In Shakti Yezdani & Anr vs Jayanand Jayant Salgaonkar & Ors 2023 SCC OnLine SC 1679, the Hon’ble Supreme Court of India (“Supreme Court”) clarified the rights of a nominee upon the death of  a shareholder.

The Supreme Court held that a consistent interpretation has been given by courts on the question of nomination under various legislations such as the Banking Regulation Act, 1949 and the Life Insurance Corporation Act, 1938, that the nominee would not get  title to the  properties or assets for which he/she is named as a nominee but would only hold it for the benefit of the legal heirs.  

Background

In the facts of the case, a family patriarch (testator) executed a will inter alia making provisions for distribution of his assets among his successors. Apart from the properties mentioned in the will, the testator had certain fixed deposits and mutual funds (“Securities”) for which he had appointed nominees.

One of the legal heirs (not appointed as a nominee for any of the Securities), filed a suit before the Hon’ble Bombay High Court (“High Court”) inter alia for declaration that the properties of the testator may be administered under court’s supervision. In response, the nominees pleaded that by virtue of their nomination, the Securities absolutely vest in them, and thus entitle them to the said Securities.  A Single Judge of the High Court rejected the contentions of the nominees noting that the Companies Act, 1956 (“1956 Act”) as well as the Depositories Act, 1996 ("Depositories Act”) do not create a third mode of succession i.e., these provisions  do not entitle a nominee to the Securities to the exclusion of the legal heirs. When the matter was taken in appeal, a Division Bench of the High Court upheld the judgment of the  Singe Judge. Hence, a second appeal was filed before the Supreme Court.

Contentions of the parties before the Supreme Court

The nominees contended that the provisions for nomination in the 1956 Act cannot be compared to nomination as provided under other legislations, and thus reliance cannot be placed on the interpretation of nomination in any other legislations. They placed reliance on the language and intent of the relevant provisions pertaining to nomination in order to establish that the Securities would ‘vest’ with them.

Conversely, the legal heirs argued that the 1956 Act is not concerned with the law of succession. As such, the term ‘vest’ provided under the provisions of the 1956 Act does not create a third mode of succession and ought to be interpreted conservatively. Hence,  a nomination does not impact the rights conferred on a legal heir/legatee  under succession laws, and only provides a smooth mechanism for transfer of shares.

Analysis by the Supreme Court

The Supreme Court dismissed the contentions of the nominees and categorically held that the 1956 Act neither deals with succession nor does it override the laws of succession.  The Court emphasised that it is beyond the scope of  a company’s affairs to facilitate succession planning of a shareholder, and therefore, by virtue of sections 109A and 109B (i.e., the sections dealing with nomination and transmission of shares) of the 1956 Act, a nominee cannot become entitled to the shares as an owner, upon the death of the nominator. In arriving at this finding, it also noted the below:

  1. The purpose for the introduction of nomination facilities in the 1956 Act, vide sections 109A and 109B of the 1956 Act, was not to confer absolute title of shares/securities to the nominee; instead, it was introduced to boost the slow investments during that time and in order to ease the complicated process of obtaining multiple letters of succession from authorities, pursuant to the death of a nominator.
  2. Various courts while dealing with the concept of nomination in other legislations such as the Government Savings Certificate Act 1959, the Banking Regulation Act, 1949, the Life Insurance Act, 1939 and the Employees Provident Fund and Miscellaneous Provisions Act, 1952, have consistently held that nomination does not automatically confer title of the subject matter unto the nominee.
  3. In order to avoid any ramifications, the term nomination has to be considered as would be ordinarily understood by any reasonable person making a nomination.
  4. Various judgments interpreting the term ‘vest’ under different enactments, including the Indian Succession Act, 1925 (“ISA”), have concluded that the term has a variable meaning and / or does not confer absolute title over the subject matter.
  5. The vesting of securities in  a nominee under the 1956 Act and the Depositories Act is only for the benefit of the company to deal with the immediate impact of the shareholder’s death and any consequential uncertainties which could likely impact the smooth functioning of the company.
  6. The non-obstante clause in section 109A of the 1956 Act i.e. the clause which was relied upon to  argue that the section had an overriding effect over any other law for the time being in force or disposition (whether testamentary or otherwise), cannot be read in isolation, regardless of its wide ambit. Such clause must be interpreted keeping in mind the objects of the statute. Hence, the non-obstante clause in section 109A of the 1956 Act should be interpreted keeping in mind the intent with which the provisions for facilitating nomination for securities was introduced in the scheme of the 1956 Act i.e. to enable smooth functioning of a company pursuant to the death of a shareholder.
  7. The company is allowed to vest shares upon  a nominee to discharge its liability against diverse claims by legal heirs of  a deceased shareholder. Such arrangement is until the legal heirs have settled the affairs of the  deceased shareholder and are ready to register the transmission of shares, by due process of succession law.

Key takeaways

 The Supreme Court has conclusively found as follows:

  1. the 1956 Act does not deal with the laws of succession and the process of nomination cannot override succession laws, therefore cannot creating a third mode of succession; and
  2. the only purpose of vesting of securities in favour of the nominee under the 1956 Act and the bye-laws was to inter alia eliminate any confusion pertaining to legal procedures pursuant to the death of a shareholder.

As such, it appears that the vesting of securities in favour of the nominee prescribed in the 1956 Act will be an interim arrangement until the legal heirs have settled the affairs of  a deceased shareholder and are ready to register the transmission of shares, by due process of succession law.