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NON-OBSTANTE CLAUSE IN COMPANIES ACT 1956: SUPREME COURT AFFIRMS LEGAL HEIR’S RIGHTS

[Shruti Thakare is a 3rd year law student at Gujarat National Law University]


Introduction:


The landmark judgment Shakti Yezdani v. Jayanand Jayant Salgaonkar, delivered by the Supreme Court of India (Supreme Court) on December 14, 2023 provides clarity in resolving the longstanding conflict between ‘the rights of a nominee under Section 109A of the Companies Act, 1956’ (1956 Act) and ‘the claims of successors to shares or securities in a company’. It was held that the rights bestowed upon a nominee under both the 1956 Act and its successor, the Companies Act, 2013, do not confer an absolute title to the nominated individual. The judgment decisively negates any potential interpretation that might seek to employ Section 109A of the Act as an indirect, alternate, or third mode of succession, thereby unequivocally defining the limits of nominee rights. This pivotal ruling not only settles the issue of nominee rights issue but also establishes a clear precedent that delineates the precise extent of authority accorded to nominees in matters of succession within the corporate framework.


Facts of the case: 


In the present case, the legal heirs of Jayant Shivram Salgaonkar were engaged in a legal dispute initiated by the first respondent. The latter sought administration of the deceased's assets, encompassing Fixed Deposits (FDs) and Mutual Fund Investments (MFs). The focal point of contention revolved around the nominations made by the deceased for the FDs and MFs. The appellants argued that, as the exclusively designated nominees, they were entitled to absolute ownership of the assets in accordance with statutory provisions upon the demise of the testator. However, their claim faced a setback when the Bombay High Court, in a 2015 order, rejected their assertion, invoking the case, Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd and Ors (Kokate judgment), which construed the nominee as the beneficial owner. Dissatisfied with the judgment of the Bombay High Court, the appellants claimed that the decision by the single-judge bench was not good in law and was per incuriam, culminating in a pivotal ruling by a Division Bench in 2016.


In the Kokate judgment, Bombay High Court held that the legal heirs, rather than the nominees, were entitled to ownership rights of share certificates. This position was reinforced by a Single Judge on March 31, 2015, relying on the Kokate judgment, thereby rejecting the appellants' claim. However, a significant reversal occurred on December 1, 2016, when the Division Bench of the High Court challenged the Kokatejudgment, asserting that the provisions of the, 1956 Act did not address succession matters and deeming the Kokate judgment as per incuriam. The Division Bench emphasised the role of Section 109A in representing the deceased shareholder for accruing benefits and preventing commerce from suffering due to delays by legal heirs in establishing succession rights. The crucial declaration by the Division Bench, asserting that nominees do not have exclusive entitlement to the beneficial ownership of shares or securities subject to nomination, further complicates the matter.


Judgement: 


In the present case, the Supreme Court bench presided over by Justices Hrishikesh Roy and Pankaj Mithal delivered a nuanced observation regarding the status of nominees of deceased shareholders, highlighting that such nominees do not acquire absolute ownership. The court underscored the consistent interpretation applied by judicial authorities to the question of nomination, elucidating that upon the demise of the shareholder, the nominee does not attain an absolute title to the nominated assets. Furthermore, this judicial stance is deemed applicable not only to the 1956 Act but also to the corresponding provisions in the Companies Act of 2013 and the Depositories Act of 1996.


Analysis:


The vesting of securities in favour of a nominee, as outlined in Section 109A of the 1956 Act and the Depositories Act, 1996, serves a distinct and defined purpose within the legal framework. This mechanism is designed to address and mitigate any potential ambiguity in the legal procedures that must be followed in the event of the holder's demise. The primary objective is to provide a streamlined process that safeguards the nominated entity from prolonged legal disputes, allowing the appointed legal representatives of the deceased to take the necessary steps without undue complications.


The initiation of the nomination facility, introduced through the Companies (Amendment) Act, 1999, reflects a broader agenda aimed at improving the investment climate. It specifically targets the simplification of the intricate process associated with acquiring diverse letters of succession from various authorities following the death of a shareholder. In essence, the nomination mechanism facilitates a more efficient and less cumbersome transition of ownership, minimising legal complexities and delays for the heirs of the deceased shareholder. It aligns with the overarching goal of enhancing the overall functioning of companies and fostering a conducive environment for investment. In essence, this initiative was a deliberate move to simplify posthumous legal formalities, providing a smoother transition of ownership and preventing unnecessary delays and complexities for the heirs of the deceased shareholder.


The Supreme Court, in a recent ruling, dismissed the contentions of nominees by affirming that the 1956 Act neither addresses issues of succession nor supersedes the established laws of succession. The Court unequivocally stated that a company's affairs should not delve into facilitating succession planning for shareholders. Sections 109A and 109B of the 1956 Act, dealing with the nomination and transmission of shares, were clarified not to confer absolute ownership rights to the nominee upon the nominator's death. The Court emphasised that the introduction of nomination facilities in the 1956 Act aimed to stimulate investments during a slow economic period and simplify the complex process of obtaining letters of succession following the death of a nominator.


The Court stressed the importance of interpreting the term "nomination" in its ordinary sense. Further, the Court explored the term "vest" under different enactments, including the Indian Succession Act, 1925, and highlighted its variable meaning as often not conferring absolute title. The vesting of securities in a nominee under the 1956 Act and the Depositories Act was clarified to be for the benefit of the company in dealing with the immediate impact of a shareholder's death and any uncertainties affecting the company's smooth functioning. The judgment scrutinised the non-obstante clause in Section 109A of the 1956 Act, emphasising that it should not be read in isolation but interpreted in light of the statute's objectives. The non-obstante clause was viewed in the context of facilitating nomination for securities, introduced to enable the smooth functioning of a company following a shareholder's demise.


By asserting that the nominee's entitlement to the subject matter of nomination is not absolute, the Supreme Court has provided clarity on the limitations of nominee rights, aligning its stance with established legal principles governing succession. This pronouncement is expected to have far-reaching implications, setting a precedent for future cases involving the intersection of nomination processes and succession laws and contributing to the jurisprudential coherence in matters of shareholder rights and inheritance.

The judgment, when analysed in conjunction with previously determined cases, offers valuable insights into the evolving legal landscape surrounding nominee rights. Moreover, it underscores the need for a nuanced understanding of Section 109A, shedding light on its nature, aims, and objectives.


Conclusion: 


In conclusion, the Supreme Court’s definitive findings highlight the limited scope and intent of the 1956 Act concerning the vesting of securities in favour of nominees. The Supreme Court firmly established that the Act does not delve into the intricacies of succession laws, and the nomination process cannot be construed as a third mode of succession. Instead, the vesting of securities in the nominee serves a specific and interim purpose—primarily to eliminate any potential confusion regarding legal procedures following the death of a shareholder.


The Court’s ruling underscores that the vesting of securities in the nominee, as outlined in the 1956 Act, is a transitional arrangement. Section 109A of the 1956 Act is designed to facilitate the immediate impact of a shareholder's demise and safeguard against uncertainties that could affect the company's smooth functioning. Importantly, this arrangement is not intended to confer absolute ownership to the nominee but acts as a temporary measure until the legal heirs of the deceased shareholder conclude the settlement of affairs. The ultimate step of registering the transmission of shares is to be carried out through the due process of succession law, thereby emphasising the supplementary and supportive role of nomination in the broader context of estate administration.

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