Nominees or Legal Heir, Who Has The Legal Right Over Shares?

Nominees or Legal Heir, Who Has The Legal Right Over Shares?
  • In a significant ruling on December 14, 2023, in the case of Shakti Yezdani v. Jayanand Jayant Salgaonkar (Civil Appeal No. 7107 of 2017), the Hon’ble Supreme Court (“Supreme Court”) has cleared the air on a critical subject. The ruling pertains to whether the rights of a nominee under the Companies Act, 1956 (Section 109A and 109B) or the analogous provisions in the Companies Act, 2013 (Section 72) (“Companies Act”) can override the rights of a legal heir to the shares/securities of a company under the general laws of succession.
  • The Supreme Court has held that ownership of financial instruments like shares would pass to the successor through legal or testamentary means, rather than to the nominee. Through the nominee related provisions, the Companies Act merely seeks 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.

Facts

  • The appellants and respondents in this case were legal heirs/nominees to certain mutual fund investments, shares, and fixed deposits of a deceased family member. One of the respondents had filed a civil suit for a declaration to the effect that properties of the testator may be administered under the court's supervision and seeking absolute power to administer the same.
  • The appellants contested the same with the claim that, they being the nominees were absolutely vested with the securities on the testator's death and relied on the judgement of the Bombay High Court in the case of Harshada Kokate v/s Saraswat Co-op Bank and Ors. (“Kokate case”), where it was held that a nominee's rights bear resemblance to a testamentary disposition and consequently, the nominees would attain unequivocal legal ownership of the shares, accompanied by the right to manage them in any manner.
  • However, a single judge bench of the Bombay High Court rejected the submissions of the nominees and also observed that the judgment of the same court in the Kokate case is per incuriam (i.e., the judgment has been decided without reference to various binding precedents set by the same court or the superior court rendered on the same issue). On appeal, the division bench of the Bombay High Court upheld the single judge’s decisions, pursuant to which an appeal was preferred before the Supreme Court.

Key Issues

The primary issue before the Supreme Court were to determine the following: 

(a) The scheme, intent and object behind the introduction of provision regarding the nomination under the Companies Act.

(b) Effect of use of the term ‘vest’ and presence of non-obstante clause in Companies Act.

(c) Implications of nomination under Companies Act, vis-a-vis law of succession.



Judgement

Answering to the first issue, the Supreme Court relied on the Statement of Object & Reasons of the Companies (Amendment) Act, 1999, which introduced sections 109A and 109B, to establish that the nomination process aimed to enhance investor confidence and streamline the complex succession claims process. The Court emphasized that succession was not the true objective of the Companies Act, and the sections did not provide a route to complete ownership or succession.

While addressing the second issue, the Court relied on its previous ruling to clarify that the Term ‘vest’ in the Companies Act, does not inherently grant ownership of the shares/securities to the nominee. The vesting of shares/securities in the nominee under this Act serves a limited purpose–facilitating the company immediate handling of the securities after the shareholder’s death to prevent uncertainty in ownership, ensuring the smooth functioning of the company.

To answer the later part of the second issue, the Court has interpreted the non- obstante clause in the sections of the Companies Act, by applying the rule that clauses and sections within a statute should be interpreted in the context of the entire statute. The Court ruled that the non-obstante clauses purpose is to empower the company to vest shares exclusively in the nominee, protecting it from diverse claims by the legal heirs of the deceased shareholder, 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.

While answering the third issue, the Court held that the argument by the appellants that nomination as a ;statutory testament; cannot be accepted simply because the Companies Act does not deal with succession nor does it override the laws of succession. It is beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. In case of a will, it is upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession.

Conclusion

Over the years, Courts have taken consistent views on this matter, holding that a nominee need not necessary be an absolute legal owner and the judgement of the Supreme Court re-enforces established legal principles.

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