Nomination Process Under Companies Act Does Not Override Succession Laws: Supreme Court

The Supreme Court has held that the nomination process under the Companies Act, 1956 (pari materia Companies Act, 2013) does not override succession laws. It is beyond the scope of the company's affairs to facilitate succession planning of the shareholder. In case of a Will, it is upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession.

The Bench has upheld the High Court order, wherein it was held that the nominee of a holder of a share or securities is not entitled to the beneficial ownership of the shares or securities, which are the subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estates of the holders as per the law of succession.

The Bench comprising Justice Hrishikesh Roy and Justice Pankaj Mithal, has held that, “Additionally, there is a complex layer of commercial considerations that are to be taken into account while dealing with the issue of nomination pertaining to companies or until legal heirs are able to sufficiently establish their right of succession to the company. Therefore, offering a discharge to the entity once the nominee is in picture is quite distinct from granting ownership of securities to nominees instead of the legal heirs. Nomination process therefore does not override the succession laws. Simply said, there is no third mode of succession that the scheme of the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and Depositories Act, 1996 aims or intends to provide.”

BACKGROUND FACTS

Mr. Jayant Shivram Salgaonkar (Testator) executed a will for the devolution of his estates upon the successors. The Appellants and Respondent No. 1 to 9 are legal heir and representatives of Testator. In the Will, the testator had certain mutual fund investments (“MFs”) in respect of which Appellants and Respondent No. 9 were made nominees. The testator passed away on 20.08.2013.

In 2014, the Respondent No. 1 filed a suit, praying for declaration that the Testator's properties be administered under the Court's supervision; seeking absolute power to administer the same; and seeking permanent injunction against all Respondents and Appellants from creating third party rights on Testator's properties.

The Appellants argued that they are sole nominees of the MFs and thus absolutely vested with securities after Testator's death. Further, nominations under MFs/shares were made as per Section 109A & 109B of Companies Act, 1956 (“Act 1956”) and bye-law 9.11.7 of the Depositories Act, 1996 (“Act 1996”). The Appellants argued that Section 109A and 109B of Act 1956 must be read as a code in themselves, wherein the meaning of words 'vest' and 'nominee' are to be seen from the statute alone, bearing in mind the non-obstante clause contained therein.

In Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd and Ors., (2010) SCC Online Bom 615, the Bombay High Court had held that the legal heirs of deceased would get ownership rights of share certificates and not the nominees.

On 31.03.2015, the Single Judge of High Court while relying on Kokate judgment, rejected the claim of Appellants.

In appeal, the Division Bench of High Court on 01.12.2016 observed that the provisions of Act 1956 do not deal with succession at all and the Kokate judgment was per in curium. It was further observed that Section 109A ensures that the deceased shareholder is represented for the various benefits accruing to him/her; and to ensure that commerce does not suffer due to delay on part of the legal heirs in establishing their rights of succession and then claiming shares of a Company.

Accordingly, the Division Bench declared that the nominee of a holder of a share or securities is not entitled to the beneficial ownership of the shares or securities, which are the subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estates of the holders as per the law of succession.

The Appellant filed an appeal before the Supreme Court against order dated 01.12.2016.

RELEVANT LAW

Section 109A of Companies Act, 1956

“109A Nomination of Shares

(1) Every holder of shares in, or holder of debentures of, a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in, or debentures of, the company shall vest in the event of his death.

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(3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, the company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in, or debentures of, the company, the nominee shall, on the death of the shareholder or holder of debentures of, the company or, as the case may be, on the death of the joint holders becomes entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint holders, in relation to such shares in, or debentures of, the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.

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SUPREME COURT VERDICT

No third line of succession contemplated under Companies Act

The Appellants contended that a nomination validly made under S. 109A of Act 1956 and Bye-law 9.11 of Act 1996 constitutes a 'statutory testament' that overrides testamentary/intestate succession.

The Bench rejected the contention and opined that the Companies Act, 1956 does not deal with succession nor does it override the laws of succession. It is beyond the scope of the company's affairs to facilitate succession planning of the shareholder. In case of a will, it is upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession.

The Bench concluded that an individual dealing with estate planning or succession laws understands nomination to take effect in a particular manner and expects the implication to be no different for devolution of securities per se. Therefore, an interpretation otherwise would inevitably lead to confusion and possibly complexities, in the succession process, something that ought to be eschewed.

It has been held that the Companies Act does not deal with law of succession and no departure from the settled position of law is warranted. The order of Division Bench of High Court has been upheld and appeal has been dismissed.

Case Title: Shakti Yezdani & Anr. V Jayanand Jayant Salgaonkar & Ors.

Case No.: 2023 LiveLaw (SC) 1071

Counsel for Appellants: Mr. Abhimanyu Bhandari.

Counsel for Respondents: Mr. Rohit Anil Rathi and Mr. Aniruddha A. Joshi.

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