Non-Obstante Clause In S. 109A(3) Of Companies Act 1956 Doesn't Exclude Legal Heir From Claiming Securities Against Nominee: Supreme Court

The Supreme Court has held that the non-obstante clause in both Section 109A(3) of the Companies Act, 1956 & Bye-law 9.11.7 of the Depositories Act, 1996, does not exclude the legal heirs from their rightful claim over the securities, against the nominee.

The sole purpose of the non-obstante clause is to allow the company to vest shares upon the nominee to the exclusion of any other person, for the purpose of discharge of its liability against diverse claims by the legal heirs of the deceased shareholder. This arrangement is until the legal heirs have settled the affairs of the testator and are ready to register the transmission of shares, by due process of succession law.

Further, nomination process under the Companies Act, 1956 (pari materia Companies Act, 2013) does not override succession laws.

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 explained the purpose for vesting of securities in favour of nominee as under:

“The vesting of securities in favour of the nominee contemplated under S. 109A of the Companies Act 1956 (pari materia S. 72 of Companies Act, 2013) & Bye-Law 9.11.1 of Depositories Act, 1996 is for a limited purpose i.e., to ensure that there exists no confusion pertaining to legal formalities that are to be undertaken upon the death of the holder and by extension, to protect the subject matter of nomination from any protracted litigation until the legal representatives of the deceased holder are able to take appropriate steps. The object of introduction of nomination facility vide the Companies (Amendment) Act, 1999 was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession, from different authorities upon the shareholder's death.”

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 opposed the Suit and argued that they are sole nominees of the MFs and thus absolutely vested with securities after Testator's death.

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, on 01.12.2016 the Division Bench of High Court set aside the Single Bench order, while holding that the provisions of Act 1956 do not deal with succession at all and the Kokate judgment was per incurium.

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

Effect of 'Vest' in S. 109a of Companies Act, 1956 & Bye-Law 9.11.1 of The Depositories Act, 1996

The Appellants contended that the term 'vest' in Section 109A of Act 1956 and Bye-law 9.11.1 under Act 1996, indicates the intent to bestow ownership of the securities upon the nominee on the shareholder's death.

The Bench rejected the contention and held that vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 is only for a limited purpose. The vesting enables the Company to deal with the securities in the immediate aftermath of the shareholder's death, to avoid uncertainty as to the holder of the securities, which could hamper the smooth functioning of the company's affairs.

Effect Of Non-Obstante Clause

The Appellants argued that the 'non-obstante clause' in S. 109A of Act 1956 confers overriding effect to the nomination over any other law and disposition, testamentary or otherwise, and entitles the nominee absolute rights over the shares/securities.

The Bench rejected the argument while observing that the non-obstante clause serves the sole purpose of allowing the company to vest shares upon the nominee to the exclusion of any other person, for the purpose of discharge of its liability against diverse claims by the legal heirs of the deceased shareholder. This arrangement is until the legal heirs have settled the affairs of the testator and are ready to register the transmission of shares, by due process of succession law.

Further, as per Bye-law 9.11.7 of Act 1996, the non-obstante clause confers overriding effect to the nomination over any other disposition/nomination 'for the purposes of dealing with the securities lying to the credit of deceased nominating person(s) in any manner'. Therefore, the purpose of invoking such a non-obstante clause is limited to enabling the depository to deal with the securities, in the immediate aftermath of the securities holder's death. The Bench concluded that the non-obstante clause in both S 109A(3) of Act 1956 & Bye-law 9.11.7 of the Act 1996 cannot be held to exclude the legal heirs from their rightful claim over the securities, against the nominee.

It was further held that the nomination process under the Companies Act, 1956 (pari materia Companies Act, 2013) does not override succession laws. 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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