By Tushar Patial
The judgment in "Shakti Yezdani & Anr. vs. Jayanand Jayant Salgaonkar & Ors." addresses the legal interpretation of nominee rights in company shares and securities. The key issues revolved around whether nominee under Section 109A of the Companies Act, 1956, and the corresponding Bye-laws under the Depositories Act, 1996, is entitled to the beneficial ownership of shares or securities to the exclusion of all other persons entitled to inherit under the law of succession.
The case involved the legal heirs and representatives of Jayant Shivram Salgaonkar, who had left a will and made nominations for his fixed deposits and mutual fund investments. A dispute arose over whether these nominees were entitled to absolute ownership of these assets upon Salgaonkar's death, leading to legal proceedings.
The judgment reconciled the provisions of the Companies Act with the established principles of succession law, rejecting the notion that a nomination creates a third line of succession or displaces the law of succession. This landmark decision clarified the legal interpretation of nominee rights in company shares, balancing the need for smooth corporate functioning with the principles of inheritance law.
Background of the Case:
In this case, the appellants and respondent nos. 1 to 9 are the legal heirs and representatives of Jayant Shivram Salgaonkar. Mr. Salgaonkar executed a will on 27.06.2011, outlining the distribution of his estates among his successors. In addition to the properties mentioned in the will, Mr. Salgaonkar had fixed deposits (FDs) amounting to Rs. 4,14,73,994/-, with respondent nos. 2, 4, and appellant no. 2 as nominees. There were also mutual fund investments (MFs) worth Rs. 3,79,03,207/-, with the appellants and Jay Ganesh Nyas Trust (respondent no. 9) as nominees. Mr. Salgaonkar passed away on 20.08.2013.
On 29.04.2014, respondent no. 1 filed Civil Suit seeking court-supervised administration of the testator's properties and absolute power for administration, along with a permanent injunction against other parties from dealing with the properties.
In Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd and Ors, The Bombay High Court held that the nominees would get ownership rights of share certificates and not the legal heirs of the deceased.
On 31.03.2015, the Single Judge of High Court declared Kokate judgment as per incuriam as it was rendered without considering relevant and binding precedents. The Division Bench of the High Court agreed with the single bench of the High Court.
Procedural History:
In the case of Sarbati Devi Anr. v. Usha Devi, the Hon’ble Supreme Court addressed the issue of nominations under the Insurance Act, 1939, asserting that unlike a will, a nomination does not confer ownership rights upon the nominee. Consequently, the court ruled in favor of the succession certificate over the nomination. This precedent has been widely applied in various contexts beyond insurance cases. In Vishin N. Khanchandani v. Vidya L. Khanchandani, the Hon’ble Supreme Court held that the Nominee was entitled to receive the sum due on the savings certificate under Section 6(1) of the Govt. Savings Certificate Act 1959, but cannot utilise it. In fact, the nominee may retain the same for those entitled to it under the relevant law of succession. However, in Harsha Nitin Kokate v. The Saraswat Cooperative Bank Ltd., the Bombay High Court departed from this established stance, holding that nominee rights take precedence over successors in the ownership of company shares. Kokate's decision marked a departure from the consistent judicial position on this matter, causing significant debate. Also in Aruna Oswal v. Pankaj Oswal, the court noted that prima facie reading of section 72 of Companies Act 2013 (Pari Materia Section 109A of Companies Act,1956) reflects that it gives absolute power to nominee to supersede other laws by virtue of Non Obstante clause present in the provision.
