Home » Between The Lines » Supreme Court: Dispute as to inheritance of shares cannot be adjudicated upon in proceedings under Section 241/ 242 of Companies Act, 2013

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The Supreme Court (“SC”) has in its judgment dated July 6, 2020 (“Judgment”) in the matter of Aruna Oswal v. Pankaj Oswal and Others [Civil Appeal No. 9340 of 2019], held that disputes pertaining to inheritance of shares cannot be pronounced upon in proceedings initiated under Sections 241 and 242 of the Companies Act, 2013 (“CA 2013”).

Facts
Brief facts of the case are that one Mr. Abhey Kumar Oswal held 53,53,960 shares in M/s. Oswal Agro Mills Limited (“Respondent No. 2”) and had on June 18, 2015, filed a nomination in favour of his wife, Mrs. Aruna Oswal (“Appellant”) under Section 72 of the CA 2013 expressly stating that “This nomination shall supersede any prior nomination made by me/us and any testamentary document executed by me/us.” Mr. Abhey Oswal passed away intestate on March 29, 2016 and on April 16, 2016, the name of the Appellant was registered as the holder against the shares held by the late Mr. Abhey Oswal.

Thereafter, Mr. Abhey Oswal’s son, Mr. Pankaj Kumar Oswal (“Respondent No. 1”) filed a partition suit on February 3, 2017 before the Delhi High Court (“DHC”), claiming entitlement to onefourthof Mr. Abhey Oswal’s estate which, inter alia, included shares constituting 39.88% shareholding in Respondent No. 2 and 11.11% shareholding in M/s. Oswal Greentech Limited (“Respondent No. 16”). Under an order dated February 8, 2017,the DHC directed the parties to maintain status quo on the shares and other immoveable property of Mr. Abhey Oswal. Consequently, the said shares continued to remain registered in the name of the Appellant.

Additionally, Respondent No. 1 also filed a Company Petition with the National Company Law Tribunal, Chandigarh (“NCLT”) alleging oppression and mismanagement in the affairs of the Respondent No. 2. Respondent No. 1 claimed eligibility to maintain the said petition on the ground of being the holder of 0.03% shareholding of Respondent No. 2 and claiming entitlement over and legitimate expectation over one-fourth shareholding (constituting 9.97% shareholding) of Mr. Abhey Oswal in Respondent No. 2.

Pursuant to the above, an application dated May 2018 was filed by the Appellant before the NCLT challenging the maintainability of the above stated Company Petition. However, by an order dated November 13, 2018, the NCLT dismissed the said application and held that Respondent No.1 was the legal heir to Mr. Abhey Oswal and thereby entitled to one-fourth share of his shares/ property. Aggrieved by the said order of the NCLT, the Appellant filed three appeals before the National Company Law Appellate Tribunal, Delhi (“NCLAT”), which appeals were also dismissed by a judgment and order of the NCLAT dated November 14, 2019. The present appeal was filed by the Appellant against the aforementioned order of the NCLAT.

Issue
Whether the question of inheritance of shares can be decided upon under a company petition for oppression and mismanagement.

Arguments
Contentions raised by the Appellant:

The Appellant, inter alia, contended that she was the sole nominee of the late Mr. Abhey Kumar Oswal and that in view of the provisions contained in Section 71of the CA 2013, Respondent No. 1 could not claim any interest over the shares in Respondent No. 2 registered in the name of the Appellant.

It was further contended that, upon excluding shares in the name of the Appellant, Respondent No. 1 would hold only 0.03% shareholding in Respondent No. 2 and therefore, would not constitute qualified threshold (on account of holding less than 10% shares) under Section 244 of the CA 2013, due to which the application under Sections 241 and 242 of the CA 2013 was not maintainable. Moreover, the shareholding to the extent of 0.03% in May, 2017 was purchased/ acquired by Respondent No. 1 after filing of the civil suit before the DHC.

It was also contended that since Mr. Abhey Kumar Oswal died intestate, in view of the provisions of Section 72 of the CA 2013, all the rights to the shares are now vested in the Appellant. It was further contended that although Respondent No. 1 had settled in Australia and had nothing to do with the management of Respondent No. 2, he was trying to illegally interfere in the management of Respondent No. 2.

