[Abolee Vilas Vaidya is a Legal Analyst at Landryt and Priyanka Pillai an Associate at IC Universal Legal, Mumbai]
The tussle between nominees and legal heirs in respect of shares of a company has always been a cause of sizeable confusion. The solution may seem to be a simple determination of whether the rights of the nominee under section 72 of the Companies Act, 2013 can override the rights of the legal heir under the general laws of succession, but the answers so far have been uncertain. In the several scattered pronouncements where this has been a recurring issue, the courts have tilted in favor of the right of the legal heir. However, this debate has re-emerged in Aruna Oswal v. Pankaj Oswal (6 July 2020).
Facts of the Case
Late Mr. Abhey Oswal held 5,35,30,960 shares in Oswal Agro Mills Limited, a listed company. During his lifetime, Mr. Oswal filed nomination in accordance with section 72 of the Companies Act, 2013 in favour of his wife Mrs. Aruna Oswal. The nomination clearly stated that it shall supersede all prior nomination and testamentary documents executed by Mr. Abhey Oswal. Therefore, Mrs. Oswal was registered as the holder of the shares after the death of Mr. Abhey Oswal, who died intestate. Mr. Pankaj Oswal, the son of Mr. Abhey Oswal, instituted proceedings under sections 241 and 242 of the Companies Act against Mrs. Oswal and the company, claiming oppression and mismanagement. He also filed a partition suit before the Delhi High Court claiming 1/4th of the estate of Mr. Abhey Oswal.
Mr. Pankaj Oswal’s claims rested on the contention that he is the rightful heir to 1/4th of the estate of Mr. Abhey Oswal and consequently the rightful owner of 10% of the shares concerned. As the owner of 10% of the shares he meets the statutory threshold to file a petition of oppression and mismanagement against the company and that the denial of the company to register him as the beneficial owner of these shares was itself an act of oppression and mismanagement.
The integral questions that arise in this debate are two-fold: firstly, whether section 72 of the Companies Act provides that nomination overrides the general law of succession and, secondly, in cases where there is a valid will and a valid nomination, what would prevail? In this post, the authors seek to analyse these questions through the looking glass of the precedents on the matter.
Overriding Effect of Section 72
Upon scrutiny of section 72, the Court in Aruna Oswal observed that every holder of securities has a right to nominate any person upon whom their securities shall vest in the event of their death. Further, section 72(3), a non-obstante clause, specifically overrides any other law for the time being in force or any disposition, whether testamentary or otherwise. It naturally follows, therefore, that a valid nomination made in accordance with section 72 purports to vest all the rights in the securities in the nominee and that such vesting is absolute as the provisions supersede any other law by virtue of the non-obstante clause. Further, the Court relied upon rule 19 of the Companies (Share Capital and Debentures) Rules, 2014 to strengthen this interpretation. Sub-rule (8) of rule 19 lays down that a nominee is entitled to receive dividends, interest and other advantages as if they were the registered holder of the securities and, upon successful transmission and becoming the registered holder, they would be entitled to participate in the meetings of the company. However, the question still remains whether this view of strict conformity to the letter of the law in Aruna Oswal was consistent with the Supreme Court’s precedents.
Nomination in Other Legislation
The leading precedent on this issue is Shakti Yezdani v. Jayanand Jayant Salgaonkar, where the Bombay High Court held that the non-obstante clause in section 109A of the Companies Act, 1956 (pari materia with section 72 of the Companies Act 2013) cannot completely override the general laws of succession. Moreover, the nominee is merely an interim holder of shares and the role is designed to protect the interests of the deceased shareholder until the transmission of the shares to the rightful owner, i.e. the legal heir, is undertaken, as the Companies Act does not envisage any automatic transmission upon death of a shareholder. A nominee, therefore, is not entitled to the shares but is only a person who could hold the shares and all the benefits accruing such as the dividends and voting rights in trust, on behalf of the legal heir until the legal heir’s name is entered into the register of members. To support this interpretation, the Bombay High Court relied on the Supreme Court’s decisions in Sarabati Devi v. Usha Devi, Vishin Khanchandani v. Vidya Lachmandas Khanchandani and Ram Chander Talwar v. Devender Kumar Talwar and held that the interpretation of the section 109A must be in line with similar nomination provisions in legislation such as the Life Insurance Act, 1939, Governments Savings Certificates Act, 1959 and Banking Regulation Act,1949. In all the above-mentioned legislation, the provisions contemplating nomination do not confer upon the nominee the assets upon the death of the deceased; rather they are mere holders of the assets. Moreover, the assets become the estate of the deceased upon death, thus devolving naturally on his legal heirs.
In Aruna Oswal, while differentiating between the abovementioned legislation, section 72 and the erstwhile section 109A, the Court held that the material difference is that these legislation do not have a specific provision of vesting the interest upon the nominee. The rights and role of the nominee is limited to that of an interim holder by specific reference, and no such limit appears under the provisions of the Companies Act. The interpretation of section 72 can only be limited by what is provided under the Companies Act and not through similar but significantly different provisions of nomination in other legislations.
Finally relying on Dwarka Prasad Agarwal v. Ramesh Chander Agarwal, the Court held that the issue of inheritance of shares is eminently a civil dispute and must not be decided under a petition of oppression and mismanagement and must be decided by the civil court in the partition suit. Although Aruna Oswal leaves the outcome of the dispute open, the observations bring in a strict interpretation of section 72 as absolute and overriding the laws of succession by virtue of its non-obstante clause.
Valid Will and Valid Nomination
Answering the second integral question in this debate, i.e., in a conflict between a valid will and a valid nomination, the same has been analysed in Dayagen Private Limited v. Rajendra Dorian Punj, an oppression and mismanagement petition, where the legal heir claimed that the deceased member’s share had been wrongfully transferred to a nominee. The claim rested on the fact that the nomination was not made in the manner prescribed under section 109A and therefore was not valid and hence the shares would devolve upon the legal heir of the deceased in accordance with his will. The High Court of Delhi differed from the decision in Sarabati Devi. It differentiated between section 109A of the Companies Act, 1956 and the nomination provision under Life Insurance Act, to hold that section 109A in clear terms vests the nominee with all the rights and benefits of the deceased shareholder and overrides the general law of succession. Therefore, it would follow that when there is a valid will and a valid nomination, the nomination would sustain owing to the overriding nature of section 109A. However, it is pertinent to note that in this case the nomination was not made in the prescribed form and it was thus held to be invalid, thereby making the legal heirs entitled to the shares in accordance with the will of the deceased shareholder.
The evergreen debate on who has a better title to the assets of a deceased, whether a nominee or a legal heir, was given a new lease of life by the Supreme Court in Aruna Oswal. The Court has differed from the precedents and has given a renewed interpretation to provisions dealing with nomination by refraining from drawing parallels with provisions of nomination in other legislation and yielding to its non-obstante clause and absolute wording.
– Abolee Vilas Vaidya & Priyanka Pillai