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Nomination v. Succession – SC Finally Settles the Debate

Historical Background

The longstanding debate on the conflict between the rights of nominees and legal heirs over the devolution of shares has always been the cause of much controversy and confusion despite the settled legal position holding the legal heir as the ultimate rightful owner of the property. A nominee can act only as a trustee on behalf of the legal heir and hold such property until a conclusive decision on the matter of succession is reached.[1] However, the introduction of Section 109A by the Companies (Amendments) Act, 1999, dealing with nomination (and the language used therein) fueled a revival of the debate.

An amendment[2] under Section 109A and 109B of the Companies Act, 1956 (“1956 Act”) first inserted the provisions for nomination by a shareholder, which was eventually re-enacted as Section 72 of the Companies Act, 2013 (“2013 Act”). The Notes on Clauses appended to the Companies Bill, 2011, explains:

“This clause corresponds to Section 109A of the Companies Act, 1956, and seeks to provide that every share holder or debenture holder may appoint a nominee or a joint nominee who shall be the owner of the instrument in the event of death of the holder or the joint holder unless the nomination is varied or cancelled.”

Controversy arose after the Bombay High Court in Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited[3](“Kokate”) held the nominee as the beneficial owner after the death of the original owner of the shares—a nomination effectively overriding succession. In Jayanand Jayant Salgaonkar v. Jayshree Jayant Salgaonkar[4](“Salgaonkar”), however, the Bombay High Courtdeclared the Kokate judgment per incuriam and held that legal heirs and not nominees would have ownership rights over the shares. An appeal was preferred to the Division Bench of the Bombay High Court, which ruled in favour of the view held in Salgaonkaras opposed to the one held in Kokate.[5]

The issue was raised in the Supreme Court in Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors.[6] The dispute in this case centered on the distribution of certain assets of Jayant Salgaonkar (“Testator”). The Testator had executed a will making provisions for the devolution of his estates by nominating successors. The Respondent filed a suit and sought a permanent injunction, restraining all other respondents and appellants from taking any action in respect of the properties.

The Supreme Court judgment has finally put the debate to rest by holding that being a nominee in a share/securities does not entitle the person to inherit it by default. The Court also held that provisions relating to the nomination for shares of the company under Section 109A of the 1956 Act, Section 72 of the 2013 Act, and the relevant provisions in the Depositories Act, 1996 (“Depositories Act”), cannot override the rules of succession under the Indian Succession Act, 1925, or the personal laws of succession applicable to the deceased shareholder.

Issues

The Court framed the following four key issues:

  1. The scheme, intent, and object behind the Companies (Amendment) Act, 1999
  2. The implication of the scheme of “nomination” under the 1956 Act and other comparable legislations
  3. The use of the term “vest” and the presence of the non-obstante clause within the provisions of the 1956 Act
  4. Nomination under the 1956 Act vis-à-vis law of succession

The Decision

On the Scheme of the Companies Act

The Apex Court held that the objective of introducing a nomination facility was to provide the corporate sector with an incentive to boost investments by encouraging investors’ confidence while ensuring that the law aligned with the economic policies of liberalisation. While the Statement of Objects & Reasons of the 1956 Act does not mention nomination and/or succession, the provisions do not indicate any intent to confer absolute ownership to the nominee either.

On Nomination under Various Legislations

The Apex Court observed that the Courts were consistent while interpreting provisions relating to nominations. A nomination did not guarantee the nominee absolute ownership of the subject property, meaning that a nomination did not imply the exclusion of the legal heirs. Neither is any uniform definition of the rights of the nominees available nor does anything imply that such a nomination bestows absolute ownership to nominees. Hence, the terms in relevant legislations must be considered as ordinarily understood by a reasonable person making nominations.

On the Effect of “Vest” in Relevant Provisions

The Appellants argued that the term “vest” in Section 109A of the 1956 Act and Byelaw 9.11.1 under the Depositories Act indicates the intent to bestow ownership of securities upon the nominee after the shareholder’s death.

The Court referred to several precedents and concluded that the terms “vest” and “vesting” had variable meaning. The mere use of the term in a statute did not confer absolute title over the subject matter; hence, it was essential to interpret the term “vest” in Section 109A of the 1956 Act along logical lines. The vesting of the assets in the nominee under the 1956 Act/2013 Act and the Depositories Act serves only a limited purpose—to enable the Company to deal with securities in the immediate aftermath of the shareholder’s death and to avoid uncertainty regarding the holder of the securities.

On the Effect of Non-Obstante Clause

The Appellants argued that the “non-obstante clause” in Section 109A of the 1956 Act provided overriding effect to the nomination over any other law and granted absolute rights to the nominee.