The Appellant further contended that the NCLT and NCLAT had ignored and overlooked the rights of the deceased shareholder that had vested on the Appellant as his nominee. It was also contended that Respondent No. 1 did not claim waiver on the rigors of Section 244 of the CA 2013 and also did not file an application seeking a waiver under the proviso to Section 244 of the CA 2013.

Contentions raised by the Respondent No. 1:

Respondent No. 1 on the other hand argued that the application filed under Sections 241 and 242 of the CA 2013 was maintainable since the nomination was made only to hold the shares for the benefit of legal representatives. It was further contended that it was permissible for a legal representative to maintain the proceedings for oppression and mismanagement in the affairs of the company, though his/her name was not entered as a registered owner of the shares. Reliance was placed upon World Wide Agencies Private Limited and Another v. Margarat T. Desor and Others [(1990) 1 SCC 536], wherein the legal representatives had been given the right to maintain the application with respect to oppression and mismanagement.

It was argued further that the waiver requirement to hold 10% shares, had been pleaded in the company petition filed by Respondent No. 1. Respondent No. 1 argued that the NCLT, as well as the NCLAT rightly held the petition to be maintainable and the civil suit’s pendency could not have come in the way of maintaining the application concerning oppression and mismanagement as only civil rights have to be determined in the civil suit. Respondent No. 1 also relied upon various decisions of the SC namely: Smt. Sarbati Devi and Another v. Smt. Usha Devi [(1984) 1 SCC 424]; Vishin N. Khanchandani and Another v. Vidya Lachmandas Khanchandani and Another [(2000) 6 SCC 724]; and Ram Chander Talwar and Another v. Devender Kumar Talwar and Others [(2010) 10 SCC 671] and contended that the company petition was prima facie maintainable in view of the verdicts held by SC in the said matters. Hence, no case for interference in the appeals had been made out.

Observations of the Supreme Court

The SC observed that it was apparent from a bare reading of the provisions of Section 72(1) of CA 2013 that every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death. In the case of joint holders also, they have a right to nominate any person to whom “all the rights in the securities shall vest” in the event of death of all joint holders. The SC noted that sub-section(3) of Section 72 of the CA 2013 contains a non-obstante clause in respect of anything contained in any other law for the time being in force or any disposition, whether testamentary or otherwise, where a nomination is validly made in the prescribed manner, it purports to confer on the person “the right to vest” the securities of the company, and therefore, all the rights in the securities shall vest in the nominee unless a nomination is varied or cancelled in the prescribed manner.

The SC further noted that prima facie shares vest in a nominee, and he becomes the absolute owner of the securities on the strength of nomination.

The SC also noted that while in World Wide Agencies Private Limited and Another v. Margarat T. Desor and Others [(1990) 1 SCC 536], the SC had held that a legal representative has a right to maintain an application regarding oppression and mismanagement without being registered as a member against the securities of a company, but at the same time the question of nomination was not involved in the said decision, and as such, the SC was not required to decide the question of the effect of nomination. There is no doubt that in the absence of nomination, a legal representative cannot be denied the right to maintain a petition regarding oppression and mismanagement. In the instant case however, the nomination had been made, and the nominee was registered as the holder of shares. The effect of the same was required to be decided to determine the extent of shareholding of Respondent No. 1, concerning which civil suit filed earlier in point of time was pending consideration.

The SC further observed that presently, Respondent No. 1 was not holding the shares to the extent of the eligibility threshold of 10% as stipulated under Section 244 of the CA 2013 in order to maintain an application under Sections 241 and 242 of the CA 2013 since the shareholding ownership was under dispute under a civil suit for partition. The question as to the right of Respondent No. 1 was required to be adjudicated finally in the civil suit, including the effect of nomination in favour of the Appellant, and whether absolute right, title, and interest in the shares is vested in the nominee or not, was to be finally determined in the said suit. The decision in the civil suit would be binding between the parties on the question of right, title, or interest and it was the domain of a civil court to determine the right, title, and interest in an estate in a suit for partition.

