The Supreme Court, vide its judgment dated December 14, 2023, in the matter of Shakti Yezdani and Another v. Jayanand Jayant Salgaonkar and Others [Civil Appeal No. 7107 of 2017], held that the Companies Act, 1956 (“CA, 1956”) does not deal with the law of succession nor does it override the laws of succession and the nominee does not receive absolute legal ownership of the subject matter of the nomination upon the death of the shareholder. This interpretation is applicable to CA, 1956 (and its equivalent provisions in the Companies Act, 2013 (“CA, 2013”)) and the Depositories Act, 1996 (“Depositories Act”).

Facts

Mr. Jayant Salgaonkar (“Testator”), family patriarch, executed a will on June 27, 2011 which made certain provisions for the devolution of the estates of the Testator upon the successors. Apart from the estate listed out in the will, the Testator had some fixed deposits and mutual fund investments (“Securities”) in respect of which nominees were appointed by the Testator. A suit was filed in the Bombay High Court by Mr. Jayanand Jayant Salgaonkar (“Respondent”) (a legal heir of the Testator who was not a nominee), wherein the administration of the properties of the deceased under the supervision of the court was claimed by the Respondent. On the other hand, Shakti Yezdani and others (“Appellants”), the sole nominees of the mutual funds, claimed for an absolute ownership of the Securities and the legal heirs contested their claim.

A single judge of the Bombay High Court took into consideration the provisions of CA, 1956 and the Depositories Act pertaining to nomination of securities and the rights of nominees and legal heirs and held that a nominee is not vested with the absolute ownership of the Securities and it was held by the Bombay High Court that nomination does not override testamentary or intestate succession and thus, CA, 1956 and the Depositories Act do not create a third mode of succession. Further, the division bench of the Bombay High Court also upheld the judgment of the singe judge, after hearing an appeal filed before it by the Appellants. Further, a second appeal was filed against the order of the division bench of the Bombay High Court before the Supreme Court.

Issues

• Whether a nominee of a holder of shares or securities, appointed under Section 109A (Nomination of shares) of CA, 1956 read with the bye-laws under the Depositories Act, is entitled to the beneficial ownership of the shares or securities which are subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estate of the holder as per the law of succession.
• Whether a nominee is entitled to all rights in respect of the shares or securities which are subject matter of nomination to the exclusion of all other persons or whether he continues to hold the securities in trust and in a capacity as a beneficiary for the legal representatives who are entitled to inherit securities or shares under the law of inheritance.
• Whether a bequest made in a will executed in accordance with the Indian Succession Act, 1925 (“Succession Act”) in respect of shares or securities of the deceased supersedes the nomination made under the provision of Sections 109A of CA, 1956 and bye-law no. 9.11 framed under the Depositories Act.

Arguments

Contentions of the Appellants:

It was contended by the Appellants that the nomination framework under CA, 1956 differs from that in other legislations. It was pointed out that the terms, including ‘vesting’, and ‘to the exclusion of others’, as well as a ‘non-obstante clause’ in CA, 1956, sets it apart from other laws. Consequently, it was argued by the Appellants that relying on judgments pertaining to nominations in other statutes such as the Insurance Act, 1939, Banking Regulation Act, 1949, National Savings Certificates Act, 1959, Employees Provident Fund and Miscellaneous Provisions Act, 1952, for interpreting the provisions of Sections 109A and 109B (Transmission of shares) of CA, 1956, would be incorrect. It was asserted by the Appellants that the provisions contained in other legislations cannot act as a ground for the interpretation of the term ‘nomination’ under CA, 1956 as they are not pari materia with Sections 109A and 109B of CA, 1956 (now Section 72 (Power to nominate) of CA, 2013).

It was argued by the Appellants that the inclusion of Sections 109A and 109B in CA, 1956 by the legislature on August 31, 1988 is explicit in conveying that a nominee, following the death of the shareholder or debenture holder, attains complete and exclusive ownership rights concerning the shares designated to them. Further, examining the hierarchy outlined in the provision, starting with shareholder in an individual capacity, followed by joint shareholders owing shares jointly, and ultimately, the nominee to whom the shares shall vest in the event of the shareholder or joint shareholders’ death, it is asserted that the intention is clear that such nomination takes precedence over any disposition, whether testamentary or otherwise.

It was also contended by the Appellants that Sections 187C (Declaration by persons not holding beneficial interest in any share) and 109A(3) of CA, 1956 should be interpreted together, indicating that shares shall ‘vest’ with the nominee, excluding all other persons unless the nomination is altered or revoked. The Appellants also contended that Section 187C of CA, 1956 inherently outlines the process for varying the nomination through a suitable declaration, establishing these provisions as complete codes within themselves. When considered in conjunction, the absence of a declaration altering the nomination would imply that the intention was to confer beneficial ownership of the shares to the Appellants through the mechanism of nomination of rights. Since the will of the Testator had explicitly mentioned all other properties of the Testator except the Securities for which the Appellants were designated as nominees, it naturally implies that the ownership rights of those Securities would pass on to the nominees after the Testator’s death.

