[Snigdha is a 3rd year B.A., LL.B. student at Gujarat National Law University, Gandhinagar]
The Supreme Court on 14 December 2023 in Shakti Yezdani v. Jayanand Jayant Salgaonkar settled the position of conflict between the rights of a nominee under section 109A of the Companies Act, 1956 (the “Act”) and that of a successor to the shares/securities of a company. The Court clarified the implications of the rights of a nominee by stating that the right conferred on a nominee under the Companies Act, 1956 as well as Companies Act, 2013 shall not grant them an absolute title to the subject matter of their nomination. The Court also nullified the possibility of using section 109A of the Act as an indirect/alternate or third mode of succession.
The post aims to analyse the judgement of the Supreme Court in this case in light of similarly situated and previously determined cases. The post also seeks to enumerate the implications of the present judgement in the scheme of the conflict surrounding the true interpretation of section 109A and the nature, aims and objectives of the introduction thereof.
The Shakti Yezdani Case
The appellants were the nominees to certain mutual fund investments and fixed deposits of the deceased in respect of which the respondents had filed a civil suit for the administration of all of the properties to the supervision of the court. The argument put forth by the appellants primarily suggested that with the nomination having been made under sections 109A and 109B of the Companies Act, 1956, the nominee should become the full and exclusive owner of the securities and therefore no question of entitlement of the security on anyone else’s part shall arise. This exclusionary effect was argued to arise from the non-obstante clause used in section 109A(3) of the Act which provides that a nomination under the said section would prevail over any other disposition, be it testamentary or otherwise.
Reading sections 187I and section 109A(3) of the Act would signify that the shares would therefore vest with the nominee to the exclusion of all other persons in all cases other than the cancellation or variation of the nomination. Furthermore, arguing upon the intention behind the incorporation of section 109A to the scheme of the Act, emphasis was placed on the method of nomination as per Form SH-13 under Rule 19(1) of the Companies (Share Capital & Debentures) Rules, 2014. The form provides for the nomination of a third party who can also be a minor; however, a minor cannot be a valid executor or a trustee of such shares/securities. Hence, it was argued that the intention behind the provision was to provide the nominee with the complete ownership of the subject matter.
In Sarbati Devi v. Usha Devi, the Supreme Court, while dealing with a nomination made under the Insurance Act, 1939 vis-à-vis the right of a successor, held that a nomination not being of the nature of a will, does not provide the nominee with ownership rights and therefore the succession certificate shall prevail over the nomination. The ratio laid in Sarbati Devi has been followed widely and in multiple cases other than those pertaining to the Insurance Act. However, in Harsha Nitin Kokate v. The Saraswat Cooperative Bank Ltd., the Bombay High Court held that the rights of the nominee would prevail over the rights of the successors when it comes to the ownership of shares in a company. The decision in Kokate was deemed to have caused an upheaval in the consistent position that courts took with regard to the issue in question.
However, a single judge of the Bombay High Court in Jayanand Jayant Salgaonkar v. Jayashree Jayant Salgaonkarfound the decision in Kokate to be per incuriam, which was further reiterated and clarified by the division bench of the Court in Shakti Yezdani. Further, the division bench also placed its reliance on Sarbati Devi to hold that the rights of nominees under sections 109A and 109B of the Act shall not prevail over that of the successors. Furthermore, the Court emphasised that the object and purpose of the Act was not related to succession or a method thereof in any manner.
However, a division bench of the Supreme Court in Aruna Oswal v. Pankaj Oswal came across the issue of the rights of a legal representative vis à vis that of a nominee to the shares of a company in relation to the eligibility criteria under sections 241 and 242 of the Companies Act, 2013. The Court here observed that a prima facie reading of section 72 of the Companies Act, 2013 (pari materia section 109A of the Companies Act, 1956) reflects that the vesting of power is absolute in nature and have the capacity to supersede other laws in force at the time by virtue of the non-obstante clause present in the provision. The observations in Aruna Oswal therefore reflect the line of reasoning adopted by the High Court in Kokate to a certain extent.
On the nature and object of Section 109A of the Act
The primary rule of interpreting a statute is that the provision should be read in line with the intent of the legislature. Here, the Court placed its reliance on the Statement of Object & Reasons, The Companies (Amendment) Act, 1999, which led to the insertion of sections 109A and 109B to the Act to highlight that the process of nomination was brought into the company law jurisprudence to boost investor confidence and to reduce the lengthy and bureaucratic process of navigating through a plethora of succession claims to a security. While placing its reliance on the statement of object and reasons of the Act as well as the contents of Entry 43, List I of the Seventh Schedule, the Court held that succession is not within the true objectives and intent of the Act. Therefore, it could not be a logical deduction assume that section 109A of the Act channelled a route for any form of complete ownership or succession.
The Court also placed its reliance on the various case laws that have consistently dealt with the ramifications of such a nomination. While harmonising the dissimilarities between the language employed in section 109A of the Act with other similarly situated provisions within other legislation, the Court adopted the ordinary meaning of the word “nomination” for its perusal. In employing such a meaning, the Court also drew an assumption that the person making such a nomination would be reasonably aware of the various decisions that align with one argument or the other on the said issue. However, such an assumption can have far reaching consequences, especially when an authoritatively settled position of law has not been reached prior to the present judgment. With judgments such as Kokate and Aruna Oswal this argument seems even bleaker.
On the dilemma between nomination under the Act vis-à-vis succession
While interpreting the word “vest” as used in section 109A of the Act, the Court held that the term does not necessarily confer an absolute title of ownership on the nominee. While placing its reliance on Municipal Corporation of Greater Bombay v. Hindustan Petroleum Corporation, the Court observed that vesting can have the effect of a limited vesting “in title as well as possession”. In the context of the facts of the case, the Court found that the use of the word “vest” itself does not confer the total ownership of the shares/securities but rather it is used as a temporary tool to reduce the uncertainty of the holding of the shares upon the shareholder’s death so as to facilitate the smooth functioning of corporate affairs.
Similarly, with respect to the use of a “non-obstante clause” in section 109A(3) of the Act, the Court found that while the effect of such a clause might primarily be to provide an overriding effect to the provision it has been appended to, reading the same without taking the context of its usage into account would be a fallacy. Therefore, the scheme and intent of the Act suggests that the effect of a non-obstante clause is limited to the temporary arrangement of the discharge of liability by the nominee to the exclusion of others for the smooth functioning of affairs and the arrangement concedes upon the settlement of the affairs of the testator. Therefore, the scheme of the Act neither creates an alternate mode of succession nor does it concern itself with the issues of succession. The Court, therefore, quite aptly uses the tools of statutory interpretation to delineate the effect of the non-obstante clause in a limited sense rather than adopting a broader construction which could have far reaching consequences in the methodology of succession.
The judgment plays an integral role in delineating the extent of the rights of a nominee under section 109A of the Companies Act, 1956 and highlighting the importance of the primary rules of interpretation in the construction of a statute. This position of law harmonises the rights of the nominee with that of the heirs in their specific contexts while providing a methodology to achieve the smooth functioning of the affairs of the company. However, the differentiation of the judgment of Aruna Oswal to the extent of the grant of absolute title under section 72 of the Companies Act, 2013 could have been made to achieve a greater consistency in the position of law as established. However, the purposive interpretation provided to the provisions brings a well requisite clarity on the issue in question.