The SC observed that in the case of Sangramsinh P. Gaekwad and Others v. Shantadevi P. Gaekwad (Dead) through LRs and Others [(2005) 11 SCC 314], the SC had held that the dispute as to inheritance of shares is eminently a civil dispute and cannot be said to be a dispute as regards oppression and/ or mismanagement so as to attract company court’s jurisdiction under Sections 397 and 398 of the Companies Act, 1956. In view of the aforesaid decision, the SC was of the opinion that the basis of the petition in the present case was the claim by way of inheritance of one-fourth shareholding so as to constitute 10% of the holding, which right cannot be decided in proceedings under Section 241 or 242 of the CA 2013. Thus, filing of the petition under Sections 241 and 242 seeking waiver was a misconceived exercise.

Decision of the Supreme Court

In allowing the appeal, the SC took note of its judgement in World Wide Agencies Private Limited and Another v. Margarat T. Desor and Others [(1990) 1SCC 536] and the fact that the Respondent No. 1, as pleaded by him, had nothing to do with the affairs of Respondent No. 2 and he was not a registered owner and that the rights in estate/shares, if any, of Respondent No. 1 were protected in the civil suit. Thus, the SC was satisfied that Respondent No. 1 did not represent the body of shareholders holding requisite percentage of shares in Respondent No. 2, necessary in order to maintain such a petition.

The SC observed that it was undisputed that the DHC had, in the pending civil suit, passed an order directing that status quo be maintained with respect to the shareholding and other properties of Mr. Abhey Oswal. The shares have to be held in the name of the Appellant until the suit is finally decided because of the status quo order. It would not be appropriate to entertain these parallel proceedings and give waiver as claimed under Section 244 of the CA 2013 before the civil suit’s decision.

The SC was of the opinion that the proceedings before the NCLT filed under Sections 241 and 242 of the CA 2013 should not be entertained because of the pending civil dispute and considering the minuscule extent of the Respondent No. 1’s holding of 0.03%.

The SC directed dropping of the proceedings filed before the NCLT regarding oppression and mismanagement under Sections 241 and 242 of the CA 2013 and also granted Respondent No. 1 the liberty to file a fresh suit, on all the questions, in case of necessity, if the civil suit was decreed in favour of Respondent No. 1 and the shareholding of Respondent No. 1 in Respondent No. 2 increased to 10%.

The SC reiterated that it had left all the questions to be decided in the civil suit pending before the DHC. The impugned orders passed by the NCLT as well as NCLAT were set aside, and the appeal was allowed.

Vaish Associates Advocates View
The SC has, in the present case, clearly outlined the principle applicable in respect of the ownership rights bestowed upon nominee holders of shares under Section 72 of CA 2013. Deviating from previously upheld precedents by the Bombay High Court (“BHC”), the SC passed an order in favour of the nominees. One of the most prominent cases pertaining to the instant subject matter is Shakti Yezdani v. Jayanand Jayant Salgaonkar where the BHC held that the non-obstante clause in the erstwhile Section 109A of the Companies Act, 1956 cannot supersede the general laws of succession. Further, the BHC interpreted the erstwhile Section 109A of the Companies Act, 1956, by drawing parallels with the Life Insurance Act, 1939 (“LIC Act”). In the instant case, the SC, dismissing this argument, differentiated between the LIC Act and Section 72 of CA 2013, emphasizing that unlike the former, the latter does not treat a nominee as merely an interim holder. The LIC Act on the other hand considers nominees to be holders of the assets that eventually become estate of the deceased upon his death, devolving upon the legal heirs of the deceased.

Furthermore, the SC has in essence reconfirmed the legislative intent behind the qualifying percentage prescribed for maintenance of an application under Sections 241 and 242 of the CA 2013, which is to discourage frivolous litigation in the guise of allegations of oppression and mismanagement by shareholders not having quantifiable and established ownership in companies.

Also, by dropping the proceedings filed before NCLT for oppression and mismanagement in the present case during the pendency of the civil suit before the DHC, the SC has once again added to the already set and established precedent of not allowing the same legal question to be put up for adjudication before different forums.

For more information please write to Mr. Bomi Daruwala at [email protected]

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