The Conundrum of the Legal Standing of Nominees of Deceased Shareholders in the Context of Succession: Shakti Yezdani v. Jayanand Jayant Salgaonkar

[By Devanshi Shukla]

The author is a student of MNLU Aurangabad.

 

Introduction 

Nomination as a process involves selecting another person as a legal nominee or representative by a person during his lifetime in respect of specific assets or properties. In the recent case of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors, the Supreme Court offered clarification on the status of nominees as nominated under Section 109A of the erstwhile Companies Act, 1956 (‘Act’) in the context of succession laws. The Court emphasized that nomination under the Act should not be viewed as an alternative method of succession. This blog seeks to delve into a comprehensive analysis of the judgment and explore its current implications. 

Facts 

Jayant Shivram Salgaonkar (‘testator’) had executed a will for the devolution of his properties upon his legal heirs. In addition to the properties mentioned in the will, he had fixed deposits (‘FDs’) and mutual funds (‘MFs’) for which he had made nominations. Following his demise, the legal heirs filed a suit for the administration of his properties. The nominees contested this arguing that the FDs and MFs absolutely vested in them, citing their nomination 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, the Division Bench held that the view taken in Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited and Others was per incuriam and made it clear that nominees were not entitled to the absolute ownership of the properties. Subsequently, the appellants filed an appeal in the Supreme Court.  

Issues at hand 

The Supreme Court deliberated on the following issues: 

  1. What is the aim behind the introduction of provisions concerning ‘nomination’ into the Act? 
  2. What is the understanding of the concept of ‘nomination’ under the Act and in relation to the law of succession? 
  3. What are 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? 

Observations made by the Court 

Object behind the introduction of Section 109A under the Act 

The Court observed that the Companies Act, 1956 was introduced to deal with the “incorporation, regulation and winding up of corporations”. Additionally, the primary intent behind introducing Section 109A and 109B by the Amendment of 1999 was to provide momentum to investment in the corporate sector and not to deal with succession. The provision of nomination was introduced to lessen the burden of legal heirs and also to foster a wholesome environment for corporate investment in the country. The Court held that there was lack of any material to show that the Amendment intended to provide absolute ownership of the property to the nominee.  

Concept of ‘nomination’ under the Companies Act, 1956 and its connection to the law of succession 

The Court referred to the concept of ‘nomination’ as enumerated by various courts under varied legislations (such as the Government Savings Certificate Act, 1959). It was asserted that due to the lack of a universally accepted definition and interpretation regarding the rights and ownership of a nominee concerning the relevant property, the Court would rely on the commonly understood meanings. The Court acknowledged that the Act does not envision a “statutory testament” that supersedes the laws of succession. It does not concern itself with the laws of succession. Nomination under the Act is not put through the same strict requirements as those applicable to the creation and validity of a will under succession laws. 

Implications of the term ‘vest’ and the non-obstante clause as used under Section 109A of the Companies Act, 1956 and Bye-Law 9.11.1 of The Depositories Act, 1996  

The Court 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 and mere usage of the term does not give absolute entitlement over the subject matter. Similarly, it was acknowledged that the non- obstante clause also is to be understood in the context of the object and scheme of the legislation under consideration. Further, the Court stated that the term ‘vest’ has to be understood in line with Section 211 of the Indian Succession Act, 1925. Under Section 211, ‘vest’ does not entitle the administrator or executor with ownership but only entitles him to hold the property until it is distributed among the legal heirs. Section 109A of the erstwhile Act was said to address the vesting of shares or debentures from a holder to their nominee in the event of the holder’s death.. 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. 

Bye-law 9.11.1 under the Depositories Act, 1996 also provides for nomination by shareholders. Similar to Section 109A, the term ‘vesting’ here is used only in a limited context. The non-obstante clause has only been included here to facilitate the depository to handle the securities in the event of the demise of the shareholder. 

Analysis & Conclusion 

The judgement plays a crucial role in delineating the rights of the nominees as nominated under Section 109A of the Act. The Supreme Court has effectively negated the view held by it in Aruna Oswal v. Pankaj Oswal & Ors. wherein it was stated that the non-obstante clause employed under Section 72(3) of the Companies Act, 2013 which is pari materia to Section 109A makes the vesting of shares unto the nominee absolute. The legal stance taken by the Apex Court aligns the rights of the nominee with those of the heirs in their respective situations, offering a method to facilitate the seamless operation of the company’s affairs.  

The decision employs rules of interpretation of a statute such as the purposive rule. The purposive rule of interpretation focuses on the intended purpose of any legislation. The judgment places major reliance on the context and objective of the Act in order to identify the impact and extent of the concept of ‘nomination’ under the erstwhile Companies Act. Emphasis is also supplied on the context of the legislation while understanding the meaning of the term ‘vest’ under the Act.  

It sets a definitive precedent, highlighting the superiority of succession laws over corporate law provisions concerning nominees. The judgment offers crucial clarity and di rection for settling conflicts between nominees and legal heirs regarding the ownership of shares or securities after the original holder’s death. Further, it also provides a detailed perspective on the concept of ‘vesting’ rights and resolves uncertainties in corporate law, influencing estate planning and corporate investments. 

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