The Supreme Court of India has recently ruled that the nomination process under the Companies Act, 1956 and the Depositories Act, 1996 does not create a third mode of succession and does not entitle the nominee to the beneficial ownership of the securities to the exclusion of the legal heirs of the deceased shareholder.
Background of the case
The case involved a dispute over the mutual fund investments held by Mr. Jayant Shivram Salgaonkar, who had executed a will making provisions for distribution of his assets among his successors. Apart from the properties mentioned in the will, he had also appointed nominees for his fixed deposits and mutual funds. One of his legal heirs, who was not appointed as a nominee for any of the securities, filed a suit before the Bombay High Court for declaration that the properties of the testator may be administered under court’s supervision.
The nominees claimed that by virtue of their nomination, they had absolute ownership of the securities, relying on Sections 109A and 109B of the Companies Act, 1956, which provide for nomination of shares or debentures by a holder. The High Court rejected this claim, emphasizing that the provisions of the Act do not govern succession and that the nominee is not entitled to the beneficial ownership.
Supreme Court’s verdict
The nominees appealed to the Supreme Court, contending that the nomination process under the Companies Act, 1956 cannot be compared to nomination under other legislations, such as the Banking Regulation Act, 1949 and the Life Insurance Corporation Act, 1938, where it has been held that the nominee would only hold the property for the benefit of the legal heirs.
The Supreme Court dismissed the appeal, upholding the High Court’s order. The Supreme Court clarified that a consistent interpretation has been given by courts on the question of nomination under various legislations, 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.
The Supreme Court held that the scope of a company’s affairs does not extend to facilitating succession planning for shareholders. The authority to determine the line of succession lies with the administrator or executor under the Indian Succession Act, 1925, in case of a will, or with the laws of succession in case of intestate succession.
The Supreme Court asserted that the nomination process does not override succession laws and that it is only a convenient mode for transmission of securities upon death of a holder. The Supreme Court also observed that Section 72(1) of the Companies Act, 2013 has clarified this position by stating that “the nominee shall on production of such evidence as may be prescribed by rules made by Central Government in this behalf by notification in Official Gazette become entitled to all rights in respect or such securities subject to any rights validly subsisting in favour of any other person.”
Implications of the judgment
The judgment has settled a long-standing ambiguity regarding the rights of a nominee vis-à-vis legal heirs in respect of shares or securities held by a deceased holder. It has reaffirmed that nomination is not a mode of testamentary disposition and does not confer absolute ownership on the nominee. It has also harmonized