Issues and Conflicts:
The scheme, intent & object behind the Companies (Amendment) Act, 1999,
The implication of the scheme of ‘nomination’ under the Companies Act, 1956 as well as other comparable legislations,
The use of the term ‘vest’ and the presence of the non obstante clause within the provisions of the Companies Act, 1956,
Nomination under the Companies Act, 1956 vis-à-vis law of succession
Analysis of the case
The Hon’ble Supreme Court noted that the nomination provision, added through the amendment, aimed to stimulate investment in the corporate sector. It was introduced to simplify the previous complex process of obtaining multiple letters of succession from various authorities and to foster favourable environment for corporate investments in the country. Courts, when interpreting laws with nomination provisions starting with a non-obstante clause or involving the term 'vest' (e.g., Banking Regulation Act, 1949, Government Savings Certificate Act, 1959, Employees Provident Fund Act, 1952), consistently reject the notion that a nominee automatically becomes the absolute owner, thereby excluding legal heirs. In the opinion of the Hon’ble Supreme Court, such an interpretation goes beyond the scope of Section 109A of the Companies Act, 1956.
The Hon’ble Supreme Court, in citing the judgment of Fruits & Vegetable Merchant Union v. Delhi Improvement Trust, emphasized that the term “vesting” carries various meanings dependent on the context. It may signify full ownership, possession for a specific purpose, or endow an authority with the power to manage the property as the agent of another entity. Furthermore, the case of Municipal Corporation. of Greater Bombay v. Hindustan Petroleum Corpn. highlighted that the term ‘vesting’ is versatile and can encompass limited vesting, both in title and possession.
Hence, the vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 is only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities, which could hamper the smooth functioning of the affairs of the company.
In the case of Vishin N. Khanchandani v. Vidya Lachmandas Khanchandani, the Hon'ble Supreme Court clarified the application of the non-obstante clause, emphasizing that it should be interpreted in light of the scheme and objective of the relevant enactment. The court noted that clauses and sections within a statute should not be construed in isolation; instead, their textual interpretation must be guided by the overall structure of the statute.
In conclusion, the use of the non-obstante clause serves the specific purpose of enabling a company to vest shares in the nominee to the exclusion of any other person. This is done for the purpose of discharging its liability against various claims by the legal heirs of the deceased shareholder. Therefore, the non-obstante clause in both Section 109A(3) of the Companies Act, 1956, and Bye-law 9.11.7 of the Depositories Act, 1996 should not be construed to exclude legal heirs from their rightful claims over the securities against the nominee.
Hon’ble Supreme Court rejected the appellants' contention that nominations under Section 109A of the Companies Act, 1956, and Bye-law 9.11 of the Depositories Act, 1996 imply a shareholder's intent to bequeath shares exclusively to the nominee, akin to a 'statutory testament' due to several reasons: the Companies Act does not recognize a 'statutory testament' beyond succession laws, it focuses on corporate regulation, and the nomination process lacks the formalities imposed on wills by succession laws, such as those outlined in Sec 63 of the Indian Succession Act. Hence, 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.
Decision of the Court:
Citing all the reasons above, the Hon’ble Supreme Court held that the Companies Act does not deal with the law of Succession. Therefore, a departure from this settled position of law is not at all warranted. Hence, the appeal was dismissed.
Conclusion:
The verdict assumes a pivotal role in defining the scope of a nominee's rights under Section 109A of the Companies Act, 1956. The judgment clarifies that a nominee under the Companies Act and Depositories Act does not gain absolute ownership of shares or securities but holds them in a fiduciary capacity. This interpretation ensures that the nominee's rights are limited to managing the shares for the benefit of legal heirs, according to succession laws. It underscores the significance of adhering to the fundamental principles of statutory interpretation when construing the statute. Hon’ble Supreme Court emphasized on the point that the main purpose of Section 109A of Companies Act, 1956 added by Companies (Amendment) Act, 1999 was to ensure that there exists no confusion pertaining to legal formalities that are to be undertaken upon the death of the holder and that it doesn’t create any third line of succession because Companies Act does not override the succession laws. Hence, the purposeful interpretation afforded to these provisions significantly clarifies the pertinent issue.
The author of this article Tushar Patial, a second-year LLB at Law Center-II, Faculty of Law, University of Delhi.
This article contains the view of the author and the publisher in no way associates with the views or ideologies of the author. All the moral rights vests with the Author(s).
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