the smooth transfer of assets but does not override the laws of succession.

Directions

No specific directions were issued by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that nomination under the Companies Act, 1956 and the Depositories Act, 1996, does not grant absolute ownership to the nominee. The judgment reaffirms the settled legal position that nomination is a mechanism for facilitating the smooth transfer of assets but does not override the laws of succession. There is no change in the previous position of law, but this judgment clarifies the law regarding the rights of nominees in the context of company shares and securities.

Conclusion

The Supreme Court’s judgment in Shakti Yezdani vs. Jayanand Jayant Salgaonkar clarifies that a nominee of company shares or securities does not become the absolute owner upon the death of the shareholder. The nominee holds the assets in trust for the legal heirs, and the laws of succession will determine the rightful owners. This decision reinforces the established legal principles and ensures that the nomination process does not circumvent the laws of succession, providing clarity and consistency in the handling of such matters.

Category

• Corporate Law
  • Nomination of Shares
  • Section 109A, Companies Act, 1956
  • Section 72, Companies Act, 2013
  • Depositories Act, 1996
• Succession Law
  • Intestate Succession
  • Testamentary Succession
  • Indian Succession Act, 1925
• Companies Act, 1956
  • Section 109A, Companies Act, 1956
  • Section 109B, Companies Act, 1956
• Companies Act, 2013
  • Section 72, Companies Act, 2013
• Depositories Act, 1996
  • Bye-law 9.11, Depositories Act, 1996

FAQ

Q: What does this judgment mean for me if I am a nominee for someone’s shares?

A: If you are a nominee for someone’s shares, it means that you are not the absolute owner of those shares upon their death. You hold the shares in trust for the legal heirs, who are determined by the laws of succession. You may have the right to manage the shares temporarily, but you are obligated to transfer them to the rightful heirs.

Q: Can a nominee sell the shares after the shareholder’s death?

A: No, a nominee cannot sell the shares as if they were the absolute owner. The nominee is a custodian of the shares and must act in the interest of the legal heirs. Any sale of the shares would be subject to the rights of the legal heirs.

Q: Does this judgment mean that a will is more important than a nomination?

A: Yes, a will, if valid, will determine the rightful heirs of the shares. The nomination is not a substitute for a will and does not override the laws of succession. If there is a will, the shares will be distributed according to the will. If there is no will, the shares will be distributed according to the laws of intestate succession.

Q: What should I do if I am a legal heir and someone else is the nominee?

A: If you are a legal heir and someone else is the nominee, you should take steps to establish your claim to the shares. This may involve obtaining a succession certificate or a letter of administration from the court. You can then approach the company to have the shares transferred to your name.

Q: Does this judgment apply to other assets like bank deposits or insurance policies?

A: While this judgment specifically deals with company shares, the principles laid down by the Supreme Court are generally applicable to other assets where nomination is involved. The courts have consistently held that nomination does not override the laws of succession.