2016 (12) TMI 308 - HC - Companies Law

Legal Interpretation: Nominee Not Sole Owner of Shares Despite Companies Act; Trust for Legal Heirs

The court concluded that the nominee under Section 109A of the Companies Act, 1956 does not become the beneficial owner of the shares to the exclusion of ... Entitlement to the beneficial ownership of the shares or securities to nominee of a holder of shares or securities - Transfer of shares - Nomination of shares - whether the view taken by the learned Single Judge in the case of Harsha Nitin Kokate v. The Saraswat Cooperative Bank Limited and Others [2010 (4) TMI 614 - HIGH COURT OF BOMBAY ] that since the nomination is shown to be correctly made by assessee's husband who was the holder of the Suit shares, the Plaintiff would have no right to get the shares of her deceased husband sold or to otherwise deal with the same is correct? - Held that:- There is no material difference between Subsection (3) of Section 109A of the Companies Act and Subsection (1) of Section 6 of the Government Savings Certificates Act, 1959 as well as Subsection (2) of Section 45ZA of the Banking Regulation Act, 1949 which start with nonobstante clause and seek to provide that nomination will override the disposition whether testamentary or otherwise. The said provisions seek to exclude all other persons except the nominee. Section 109B of the Companies Act does not advance the case of the Appellants any further. Section 109B does not suggest that on nomination being made by a deceased shareholder of a Company, his nominee becomes the owner of the shares to the exclusion of all other legal heirs. In the present case, we find that the provisions of Section 109A and in particular Subsection (3) thereof are not materially different from the provisions of Subsection (1) of Section 6 of the Government Savings Certificates Act, 1959. Subsection (2) of Section 45ZA of the Banking Regulation Act, 1949 is also similar to Subsection (2) of Section 109B. The same is the case with Byelaw 9.11 of the Depositories Act,1996. Even assuming that the format of the nomination requires attestation as required by a will under the Indian Succession Act,1925, the nomination does not become a testamentary disposition. Therefore, the decision of the Apex Court in the case of State of Himachal Pradesh and Others v. Ashwani Kumar and Others [2015 (11) TMI 1610 - SUPREME COURT] is of no help to the Appellants. The nominee does not get absolute title to the property subject matter of the nomination. The reason is by its very nature, when a share holder or a deposit holder or an insurance policy holder or a member of a Cooperative Society makes a nomination during his life time, he does not transfer his interest in favour of the nominee. It is always held that the nomination does not override the law in relation to testamentary or intestate succession. The provisions regarding nomination are made with a view to ensure that the estate or the rights of the deceased subject matter of the nomination are protected till the legal representatives of the deceased take appropriate steps. None of the provisions of the aforesaid Statutes providing for nominations deal with the succession, testamentary or nontestamentary. The object of the provisions of the Companies Act is not to either provide a mode of succession or to deal with succession. The object of the Section 109A is to ensure that the deceased shareholder is represented by some one as the value of the shares is subject to market forces. Various advantages keep on accruing to shareholders. We hold that there was no reason to take a view which is contrary to the view taken in the long line of the decisions of the Apex Court on interpretation of provisions regarding nominations. Hence, the view taken in Kokate's case is not correct. We answer the first question in the negative. Also the issue of the effect of nomination made by the testator cannot be gone into by the Testamentary Court in the probate proceedings. Issues Involved:1. Whether a nominee of a holder of shares or securities under Section 109A of the Companies Act, 1956, read with the Depositories Act, 1996, is entitled to the beneficial ownership of the shares or securities to the exclusion of all other persons entitled to inherit the estate as per the law of succession.2. Whether the nominee holds the securities in trust for the legal representatives entitled to inherit under the law of inheritance.3. Whether a bequest made in a Will supersedes the nomination made under Sections 109A and Bye-Law No.9.11 of the Depositories Act, 1996.Detailed Analysis:Issue 1: Beneficial Ownership of NomineeThe primary question was whether the nominee under Section 109A of the Companies Act, 1956, and the Depositories Act, 1996, gains beneficial ownership of the shares to the exclusion of all other persons entitled to inherit the estate. The court examined the case of Harsha Nitin Kokate v. The Saraswat Cooperative Bank Limited, which held that the nominee becomes the beneficial owner of the shares, excluding all other persons. However, the court noted that this interpretation was not consistent with the general principles of succession and the purpose of nomination provisions under various statutes.Issue 2: Nominee as TrusteeThe court analyzed whether the nominee holds the securities in trust for the legal representatives who are entitled to inherit under the law of inheritance. The court referred to several precedents, including the Supreme Court's decisions in Sarbati Devi v. Usha Devi and Vishin N. Khanchandani v. Vidya Lachmandas Khanchandani, which clarified that a nominee does not become the owner of the property but merely holds it in trust for the legal heirs. The court concluded that the nominee under Section 109A does not get absolute ownership but holds the securities as a trustee for the legal heirs.Issue 3: Supersession by WillThe court examined whether a bequest made in a Will executed according to the Indian Succession Act, 1925, supersedes the nomination under Sections 109A and Bye-Law No.9.11 of the Depositories Act, 1996. The court held that the nomination does not override the testamentary disposition made by the deceased. The nomination's purpose is to ensure that the estate is represented until the legal heirs establish their rights. The court reaffirmed that the law of succession governs the distribution of the deceased's estate, and the nomination does not create a third mode of succession.Conclusion:The court concluded that the view taken in Harsha Nitin Kokate's case was incorrect. It held that the nominee does not become the beneficial owner of the shares to the exclusion of the legal heirs. The nominee holds the securities in trust for the legal representatives entitled to inherit under the law of succession. The nomination does not supersede a valid Will executed under the Indian Succession Act, 1925.Orders:- Appeal No.313 of 2015 was dismissed, confirming the order in Suit No.503 of 2014.- The order was set aside concerning Testamentary Petition No.457 of 2014, as the issue of the effect of nomination could not be decided in probate proceedings.- Pending Notices of Motion were disposed of.- Interim orders were extended for ten weeks from the date of the judgment.