Friday, December 23, 2016

Bombay High Court Clarifies Rights of Nominees in Shares

An intricate legal question that has befuddled various courts relates to the conflicts between the rights of nominees and those of successors in the case of ownership of various financial instruments, including shares of a company. As regards shares, the issue came to the fore in 2010 in the case of Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited (“Kokate”) wherein, after interpreting the provisions of sections 109A and 109B of the Companies Act, 1956, a single judge of the Bombay High Court ruled that the nominee of shares becomes a beneficial owner thereof after the death of the original owner, and that nomination effectively overrides succession. This decision was previously discussed on this Blog, including a strong critique by our contributor Somasekhar Sundaresan, as the decision seemed to flows against the tide of conventional wisdom at the time relating to the debate surrounding nomination and succession in the case of ownership of financial instruments.

The issue was hardly one to subside, and resurfaced with a decision of another single judge of the Bombay High Court in 2015 in Jayanand Jayant Salgaonkar vs. Jayshree Jayant Salgaonkar (“Salgaonkar”), wherein it was declared that the judgment in Kokate was per incuriam, and that legal heirs and not the nominees will obtain the ownership rights of share certificates. Sumit Agrawal discussed the development at the time on this Blog.

An appeal was preferred from the single judge’s decision in Salgaonkar to a division bench of the Bombay High Court in Shakti Yezdani v. Jayanand Jayant Salgaonkar (“Yezdani”), wherein the judgment was delivered on December 1, 2016. The division bench was effectively called upon to resolve the differences between the two single judges in Kokate and Salgaonkar. Ultimately, it ruled in favour of the position adopted in Salgaonkar and against that in Kokate, effectively circumscribing the scope of the nomination of shares under the provisions of the Companies Act, 1956.

In Yezdani, the facts were essentially that a deceased individual left behind several shares and investments (such as mutual fund units). While the individual made a bequest in the form of a will, certain others made claims as nominees of the shares. The nominees claimed that they were beneficial owners of the shares upon death of the nominator in view of such nomination.

In deciding on the issue of conflict between nomination and succession, the division bench was taken through a catena of cases relating to various financial instruments and other assets wherein nomination facility was provided for under different legislation. One of them was a decision of the Indrani Wahi v. Registrar of Co-op. Societies wherein the Court had considered the provisions of sections 69 and 70 of the West Bengal Co-operative Societies Act, 1983 and held that nomination does not bind the legal representatives of the deceased member of a society nor does it overrides the law of succession. This despite the said West Bengal legislation (in section 80) providing that in case of death of a member the share or interest of the member in the co-operative society shall stand transferred to the person nominated. The Court also considered various decisions of the Supreme Court under other legislation such as the Banking Regulation Act, 1949 and the Government Savings Certificate Act, 1959, wherein similar conclusions were arrived at. The Court found that sections 109A and 109B of the Companies Act, 1956 were not materially different from these legislation.

In the operative portion of its decision, the Bombay High Court noted:

32. In the present case, we find that the provisions of Section 109A and in particular Sub­section (3) thereof are not materially different from the provisions of Sub­section (1) of Section 6 of the Government Savings Certificates Act, 1959. Sub­section (2) of Section 45­ZA of the Banking Regulation Act, 1949 is also similar to Sub­section (2) of Section 109B. The same is the case with Bye­law 9.11 of the Depositories Act,1996. ...
34. The provisions relating to nominations under the various Enactments have been consistently interpreted by the Apex Court by holding that the nominee does not get absolute title to the property subject matter of the nomination. The reason is by its very nature, when a share holder or a deposit holder or an insurance policy holder or a member of a Co­operative Society makes a nomination during his life time, he does not transfer his interest in favour of the nominee. It is always held that the nomination does not override the law in relation to testamentary or intestate succession. The provisions regarding nomination are made with a view to ensure that the estate or the rights of the deceased subject matter of the nomination are protected till the legal representatives of the deceased take appropriate steps. None of the provisions of the aforesaid Statutes providing for nominations deal with the succession, testamentary or non­testamentary. As observed by the Apex Court, the legislative intention is not to provide a third kind of succession.

35. Considering the consistent view taken by the Apex Court while interpreting the provisions relating to nominations under various Statutes (including the view in the recent decision in the case of Indrani Wahi), there is no reason to make a departure from the consistent view. The provisions of the Companies Act including Sections 109A and 109B, in the light of the object of the said Enactment, do not warrant any such departure. The so called vesting under Section 109A does not create a third mode of succession. It is not intended to create a third mode of succession. The Companies Act has nothing to do with the law of succession. ...

By this, the Bombay High Court has circumscribed the scope of nomination, and treated it essentially as a temporary arrangement so that shares do not remain ownerless during the period that succession issues are resolved. In other words, nomination is only a means and not an end. Through this, the Court has largely harmonized the law relating to shares with that of other financial instruments and membership rights under other legislation. The upheaval caused by Kokate has now been ironed out.

Given that section 72 of the Companies Act, 2013 is in pari material with section 109A of the Companies Act, 1956, the tenor of the Bombay High Court’s ruling will be immensely relevant in interpreting the new legislation going forward.


1 comment:

Renganath said...

S. 39 (6) & (7) of the Insurance Act, as amended (w.r.e.f. 26-Dec-14) by the Insurance Laws (Amendment) Act, 2015 provides an interesting counter point –

"39 - Nomination by policyholder .... (6) Where the nominee or if there are more nominees than one, a nominee or nominees survive the person whose life is insured, the amount secured by the policy shall be payable to such survivor or survivors."

(7) Subject to the other provisions of this section, where the holder of a policy of insurance on his own life nominates his parents, or his spouse, or his children, or his spouse and children, or any of them, the nominee or nominees shall be beneficially entitled to the amount payable by the insurer to him or them under sub-section (6) unless it is proved that the holder of the policy, having regard to the nature of his title to the policy, could not have conferred any such beneficial title on the nominee."