2020 (7) TMI 168 - SC - Companies Law

Supreme Court clarifies nominee's rights vs inheritance claims in Companies Act matters

Aruna Oswal Versus Pankaj Oswal & Ors.

The Supreme Court held that the applications under sections 241 and 242 of the Companies Act, 2013 were not maintainable as they involved inheritance ... Maintainability of application - sections 241 and 242 of the Companies Act, 2013 - Oppression and Mismanagement - transfer of shares - nomination of shares - HELD THAT:- A bare reading of the provisions of section 72(1), every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death. In the case of joint­holders also, they have a right to nominate any person to whom “all the rights in the securities shall vest” in the event of death of all joint holders. Sub­section (3) of section 72 contains a non­obstante clause in respect of anything contained in any other law for the time being in force or any disposition, whether testamentary or otherwise, where a nomination is validly made in the prescribed manner, it purports to confer on any person “the right to vest” the securities of the company, all the rights in the securities shall vest in the nominee unless a nomination is varied or cancelled in the prescribed manner. It is prima facie apparent that vesting is absolute, and the provisions supersede by virtue of a non­obstante clause any other law for the time being in force. Prima facie shares vest in a nominee, and he becomes absolute owner of the securities on the strength of nomination. In WORLD WIDE AGENCIES PVT. LTD. AND VERSUS MRS. MARGARAT T. DESOR AND ORS [1989 (12) TMI 245 - SUPREME COURT], this Court held that a legal representative has a right to maintain an application regarding oppression and mismanagement without being registered as a member against the securities of a company. However, the question of nomination was not involved in the said decision, as such, Court was not required to decide the question of the effect of nomination whether it vests all the rights in the securities in nominee to the exclusion of legal representatives. The basis of the petition is the claim by way of inheritance of 1/4th shareholding so as to constitute 10% of the holding, which right cannot be decided in proceedings under section 241/242 of the Act. Thus, filing of the petition under sections 241 and 242 seeking waiver is a misconceived exercise, firstly, respondent no.1 has to firmly establish his right of inheritance before a civil court to the extent of the shares he is claiming; more so, in view of the nomination made as per the provisions contained in Section 71 of the Companies Act, 2013. In the present case, respondent no.1, as pleaded by him, had nothing to do with the affairs of the company and he is not a registered owner. The rights in estate/shares, if any, of respondent no.1 are protected in the civil suit. Thus, we are satisfied that respondent no.1 does not represent the body of shareholders holding requisite percentage of shares in the company, necessary in order to maintain such a petition. In the facts and circumstances of the instant case, in order to maintain the proceedings, the respondent should have waited for the decision of the right, title and interest, in the civil suit concerning shares in question - it is deemed appropriate to direct the dropping of the proceedings filed before the NCLT regarding oppression and mismanagement under sections 241 and 242 of the Act with the liberty to file afresh, on all the questions, in case of necessity, if the suit is decreed in favour of respondent No.1 and shareholding of respondent No.1 increases to the extent of 10% required under section 244. Issues Involved:1. Maintainability of applications filed under sections 241 and 242 of the Companies Act, 2013.2. Effect of nomination under section 72 of the Companies Act, 2013.3. Eligibility of respondent No.1 to maintain the petition based on shareholding.4. Parallel proceedings in civil and company law jurisdictions.5. Determination of civil rights in the context of company law disputes.Issue-wise Detailed Analysis:1. Maintainability of Applications under Sections 241 and 242:The appeals challenge the NCLAT's decision affirming the NCLT's order concerning the maintainability of applications filed under sections 241 and 242 of the Companies Act, 2013. The NCLT had dismissed the appellant's challenge to the maintainability, holding that respondent No.1, as a legal heir, was entitled to one-fourth share of the property/shares. The Supreme Court found that the basis of the petition was the claim by way of inheritance, which cannot be decided in proceedings under sections 241 and 242. The Court emphasized that respondent No.1 must first establish his right of inheritance in a civil court.2. Effect of Nomination under Section 72:The Court examined the effect of nomination under section 72 of the Act, which allows a shareholder to nominate a person to whom the securities shall vest in the event of the shareholder's death. The Court noted that the nomination prima facie vests the securities in the nominee, making them the absolute owner. The Court distinguished this from other cases where nomination did not confer absolute rights, emphasizing that the effect of the nomination in favor of Mrs. Aruna Oswal must be determined in the pending civil suit.3. Eligibility of Respondent No.1 to Maintain the Petition:Respondent No.1 held only 0.03% of the shares, acquired after filing a civil suit, and claimed additional shares as a legal representative. The Court highlighted that respondent No.1 did not meet the 10% shareholding requirement under section 244 to maintain the petition. The Court reiterated that the right to the disputed shares must be firmly established in the civil suit before proceeding under sections 241 and 242.4. Parallel Proceedings in Civil and Company Law Jurisdictions:The Court addressed the issue of parallel proceedings, noting that the civil suit concerning the inheritance of shares was pending. It was deemed inappropriate for the NCLT to entertain the application under sections 241 and 242 while the civil suit was unresolved. The Court emphasized that the civil court's decision on the right, title, and interest would be binding and should precede any company law proceedings.5. Determination of Civil Rights in Company Law Disputes:The Court underscored that the dispute over the inheritance of shares is a civil matter and cannot be adjudicated under sections 241 and 242, which address oppression and mismanagement. The Court referenced previous judgments, including Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad, to support the view that such disputes are outside the purview of company law proceedings and must be resolved in civil court.Conclusion:The Supreme Court set aside the NCLT and NCLAT orders, directing the dropping of the proceedings under sections 241 and 242, with liberty to file afresh if the civil suit is decreed in favor of respondent No.1 and his shareholding increases to the requisite 10%. The Court requested an expedited decision in the civil suit and emphasized that all questions should be decided therein, maintaining the status quo as ordered by the High Court.