1. Nomination of securities under Companies Act, 1956 and Depositories Act, 1996 — Dispute over beneficial ownership versus fiduciary capacity of nominees relative to succession laws. (Para 2 , 4 )
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2023 Supreme(SC) 1242
SUPREME COURT OF INDIA
HRISHIKESH ROY, PANKAJ MITHAL, JJ.
Shakti Yezdani and Another – Appellants
Versus
Jayanand Jayant Salgaonkar and Others – Respondents
Civil Appeal No. 7107 of 2017
Decided On : 14-12-2023
Important Points
Nominees under the Companies Act do not gain absolute ownership of shares; they hold them in a fiduciary capacity for legal heirs, preserving the rights of succession.
Subject
Civil Law - Succession Law
Act Referred
ANDHRA PRADESH GRAM PANCHAYAT ACT : S.85
BANKING REGULATIONS ACT : S.45(za), S.45(za)(2)
COMPANIES ACT : S.108, S.109(a), S.109(a)(3), S.109(b), S.110, S.111, S.112
Companies Share Capital and Debentures Rules : R.19(1)
DEPOSITORIES ACT : S.9.11, S.9.11.7
GOVERNMENT SAVINGS CERTIFICATES ACT : S.6(1)
INSURANCE ACT : S.39
MAHARASHTRA CO-OPERATIVE SOCIETIES ACT : S.30
SEBI Mutual Funds Regulations : Reg.29(a)
SUCCESSION ACT : S.63
BANKING REGULATIONS ACT : S.45(za), S.45(za)(2)
COMPANIES ACT : S.108, S.109(a), S.109(a)(3), S.109(b), S.110, S.111, S.112
Companies Share Capital and Debentures Rules : R.19(1)
DEPOSITORIES ACT : S.9.11, S.9.11.7
GOVERNMENT SAVINGS CERTIFICATES ACT : S.6(1)
INSURANCE ACT : S.39
MAHARASHTRA CO-OPERATIVE SOCIETIES ACT : S.30
SEBI Mutual Funds Regulations : Reg.29(a)
SUCCESSION ACT : S.63
Headnote
(A) Companies Act, 1956 - Sections 109A and 109B - Nomination of shares and securities - Nominee does not obtain absolute ownership; the nominee holds shares in a fiduciary capacity for legal heirs - The Companies Act does not provide a third line of succession or override laws of succession. (Paras 12, 44-47)
(B) Nomination - The term ‘vest’ does not confer absolute title; it is intended for the company to manage shares post-death. (Paras 30-34)
(C) Legal Principles - Nomination under the Companies Act is not a testamentary disposition and does not negate the rights of legal heirs. (Paras 39-42)
Facts of the case:
The testator executed a will and had made nominations for shares, fixed deposits, and mutual funds. Dispute arose regarding the interpretation of the Companies Act provisions concerning the nominees' rights.
Findings of Court:
The court ruled that nominations do not create absolute ownership and reaffirmed the principles of succession law.
Issues: The court addressed whether a nominee is entitled to beneficial ownership over shares to the exclusion of legal heirs and the implications of the nomination under the Companies Act.
Ratio Decidendi: The court held that the nominee does not gain absolute rights and that the law of succession remains applicable.
Result: Appeals dismissed.
(B) Nomination - The term ‘vest’ does not confer absolute title; it is intended for the company to manage shares post-death. (Paras 30-34)
(C) Legal Principles - Nomination under the Companies Act is not a testamentary disposition and does not negate the rights of legal heirs. (Paras 39-42)
Facts of the case:
The testator executed a will and had made nominations for shares, fixed deposits, and mutual funds. Dispute arose regarding the interpretation of the Companies Act provisions concerning the nominees' rights.
Findings of Court:
The court ruled that nominations do not create absolute ownership and reaffirmed the principles of succession law.
Issues: The court addressed whether a nominee is entitled to beneficial ownership over shares to the exclusion of legal heirs and the implications of the nomination under the Companies Act.
Ratio Decidendi: The court held that the nominee does not gain absolute rights and that the law of succession remains applicable.
Result: Appeals dismissed.
Legal Category Hierarchy
Advocates:
Advocate Appeared:
For the Appellant(s) : Mr. Abhimanyu Bhandari, Adv. Ms. Rooh-e-hina Dua, AOR Mr. Arav Pandit, Adv. Mr. Harshit Khanduja, Adv. Ms. Dhanakshi Gandhi, Adv. Mr. Sahib Kochhar, Adv. Mr. Randeep Sachdeva, Adv. Ms. Shreya Arora, Adv.
For the Respondent(s): Mr. Rohit Anil Rathi, AOR Mr. Aniruddha Joshi, Adv. Mr. Rajeev Maheshwaranand Roy, AOR Mr. P. Srinivasan, Adv.
Advocate Appeared:
For the Appellant(s) : Mr. Abhimanyu Bhandari, Adv. Ms. Rooh-e-hina Dua, AOR Mr. Arav Pandit, Adv. Mr. Harshit Khanduja, Adv. Ms. Dhanakshi Gandhi, Adv. Mr. Sahib Kochhar, Adv. Mr. Randeep Sachdeva, Adv. Ms. Shreya Arora, Adv.
For the Respondent(s): Mr. Rohit Anil Rathi, AOR Mr. Aniruddha Joshi, Adv. Mr. Rajeev Maheshwaranand Roy, AOR Mr. P. Srinivasan, Adv.
