Nomination under Companies Act

A bench of the Supreme Court of India (“SC”) recently ruled in the case of Shakti Yezdani and Anr vs Jayanand Jayant Salgaonkar and Ors[1] that the nomination process under the Companies Act, 1956 and similarly in the Companies Act, 2013 shall not override the provisions of the law of succession in India and a company cannot facilitate the succession planning of its shareholders. The line of succession in case of a duly prepared will is determined by the administrator or executor under the Indian Succession Act, 1925 or by the laws of succession in case of intestate succession.

Facts of the Case "Shakti Yezdani and Anr vs Jayanand Jayant Salgaonkar and Ors"

In this case Mr. Jayant Shivram Salgaonkar (“Testator”) executed a will for the devolution of his estate among his successors. After the death of the Testator in 2013 the appellants to this dispute filed an application arguing that they are the sole nominees of the Testator in case of some Mutual Funds as against the contentions of the respondents who stated that nomination only provides a method for the transmission of securities in accordance with applicable laws related to succession in India. The appellants backed their claim by referring to the provisions of Sections 109A and 109B of the Companies Act, 1956 (“CA 1956”) which they argued was to be held as a code in itself without reference to any other law in force at that time due to a non-obstante clause in the provision. The appellants argued before the SC that a valid nomination under Sections 109A and 109B of the CA 1956 can be construed as a valid “statutory testament” and that this overrides any case of testamentary succession.

Judicial analysis of the dispute

When this dispute was brought before a single judge bench the court rejected the claim of the appellant relying on the judgement of the Bombay High Court in the case of Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd and Ors[2]  (“Kokate judgement”) wherein it was held that the legal heirs of a deceased shareholder and not their nominees will get possession of their share certificates. When this judgement of the single judge bench was challenged before a division bench the bench noted that the was per incuriam as Sections 109A and 109B of CA 1956 did not deal with succession. The High Court further noted that the aforementioned sections only serve to ensure that the deceased shareholder in duly represented with regards to benefits accrued to said shareholder and that the company’s business activities is not affected due to ambiguity in the details of shareholding in the unfortunate case of the death of a shareholder. It was against this judgement of the division bench that the appellants approached the SC.

The division bench of the SC rejected the argument of the appellant regarding the sections being valid testamentary intruments and stated that CA 1956 does not deal with estate planning of the shareholder and as summarised above, a company cannot facilitate the succession planning of its shareholders. The line of succession in case of a duly prepared will is determined by the administrator or executor under the Indian Succession Act, 1925 or by the laws of succession in case of intestate succession.

Reasoning of the SC

The SC based its judgement by stating that standard practice regarding estate planning and succession laws states that nomination takes place in a particular manner and the same framework is to be followed in case of devolution of securities of any kind. Therefore, a different interpretation and judgement in this regard will only serve to create future confusion and lead to practical difficulties in the interpretation of the law and the succession process as underlined therein. The provisions of CA-1956 and the Depositories Act provide for the vesting of securities to the nominee in case of the death of the shareholder and the term “vest” as per the judgement of the SC should be construed conservatively keeping in mind the object of the statute and should not be construed as providing absolute title over the underlying security to the nominee. The SC reasoned that securities are vested on the nominee in order to protect themselves against liability from claims by legal heirs of the deceased shareholder, but it is the duty of the nominee to effectuate the transmission of such securities as per applicable laws of succession in this regard.  Thus, the provisions of CA 1956 and in extension the provisions of Companies Act, 2013 has no role to play in the operation of succession laws the process of which has already been settled effectively and therefore the order of the division bench of the High Court was upheld the appeal dismissed.

Conclusion

Therefore, through this judgement the SC settled the provisions related to succession in case of the death of a shareholder under the Companies Act, 1956 and in extension to the Companies Act, 2013 do not form a separate legal avenue for succession of property of a deceased individual. The provision for nomination is only a stop-gap measure under the greater framework of succession laws in India and nominees under the Companies Act, 1956 will be required to complete the procedure for transmission of securities as per applicable succession laws in order assume ownership of such securities.

[1] 2023 SCC OnLine SC 1679

[2] (2010) SCC Online Bom 615