Recently, a Division Bench[1] of the Bombay High Court hopefully settled the controversy regarding the rights of legal heirs as opposed to nominees. The Court held that the rights of legal heirs supersede the rights of the nominee of a shareholder.
The controversy arose with two Single Bench Bombay High Court judgments: Harsha Kokate v. The Saraswat Co-operative Bank Limited[2] (Kokate case) and J. J. Salgaonkar v. J.J. Salgaonkar[3] (Salgaonkar case). In the Kokate case, relying primarily on Section 109A of the erstwhile Companies Act, 1956 (1956 Act), the Court held that the nominee would be entitled to all rights in shares and debentures, including ownership rights, to the exclusion of all other persons. Thus, upon death of the shareholder, the securities would automatically get transferred to the nominee, and not the legal heirs.
However, the Salgaonkar case ruled that the Kokate case was per incuriam and in direct conflict with other Supreme Court decisions. The Court held that the legal heirs, and not the nominees, would obtain ownership of the shares. The nominees would merely hold the securities as a fiduciary on behalf of the claimants under prevailing succession laws.
However, since both judgments were Single Bench decisions, the matter was referred to a Division Bench of the Bombay High Court.
Division Bench Judgment
The Division Bench dealt in detail with the Kokate and Salgaonkar cases and a testamentary petition. The following issues were addressed:
The Court answered the first question in negative, and the second in affirmative. The Court relied on leading Supreme Court judgments wherein the common view is that the nominee does not obtain an absolute title to the property. Nomination does not override the law of testamentary or intestate succession. The Court emphasised that at no point has it been held that the rights of the nominee would prevail over that of a legal heir. Thus, the view in the Salgaonkar case was reaffirmed and the Kokate case was held to be per incuriam.
Impact and Relevance
This judgment is relevant as it has settled the legal dispute arising between the nominee of the shareholders and his/her legal heirs. It has reiterated that within the law, there are only two types of succession, i.e. intestate and testamentary. The Kokate case attempted to introduce a third method of succession wherein statutory provisions which relate to nomination could override prevailing succession laws.
The Division Bench has reaffirmed the established practice that nominations are made with a view to ensure that the estate or any other subject matter is protected till the legal representatives of the deceased take appropriate steps. Thus, the scope of nomination is limited to that of a temporary arrangement. In the event of a transfer of shares or interest based on nomination, the members of the family of the deceased can pursue their case of succession or inheritance in consonance with the law.
This ruling is pertinent as it makes a clear distinction between corporate and succession law. It highlights that the 1956 Act cannot adjudicate on matters of succession or inheritance and cannot abrogate the rights enshrined therein. The provision was enacted to ensure that there is no commercial loss due to the delay in the legal heirs staking their claim. The rights of a legal heir cannot be usurped by any nominee. Essentially, nomination of shares/securities can neither displace the laws of succession nor substitute a Will. It cannot be understood to bequeath any estate or part thereof.
Additionally, Section 72 of the Companies Act, 2013 is pari materia with Section 109A of the 1956 Act. Hence, this approach of the judiciary will be of paramount importance in future interpretation and application of the Companies Act, 2013.
Conclusion
The Bombay High Court has removed the ambiguity triggered by the Kokate case. Through this judgment, the Court has attempted to align the law pertaining to shares with that of other financial instruments and memberships under various legislations.
However, a threat that continues to loom is that of the judgment being subject to the ruling of the Supreme Court. The decision may be appealed or taken up to the Supreme Court, which has the power to either affirm the judgment or reverse it in its entirety. Although, given the plethora of Supreme Court rulings that confirm the view of the Division Bench, a reversal seems unlikely.
Nonetheless, this verdict provides a relief to the legal heirs and conforms to the accepted practice of prevalence of succession over nomination. To keep things simple in the meantime, we would highly recommend everyone ensures that their nominations and Wills say the same thing!
[1]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
[2] 2010 (3) Mh. L. J 780
[3] Order dated 31st March 2015, in Notice of Motion No. 822 of 2014 in Suit No. 503 of 2014
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