Table of Contents
2. Whether 'vesting' and non-obstante clauses in the Companies Act create absolute ownership for nominees, overriding testamentary dispositions and the general law of succession. (Para 15 , 16 , 17 )
3. Analysis of legislative intent to boost investor confidence and the variable meaning of 'vesting' as not necessarily conferring absolute title. (Para 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42 )
4. Nomination under the Companies Act, 1956 and Depositories Act, 1996 does not create a third mode of succession or confer absolute title to the exclusion of legal heirs. (Para 43 , 44 , 45 , 46 )
5. Appeal dismissed — High Court decision affirmed that nomination does not override the law of succession. (Para 47 )
6. Does nomination under the Companies Act, 1956 confer absolute ownership of securities on the nominee?
No. Nomination is intended to provide a valid discharge to the company and ensure representation of the deceased shareholder to avoid commercial delays, but the nominee holds the securities in a fiduciary capacity for the legal heirs. (Para 6 , 12 , 21 , 45 , 46 )
7. What is the legal effect of the term 'vest' in Section 109A of the Companies Act, 1956?
The term 'vest' has variable meanings depending on context. In this statute, it denotes limited vesting for the purpose of enabling the company to deal with securities in the immediate aftermath of death, not conferring absolute title. (Para 30 , 31 , 32 , 33 , 34 , 35 )
8. Does the non-obstante clause in Section 109A of the Companies Act, 1956 override the law of succession?
No. The non-obstante clause serves only to allow the company to vest shares in the nominee to the exclusion of others for the purpose of discharging its liability, not to exclude the rightful claims of legal heirs. (Para 36 , 37 , 38 )
9. Can a nomination under the Companies Act be considered a 'statutory testament' that overrides a Will?
No. The Companies Act does not contemplate a third line of succession or a statutory testament. Nominations are not subject to the formal execution rigors required for a valid Will under the Indian Succession Act. (Para 39 , 40 , 41 , 42 )
JUDGMENT :
HRISHIKESH ROY, J.
1. Heard Mr. Abhimanyu Bhandari, learned counsel appearing for the appellants. Also heard Mr. Rohit Anil Rathi, learned counsel representing respondent no. 1. Mr. Aniruddha A. Joshi, learned counsel appears for respondent nos. 4, 6, 7 and 8.
2. The appellants and respondent nos. 1 to 9 are the legal heirs and representatives of an individual-Jayant Shivram Salgaonkar. The family patriarch executed a will on 27.06.2011 making provisions for the devolution of his estates upon the successors. Apart from the properties mentioned in the will, the testator had certain fixed deposits (FDs) for the sum of Rs. 4,14,73,994/- in respect of which the respondent nos. 2, 4 and appellant no. 2 were made nominees. Additionally, there were certain mutual fund investments (MFs) of the amount of Rs. 3,79,03,207/- in respect of which appellants and Jay Ganesh Nyas Trust (respondent no. 9) were made nominees. The testator Jayant Shivram Salgaonkar passed away on 20.08.2013.
3. On 29.04.2014, the respondent no. 1 filed Suit No. 503/2014 with the prayer for declaration inter-alia that the properties of the testator may be administered under the court’s supervision and seeking absolute power to administer the same. He also prayed for permanent injunction restraining all other respondents and appellants from disposing, transferring, alienating, assigning and/or creating any third-party interests in respect of the properties in Exhibit A.
4. In their reply to the notice of motion in Suit No. 503/2014, the appellants pleaded that they were the sole nominees to the MFs. The essence of their claim was that the appellants being nominees were absolutely vested with the securities on the testator’s death. The appellant no. 2 was additionally nominated and entitled to the FDs of the testator in the IDBI Bank. It was also the appellants’ contention that nominations made under/in Jayant Shivram Salgaonkar’s MFs/shares were made as per Section 109A and 109B of Companies Act, 1956 and bye-law 9.11.7 of the Depositories Act, 1996. Section 109A and 109B of the Companies Act, 1956 must be read as a code in themselves, wherein the meaning of words ‘vest’ and ‘nominee’ are to be seen from the statute alone bearing in mind the non-obstante clause contained therein. Therefore, the provisions should be interpreted without reference to any outside consideration.
5. On 31.03.2015, the learned Single Judge of the Bombay High Court while passing the order in the Notice of Motion mainly considered whether the law laid down in the case of Harsha Nitin Kokate vs. The Saraswat Co-operative Bank Limited and Others, (2010) SCC Online Bom. 615 was per incuriam. Further, the contentions of the appellants were rejected by the court by observing that S. 109A & S. 109B of the Companies Act, 1956 cannot be read in a vacuum and it is permissible for the court to look at pari materia provisions in other statutes. The court, while considering the argument of a ‘statutory testament’ raised in Sarbati Devi vs. Usha Devi, (1984) 1 SCC 424 expressly negated those and opined that it would not be proper to limit the ratio in Sarbati Devi (supra) to the narrow confines of Section 39 of the Insurance Act, 1939. The same was thereafter reaffirmed in Vishin N. Khanchandani and Another vs. Vidya Lachmandas Khanchandani and Another, (2000) 6 SCC 724, Shipra Sengupta vs. Mridual Sengupta and Others, (2009) 10 SCC 680, Ramchander Talwar and Others vs. Devendra Kumar Talwar and Others, (2010) 10 SCC 671, Nozer Gustad Commissariat vs. Central Bank of India and Others, (1993) 1 Mah. L.J. 228 and Antonio Joao Fernandes vs. Asst. Provident Fund Commissioner, (2010) 4 Mah. L.J. 751. According to the learned judge, the decision in Kokate (supra) failed to consider the decision of the Supreme Court in Khanchandani (supra), Shipra Sengupta (supra) or even those of the Single Judge of the Bombay High Court in Nozer Gustad Commissariat (supra) and Antonio Joao Fernandes (supra), although ea
