NOMINEE SHAREHOLDERS

This article was written by Piyush Tiwari, a student of WBNUJS.

Section 72 of the Companies Act, 2013 states that every shareholder or debenture holder in a company has a right to nominate a person in a prescribed manner to whom the shares or debentures shall vest in the event of death of the original owner. Section 72(3)[1] of the Act states that “Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, the company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in, or debentures of, the company, the nominee shall, on the death of the shareholder or holder of debentures of the company or, as the case may be, on the death of the joint holders become entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint holders, in relation to such shares in, or debentures of the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.”[2] The sub-section starts with a non-obstante clause which says that if the nomination has been made in a prescribed manner then on the death of the shareholder the shares or debentures will get vested in the nominee, the nature of the rights will be as if the owner has transferred the shares to the nominee. On the death, the nominee will be entitled to all the rights to the exclusion of the legal heirs of the deceased.

The issue with regard to this law is that it creates a third type of succession. It has been argued in few cases that nomination does not give any ownership rights to the nominee, the latter only acts as a trustee to avoid any problems which might arise by having untitled shares. Also in some cases it the court has held that nomination vests ownership right.

In M/S Dayagen Pvt. Ltd. v. Mr. Rajendra Dorian Punj and Anr.,[3] the Delhi High court discussed the scope of Section 109A of the Companies Act, 1956 which is pari materia to Section 72 of the 2013 Act. It was argued before the court that a nomination only gives the nominee power to hold the property of the deceased as a trustee and the legacy does not get transferred to the nominee. However, this argument was rejected by the court as the language of Section 109A was clear. The Court held that it is extremely clear from the reading of the section that it was the intention of the legislature to create an exception in the general law of succession in relation to nomination made under this section for shares or debentures. The Court further said the just like a ‘will’ has to be executed in a certain manner by fulfilling some requirement without which it will not be a valid executed will, a nomination also has to be done in a prescribed manner and it has to be strictly followed to have the effect of overriding the succession laws.[4]

This position was further affirmed by Bombay High Court in the case of Harsha Nitin Kokate v. The Saraswat Co-Op. Bank Ltd. and others.[5] The issue before the court was whether the nomination under Section 109A of the Companies Act gives ownership rights to the nominee in the event of death of the original shareholder. It was argued that the nomination under Section 39 of the Insurance Act and Section 30 of the Maharashtra Co-operation Societies Act, only makes the nominee a trustee of the property or payment and does not vest any ownership right in the nominee.[6] However, the wording of the above-mentioned action is substantially different from the wording of Section 109A of the Companies Act. The latter has a non-obstante clause which overrides the succession laws, it clearly says the shares or debentures would vest in the nominee in case of death of the shareholder or joint shareholders to the exclusion of all other persons, which includes legal heir as well. Further the Court discussed the scope of the word ‘vest’ used in this section. The word vest has many connotations and it is generally used for different purposes. The High Court interpreted it as “to confer ownership rights” because of the language used in the section. The language was clear in terms and intended to mean that the nomination will confer ownership rights on the nominee on the death of the shareholder(s). The court went on to observe that nomination is revocable in nature and only the last nomination will be relied upon just like a testamentary Disposition[7].

In Shakti Yezdani and Anr. V. Jayanand Jayant Salgaonkar,[8] the decision of Harsha Nitin Kokate v. The Saraswat Co-Op. Bank Ltd. and others. The Division bench of High Court heard the appeal, it considered all the binding precedents of the Apex Court and also analysed the relevant sections of the Companies Act. Section 6 of the Government Saving Certificate Act, 1959 empowers the holders of the savings certificate to nominate anyone who will receive the payment of the sum due on the savings certificate in the event of death of the shareholder. the section starts with a non-obstante clause and it is substantially identical to the Section 109A (3)[9] of the Companies Act, except the former does not use the word vest rather the word ‘received’ is used. Also, Section 8 of the National Saving certificate Act says that the discharge of payment to a nominee does not preclude the legal heirs from recovering the sum from the nominee.[10] While analysing the Section 6 of the Act the Apex court in Shri Vishin N. Khanchnadani and Anr. v. Vidya Lachmandas Khanchandani,[11] has held that the nomination does not give any ownership right to the nominee and it only makes him a caretaker or a trustee for the time being till the legal heirs claim the payment. The division bench in Yezdani case based its reasoning on this judgement saying that the both the sections are substantially similar and hence the decision of the Apex court in the Vishin’s case will apply to this case as well. Hence, the Division Court declared the judgment of Kokate’s case as per incuriam and that the nomination does not create any ownership rights.

Author’s Opinion

The Division bench in Yezdani case overlooked the fact that the language of both the sections is not exactly similar and Section 6 only talks about receiving of payment whereas section 109A of 1956 Act and 72 of 2013 Act talk about vesting of share or debentures of a company in the nominee, which is different from the former. Also section 8 of the saving certificate Act clarifies that the objective behind a nominee is only that at the time of the death of the holder there will be someone to receive the sum as a trustee and then pass it to the legal heirs of the deceased. Further the intention of the legislature behind the Section 109A is abundantly clear as it uses the words very carefully if the intention of the legislature was to restrict the nomination to only mean receiving of the share then it would have used word receive not vest. Also in the new Act the Section remains exactly same and the legislature again had the chance to clarify the meaning of the section however it did not do so, which only shows that the intention was to carve out an exception to the general laws of succession and confer all the rights including ownership rights on the nominee.

[1] The Companies Act, 2013, §72(3).

[2] Id.

[3] M/S Dayagen Pvt. Ltd. v. Mr. Rajendra Dorian Punj and Anr., (2008) 105 DRJ 29.

[4] Id.

[5] Harsha Nitin Kokate v. The Saraswat Co-Op. Bank Ltd. and others, (2010) 3 Mah LJ 780.

[6] Id.

[7] Harsha Nitin Kokate v. The Saraswat Co-Op. Bank Ltd. and others, (2010) 3 Mah LJ 780, ¶24.

[8] Shakti Yezdani and Anr. V. Jayanand Jayant Salgaonkar, (2017) 1 Bom CR 319.

[9] The Companies Act, 1956, §109A (3).

[10] The Government Savings Certificate Act, 1959, §8.

[11] Shri Vishin N. Khanchnadani and Anr. v. Vidya Lachmandas Khanchandani, (2000) 6 SCC 724.