The issue of legatees vs. nominees still seems to be causing confusion in the minds of the public. Even after a number of clear judicial decisions on this topic, confirming that legal heirs are the correct persons to inherit assets (over that of a nominee), a new decision re-confirms this issue.

The National Company Law Appellate Tribunal, New Delhi (“NCLAT”), on November 14^th, 2019 had held that nomination does not amount to beneficial ownership to an asset and the nominee holds the asset for and on behalf of the legal heirs of the deceased. The Bench of Justice S.J. Mukhopadhyaya and Justice A.I.S. Cheema, in the case of Oswal Greentech v Mr Pankaj Oswal and Ors[1] (“Oswal”) whilst listening to the question of maintainability of the petition under Section 241-242 of the Companies Act, 2013 (“Act”), decided on the said matter.

In our previous blog post , we have previously discussed the decision of the Bombay High Court in Shakti Yezdani v. Jayanand Jayant Salgaonkar,[2] which settled the controversy regarding the rights of legal heirs as opposed to nominees. The High Court held that the rights of legal heirs supersede the rights of the nominee of a shareholder. Now, the same has been reaffirmed in the Oswal case.

Facts of the Oswal case

Mr. Abhey Kumar Oswal (“Deceased”) held 5,35,30,960 shares (“Shares”) in Oswal Agro Mills Limited (“Company”). In 2015, the Deceased filed a nomination in terms of Section 72 of the Act in favour of Mrs. Aruna Oswal (“Nominee”). The nomination provided that “This nomination shall supersede any prior nomination made by me/ us and also any testamentary document executed by me/us”.

After the Deceased’s death, the nominee made a request of registration as the holder of the Shares; and the same was granted to her on 16^th April, 2016.

Mr. Pankaj Oswal (“Legal Heir”) had subsequently filed for a suit of partition in February 2017, before the Delhi High Court claiming 1/4^th of the share in the property. The suit of partition, however, was still pending. Further, the Legal Heir instituted a petition before the National Company Law Tribunal (“NCLT”) alleging acts of oppression and mismanagement in the affairs of the Company, on the premise that the Company transmitted the Shares to the Nominee in contravention of law. However, one of the pre-requisites for institution of the said proceedings under the Act is that the shareholder must own at least 10% of the total capital of the Company, unless a waiver has been given.

Unfortunately, the Legal Heir held only 0.03% shares in the Company. However, he claimed that he was entitled to more than 10% of the total capital on the basis that he was one of the four heirs on intestacy of the deceased – Thus, the resultant holding would be 10% of the total capital. The NCLT (on 13^th November, 2018) accepted the contention of the Legal Heir and held that the petition was maintainable.

The matter was then appealed by the Company and reached the NCLAT. The Company argued that in view of the nomination filed by the deceased during his lifetime and the registration of the name of the Nominee after his death, the Legal Heir cannot claim to be entitled to exercise any rights over the Shares. Reliance was placed on Section 72 of the Act, with the accompanying rules, according to which the title of the securities vests in the nominee and the nominee is entitled to all the rights in the securities to the exclusion of all other persons.

The Company further relied on the decision of the Delhi High Court in Dayagen Private Limited v. Rajendra Dorian Punj[3], wherein the Court held that Section 72 overrides the general law of succession, and vests the nominee with full and exclusive ownership rights in respect of the shares.

The Court, however, relied on the Supreme Court’s ruling in the case of World Wide Agencies Pvt. Ltd[4], which said that taking the interpretation that legal representatives of a deceased shareholder could not have the same right of a member would be a hyper-technical view, counter-intuitive to justice. It further said that:

“legal representatives of a deceased member represent the estate of that member whose name is on the register of members. When the member dies, his estate is entrusted in the legal representatives. When, therefore, these vesting’s are illegally or wrongfully affected, the estate through the legal representatives must be enabled to petition in respect of oppression and mismanagement and it is as if the estate stands in the shoes of the deceased member.”

