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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • 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."

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