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Right of Nomination Versus Right of Succession – A Case Analysis

The Supreme Court of India’s recent decision in Shakti Yezdani and Anr. V Jayanand Jayant Salgaonkar and Ors[i]. laid rest to the uncertainty of the status of a nomination under the Companies Act, 2013 vis-à-vis the Indian Succession Act, 1925. The Hon’ble Bench, comprising of Hon’ble Mr. Justice Hrishikesh Roy and Hon’ble Mr. Justice Pankaj Mithal, analyzed the Companies Act, 1956 (“Act”) to conclude that nomination under the Act is subject to succession laws and does not create a third line of succession.

Nomination, in its simplest form, involves selecting another person as a legal nominee during a person’s lifetime. The Court held that the Act does not envision a “statutory testament” that supersedes the laws of succession. In fact, it does not concern itself with the laws of succession. Nomination under the Act, if treated at par with wills, can create inconsistency since it is not subject to the same strict requirements as those applicable to the creation and validity of a will under succession laws.  A brief overview of the case is below.

Jayant Shivram Salgaonkar, the testator in the case, had executed a will for the devolution of his properties upon some of his legal heirs. In addition to the properties mentioned in the will, he had certain other investments such as fixed deposits (“FD”) and mutual funds (“MF”) for which he had made nominations. Following his demise, the legal heirs filed a suit for the administration of his properties. The nominees mentioned in the deposits and funds contested the administration, stating that the FDs and MFs vested in them, considering that these nominees were nominees under the Act. A single judge of the Bombay High Court rejected the contentions put forth by the nominees, stating that the appointed nominee retains ownership of the shares/securities in a fiduciary role and is responsible for addressing any claims within the framework of succession law. On appeal, a division bench of the Bombay High Court held that the nominees were not entitled to the absolute ownership of the properties. Subsequently, the appellants filed an appeal in the Supreme Court. 

The issues analysed by the Supreme Court included the concept of nomination under the Companies Act, 1956 concerning the law of succession, the consequences of the term ‘vest’ and the non-obstante clause as employed in Section 109A of the Act and under Bye-law 9.11.1 of the Depositories Act, 1996.

Section 109A of the Companies Act, 1956 (pari materia to Section. 72 of the Companies Act, 2013) prescribes that holders of shares and/or debentures may nominate a person to whom the holder’s shares or debentures shall vest in the event of the holder’s death. Under Section 109A, unless the nomination is varied or cancelled, the nominee is entitled to all the rights in the shares or debentures of the company to the exclusion of all other persons. As per Section 109B of the Companies Act, 1956, the nominee may either register himself as the holder of the share or debenture or transfer the share or debenture. Further, once the nominee becomes a shareholder, he is entitled to the same dividends and other benefits to which the holder of the share or debenture would be entitled.

Bye-law 9.11 under the Depositories Act, 1996 stipulates that the beneficial owner of every account can nominate any person to whom his securities shall vest in the event of his death. Bye-law 9.11.7 specifically states that the Depository should rely on the latest nomination validly made before the death of the nominating party, to deal with the securities held with the depository on behalf of the nominating party. The Court further examined case laws that interpreted the provisions of the Government Savings Certificate Act of 1959, the Banking Regulation Act of 1949, the Insurance Act of 1938 and the Employees Provident Fund and Miscellaneous Provisions Act of 1952 to arrive at the finding that nomination made under these statutes do not lead to the nominee acquiring absolute title over the property. The Court held that neither the words ‘vesting’ nor ‘to the exclusion of others’ nor the existence of a non-obstante clause- “notwithstanding anything contained in any other law,”  could alter such interpretation.

It has been held that the term ‘vest’ can have multiple meanings according to the context in which the word has been used in a provision or legislation. The mere usage of the term does not give absolute entitlement over the subject matter. In the case of Section 109A, it was observed that vesting was for the limited purpose of facilitating the company to deal with the securities of a person upon his demise. The use of the word ‘vest’ in the Indian Succession Act, of 1925 was also analyzed, wherein Section 211 vests the estate of a deceased person in the administrator or executor, and such vesting did not signify ownership.

As for Bye-law 9.11.7 of the Depositories Act, 1996, the purpose was clarified to be limited to enable the depository to deal with securities for the period following the death of the security holder. Similar to Section 109A of the erstwhile Act, the term ‘vesting’ here is used only in a limited context.

It was acknowledged that the non-obstante clause is also to be understood in the context of the object and scheme of the legislation under consideration. The non-obstante clause temporarily vests securities unto a nominee, to the exclusion of others to help the company in discharging its liability regarding various claims put forth by the successors of the deceased shareholders until the successors have resolved matters and are ready for the transfer of the securities. The non-obstante clause has only been included to facilitate the depository to handle the securities in the event of the demise of the shareholder.

The judgement has clarified the scope of rights conferred by provisions governing nomination under the Companies Act, 1956 and the corresponding provisions under the Companies Act, 2013. The Court has followed precedents to uphold that nomination under the Companies Act is subject to succession laws and does not create a third line of succession. The principles of statutory interpretation, such as purposive interpretation, have been rightly applied by the court in examining each aspect of the provisions and in deciphering the statutory intent to clarify the purpose of the provisions for nomination.

Author: Naasha F Anklesaria

Publication Date: May 16, 2024


[i] 2023 SCC OnLine SC 1679

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