In an erudite judgment by Mr. Justice G.S. Patel, the Bombay High Court in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar has held that a nominee of shares and securities of a company merely holds the securities in trust, and as a fiduciary on behalf of any claimants under the laws of succession.
The court was compelled to analyse the question of law since it appeared that an earlier decision of the Bombay High Court in Harsha Nitin Kokate vs. The Saraswat Co-operative Bank Limited & Ors.1 (Kokate) was in direct conflict with the views of the Supreme Court of India on the subject. The decision in Kokate has been held as incorrect by the court in the present case and in doing so, have reversed the understanding of the rights of a nominee shareholder.
The issue in Kokate:
The issue before the court in Kokate was whether the plaintiff in that case, i.e. the widow of the deceased Mr. Kokate could lay claim to any rights over the shares held by Mr. Kokate when in fact Mr. Kokate had made a nomination of those shares in favour of his nephew. After considering the provisions of Section 109A of the Companies Act, 1956 (Companies Act) and Bye-Law 9.11 under the Depositories Act, 1996 (Depositories Act), the single judge concluded that once a nomination is made, the securities in question automatically get transferred in the name of the nominee upon the death of share-holder, and also that the nomination carries this effect irrespective of anything contained in any testament, will or any other nomination.
The very same opposing argument in Kokate was also adopted by the plaintiff in the present case – that a nomination merely makes a nominee a trustee for the shares; and that on the death of the shareholder, the rightful successors would be entitled to the shares to the exclusion of the nominee as per the laws of succession.
The Supreme Court of India on the issue:
The Supreme Court of India has held a consistent view regarding the interplay between a nomination and the rights of a claimant under the laws of succession, intestate or otherwise. A nomination cannot be construed as another mode of succession or something capable of altering the course of succession under law.
While there is no decision of the top court which conclusively answers the question vis-ŕ-vis a nomination of shares per se, the decisions in Smt. Sarbati Devi vs. Smt. Usha Devi2 with regard to Section 39 of the Insurance Act, 1938 (nominee of a life insurance policy), and in Shri Vishin N. Khanchandani & Anr. vs. Vidya Lachmandas Khanchandani & Anr.3 regarding nomination under the Government Savings Certificates Act, 1959 make it amply clear that the rights and position of a nominee are subject to and do not derogate from the laws of succession. These decisions were also discussed, followed and upheld by the apex court in Shipra Sengupta vs. Mridul Sengupta & Ors.4
Kokate held to be per incuriam:
No 'vested' rights:
The interpretation in Kokate was that Section 109A of the Companies Act and Bye-Law 9.11 under the Depositories Act is a "re-vesting" of the shares of the holder in the nominee which takes effect on the death of the shareholder.
The court in the present case disagreed with this view and relied upon a number of precedents to establish that the word 'vest' takes its colour from the context, and may have different connotations. The court concluded that to vest does not necessarily connote title. A person, in whom the property of another vests has the same rights over the property as the owner would have had, no more or no less. But this being the case, no person has the right to deal with his property to defeat the legal claims of others. By this rationale, the court held that the usage of the word 'vest' in Section 109A of the Companies Act and Bye-Law 9.11 under the Depositories Act is not with the intention to vest the rights in the nominee to the exclusion of the lawful successors of the shareholder.
Discharge of the Company/ Depository:
The court held that the sole intention of Section 109A of the Companies Act and Bye-Law 9.11 under the Depositories Act is, quite clearly, to afford the company or depository in question a legally valid discharge so that it does not remain answerable to any claims of the successors or litigants. The nomination allows the company or depository to shift the burden of answerability to the nominee and it is in this capacity that the nominee comes to hold the shares.
Holder in a fiduciary capacity:
The court held that the nominee, upon the death of the shareholder comes to hold the shares in fiduciary capacity. The nominee will be answerable to all the claimants under succession laws. The court observed that the position cannot be otherwise.
The views and the decision in Kokate is inconsistent and in conflict with the views of the apex court in the cases of Sarbati Devi, Khanchandani and Shipra Sengupta. Kokate is also inconsistent with the views of the Bombay High Court in Nozer Gustad Commissariat vs. Central Bank of India & Ors.5 and in Antonio Joao Fernandes vs. The Assistant Provident Fund Commissionersup>6, and for these reasons, the decision in Kokate was held to be per incuriam, i.e. a decision without adequate consideration of the relevant and binding law already in force.
Nomination cannot be a 'super will':
The court observed that if one were to assume that the law in Kokate is correct, several rigours of succession laws would be rendered inapplicable. For instance, if the nomination paper is considered a testamentary instrument, would it be capable of being modified by a codicil? How would one obtain a probate for a nomination? Who would be the witnesses to a nomination as required by law for a will? Pertinent questions such as these would be left with no answers if Kokate is correct law.
In effect, Kokate makes a nomination a sort of 'super-will' which purportedly has the power to bequeath like a will, but one that will not partake any of the characteristic traits or tests as per law that defines a will. The legal rights of another person can be excluded or done away with only by the operation of law. Kokate's understanding of Section 109A of the Companies Act (corresponds to Section 72 of the Companies Act, 2013) and Bye-Law 9.11 under the Depositories Act is therefore incorrect as these provisions do not, and cannot displace the laws of succession or open up another line of succession. Kokate is therefore, per incuriam.
1. 2010 (112) Bom. LR 2014
2. (1984) 1 SCC 424
3. (2000) 6 SCC 724
4. (2009) 10 SCC 680
5. 1993 Mh. L.J. 228
6. 2010 (4) Bom. C.R. 208
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