Accordingly, the NCLAT held that on the death of the holder of the instrument, the amount / share vests with the legal heirs, the nominee merely holds the amount / share till the matter of vesting is decided in favour of the legal heirs. Thus, a nominee is merely a caretaker of the deceased’s property until the same is distributed amongst the legal heirs.

What are the implications of this case for you?

Whilst these cases keep reinforcing the fact that it is the legal heir who is the ultimate, rightful owner of the property of a deceased individual, people at times do get confused on how this relates to a nominee. To make it explicitly clear, a nominee (pursuant to a nomination given by the deceased during his / her lifetime) would act only as a trustee on behalf of the rightful legal heir(s), and hold such property until the matter of succession or inheritance is decided and implemented. E.g. consider a case where a husband, under his will, bequeaths his bank account and deposit account amongst his children equally. He had made a nomination, during his lifetime, in favour of his wife. Here, the wife / widow would only hold the accounts on behalf of their children until such time as the matter of succession is concluded. It is hoped that this does not lead to a family dispute, where the children start claiming what may be a very lucrative bank account / balance, but the widow refuses to handover the same and uses it for her own ends.

A properly implemented and well thought through succession plan would need to ensure that the conflicting intentions, as above, are avoided. The individual names given in both the nomination for bank & deposit accounts should correspond with what is written in the individual’s will. Using the same example above, a better approach for the deceased husband may have been to nominate the bank account and deposit account in his wife’s name, as he had done already. He should have made a Will bequeathing it to her first, and in the event she predeceases him, then to the children equally. If she survived her husband, then her will could have left her husband’s account (now coming under her estate) to their children. An even better approach, if so possible here, would have been that the husband / father opened separate accounts in the name of each of his children, and funded the same with a suitable balance. Each such new account could be nominated in favour of his children individually, and bequeathed to them under his Will as well. His wife could similarly have had a self-contained account. Simple, right? Hence, the same intention is achieved by all without any conflict or confusion.

It is critical to ensure that an individual, despite making nominations, also creates a Will. It is also prudent to ensure that the contents of the Will are harmonised – with the nominees and the legal heirs under the Will being the same persons.

A reference can be made to the nomination policies of certain banks, to support the above, namely:

1. Standard Chartered Bank – the bank policy recommends that all depositors should avail the nomination facility. The nominee, in the event of death of the depositor/s, would receive the balance outstanding in the account as a trustee of legal heirs.

See: http://www.sc.com/in/important-information/model-policy-on-deposits/

2. ICICI Bank – With the nomination, the bank gets a clearance for making the payment of the outstanding balance in the depositor’s account. In the event the claim has not settled and a probate / succession certificate is presented, the bank will discharge its obligation in accordance with the probate / succession certificate after giving due notice to the nominee of the same.

See: http://www.icicibank.com/managed-assets/docs/personal/accounts-and-deposits/deceasedclaimupdatewebsite.pdf

3. Kotak Mahindra Bank – The bank’s policy states the balance amount in the account of the deceased will be transferred to the account of / paid to the nominee. However, in the absence of nomination and when there are no disputes among the claimants, the bank would pay the amount outstanding in the account of deceased person against joint application by all legal heirs.

See: http://www.kotak.com/bank/common/pdf/deceased_depositors_with_nomination_rules.pdf

Hopefully, with the Oswal case, this issue is finally settled and put to rest. As above, one should know the clear difference between the rights of a nominee and a legal heir, in order to ensure that your estate is smoothly passed on to your heirs. Of course, nothings beats talking to your favourite and trusted lawyer, to prepare your succession plan.

[1] (Company Appeal (AT) No 410 of 2018)

[2] Shakti Yezdani and Anr v. Jayanand Jayant Salgaonkar and Ors. And Nanak S. Ghatalia v. Swati Shatishchandra Ghatalia, Appeal No. 313 of 2015 in Notice of Motion No. 822 of 2014 in Suit No. 503 of 2014 along with Appeal No. 311 of 2015 in Testamentary Petition No. 457 of 2014

[3] 2008 (105) DRJ 29

[4] [(1990) 1 SCC 536