The Court referred to the judgment in Ram Chander Talwar & Anr. v. Devender Kumar Talwar & Ors.,[7]where it had rejected the argument that the non-obstante clause granted the nominee absolute ownership of the subject matter to the exclusion of legal heirs. Interpretation of the general words and phrases used in a statute must be according to the objects of the statute and not read in isolation. Application of the non-obstante clause must be in accordance with the scheme of the legislation.[8] The Court observed that the non-obstante clause in this case served the singular purpose of allowing the company to vest the shares upon the nominee to the exclusion of any other person to discharge its liability against diverse claims by the legal heirs of the deceased shareholders. This arrangement would be temporary, 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. Hence, the interpretation of Section 109A,while keeping in mind the scheme and intent of the Act, clarified that the non-obstante clause did not exclude legal heirs from their claim over the securities against the nominee.

On Third Line of Succession contemplated under Companies Act

The Appellants argued that a valid nomination made under Section 109A of the 1956 Act/ Section 72 of the 2013 Act and the Depositories Act constituted the third category of a statutory testament overriding intestate succession. The Court rejected this argument referring to the judgment in Sarbati Devi & Anr. v. Usha Devi[9]that held that a nomination under the Life Insurance Act, 1938, did not contemplate a statutory testament and the amount paid to a nominee on the death of the policy holder would form part of the estate of the deceased. This would eventually devolve upon the heirs in accordance with the personal law of succession applicable to the deceased.

The Court held that the 1956 Act/2013 Act did not contemplate a “statutory testament” that stood over and above the laws of succession. A perusal of the statement of objects elucidated that the Act was concerned with regulating the affairs of corporates and not with the laws of succession. Moreover, a “statutory testament” through nomination was not bound by the same stringent requirements as those applied to the creation and validity of a will under the laws of succession.

Concluding Thoughts and Observations

The Indian Companies Act is largely based on the English Companies Act. However, the English Companies Act has no parallel provision except that the English Legislation provides for nomination by shareholders under Section 145, if the Articles of the Company allow for the same.[10] This nomination does not confer absolute ownership. The intent behind the provision was to facilitate indirect investors to exercise governance rights.[11] The intent behind introducing the section was to remove any doubts about the companies’ ability to make provisions in their Articles of Association for others to enjoy and exercise membership rights. It also enables indirect investors to enjoy information rights via the registered member. The legislation also clarifies that the nomination, with respect to information rights as provided under Section 146,[12] will terminate on the death of the shareholder under Section 148 of the Act.[13] This is in clear contrast with the Indian position prior to the decision.

In Salgaonkar, the Court was of the view that “The nature of corporate instruments and securities has, however, undergone a massive change… The fundamental focus of Section 109A and Section 109B of the Companies Act and Bye-Law 9.11 of the Depositories Act is not the law of succession, nor is it intended to trammel that in any way. The sole intention is, quite clearly, to afford the company or depository in question a legally valid quittance so that it does not remain forever answerable to a raft of succession litigations and an endless slew of claimants under succession law. It allows that liability to move from the company or the depository to the nominee.”

The Supreme Court decision has cleared the confusion regarding a nominee’s status as a holder of assets versus an absolute owner. The general understanding is that the nominee cannot be equated with an heir upon the death of the holder of the instrument, considering the nomination does not confer any beneficial interest in the nominee. Following an analysis of the intent behind the provision, the Court concluded that the vesting of assets in the nominee under the 1956 Act was only for a limited purpose and the interpretation of the non-obstante clause should be according to the objects of the statute. In effect, the provision had not excluded legal heirs from their claim over the securities against the nominee.

Further, the subjects of wills, intestacy, and succession fall under Entry 5 of List III of Schedule VII of the Constitution of India. Both the State Legislature and the Parliament can legislate on subjects under List III. However, the Parliament has enacted the Companies Act pursuant to Legislative Entries 43 and 44 of List I of Schedule VII and gives only the Parliament the power to legislate. The State Legislature cannot make any changes to the same. Therefore, the Companies Act could not have governed matters relating to intestacy and succession as it takes away the power of the State legislature to legislate over those subjects.


[1] Rishabh Shroff, Aditya Karekatte, Court Re-Confirms That Legal Heirs Are Preferred Over Nominees.

Court Re-Confirms That Legal Heirs Are Preferred Over Nominees | Private Client (cyrilamarchandblogs.com).

[2] Companies (Amendment) Act, 1999.

[3] 2010 SCC OnLine Bom 615.

[4] 2015 SCC OnLine Bom 1221.

[5] Shakti Yezdani v. Jayanand Jayant Salgaonkar, 2016 SCC OnLine Bom 9834.

[6] 2023 SCC OnLine SC 1679.

[7] (2010) 10 SCC 671.

[8] Vishin N. Khanchandani & Anr. v. Vidya L. Khanchandani, (2000) 6 SCC 724.

[9] (1984) 1 SCC 424.

[10] Section 148, English Companies Act, 2006.

[11] Usually when an investor buys shares in a listed company, they are more likely to hold their shares through an intermediary. As the name on the company’s register of members is that of the intermediary’s, investors have to rely on contractual arrangements with the intermediaries to obtain information and give instructions on how shares should be voted.

[12] Section 146, English Companies Act, 2006.

[13] Section 148, English Companies Act, 2006.

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