Reference was made by the Appellants to the bye-law of the Depositories Act governing the transmission of securities in case of nomination. The presence of a non-obstante clause within this provision implies that the effect of nomination under the bye-law is that it would vest complete title of the shares within the nominee, irrespective of provisions in testamentary disposition(s) or nomination(s) under other laws which governs securities.

It was further pointed out by the Appellants that Regulation 29A (Nomination) of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 mandates asset management companies to provide the option to its unit holder to nominate a person in whom all rights of the units shall vest in the event of the unit holder’s death. It was the contention of the Appellants that when a change in nomination cannot be made without the consent of the other joint shareholder(s), the same cannot be made by way of a will or testamentary dispositions or laws of succession either.

It was asserted by the Appellants that the Bombay High Court’s interpretation is inconsistent with the legislative intent behind the insertion of Sections 109A and 109B into CA, 1956. As per the Appellants, acceptance of the Bombay High Court’s interpretation would undermine the legislature’s intent pertaining to the ease of succession planning.

Contentions of the Respondent:

The Respondent emphasized that CA, 1956 does not deal with the law of succession and that the nominee of a share or the securities holder is not entitled to exclusive ownership of the shares or securities. The Respondent contended that the consistent view of various courts, including the Supreme Court, is that a nominee does not become the absolute owner of the estate. The Respondent stated that nomination does not affect the usual mode of succession and the legal heirs have not been excluded by virtue of the nomination.

It was argued by the Respondent that the nomination provisions do not confer absolute ownership rights to the nominees, and that the nominees do not become full owners of the estate for which they have been nominated. Additionally, the Respondent contended that the nomination provisions should not be considered as a form of ‘statutory testament’ that supersedes the law of succession as per the Succession Act. The Respondent also emphasized the need for a detailed judicial process to obtain letters of administration or succession certificates, as prescribed by the Succession Act, and argued that the nomination provisions do not replace the said process.

Observations of the Supreme Court

The Supreme Court, with a broad interpretation, in-depth analysed the provisions, scheme, and object of CA, 1956 as well as CA, 2013 and the amendments to it, the implication of the scheme of nomination under different statues and various judgement of different courts. The Supreme Court observed that the provisions of CA, 1956 do not deal with succession in any manner and it do not create a third mode of succession and do not override the law in relation to testamentary or intestate succession. Therefore, Supreme Court rejected the contention of nomination as a ‘statutory testament.’ Additionally, it was observed by the Supreme Court that there exists no material to depict that the intent of the legislature behind introducing a method of nomination through the Companies (Amendment) Act, 1999 was to confer absolute title of ownership of shares on the said nominee. Further, the Supreme Court observed that the non-obstante clause in Section 109A of CA, 1956 and bye-law no. 9.11.7 of the Depositories Act cannot be held to exclude the legal heirs from their rightful claim over the securities against the nominee. The said non-obstante clause does not contemplate a third line of succession under CA, 1956.

The nomination under these provisions does not grant absolute title over the subject property for which the nomination has been made in respect to the ownership in favour of the nominee, and it is not intended to restrict the law of succession in any manner. Further, the court also observed that the term ‘vesting’ does not confer absolute ownership of the securities in favour of the nominee which is also a well settled position under various other pari materia legislations. The object of addition of nomination facility in the Companies (Amendment) Act, 1999 was only to provide an impulsion to the investment climate and ease the burdensome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.

Decision of the Supreme Court

The Supreme Court dismissed the appeal, upheld the decision of the Bombay High Court and held that a nominee does not attain absolute title over the property for which the nomination has been made and it does not override testamentary or intestate succession. The Supreme Court also laid emphasis on the need for consistency in interpreting settled principles of law and the significance of maintaining certainty in legal decisions. The Supreme Court also held that the same principles that apply to nomination in estate planning and succession laws should also apply to the devolution of securities. Thus, it was held by the Supreme Court that nomination must be considered as ordinarily understood by a reasonable person making nominations, with respect to their movable/immovable properties.

It was also held by the Supreme Court that the non-obstante clause under Section 109A(3) of CA, 1956 and bye-law no. 9.11.7 of the Depositories Act should be interpreted keeping in mind the intent with which the provisions for facilitating nomination for securities was introduced in the scheme of CA, 1956, that is, to enable smooth functioning of a company pursuant to the death of a shareholder.

VA View:

The present case is a landmark ruling which settles the long pending and complex debate, followed by a series of contradictory judicial pronouncements by the courts of different jurisdictions, pertaining to the rights of the successors and nominees of an individual in relation of the shares or securities.

The Supreme Court has rightly clarified that the nomination process does not override the laws of succession as the purpose of the nomination process is merely simplification of the transfer of securities and protection of the subject matter of the nomination until the legal heirs can establish their right of succession. Therefore, the Supreme Court has in an appropriate manner brought a harmonious construction and given due consideration to both the laws of nomination as well as succession laws.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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