The Bombay High Court, recently, had to deal with a question of law, namely the effect of nomination of securities vis-à-vis law of succession in the case of Jayanand Salgaonkar v. Jayashree Sangaonkar (Notice of Motion No. 822 of 2014 in Suit No. 503 of 2014) and Nanak Ghatalia v. Swati Ghatalia (Testamentary Petition no. no. 457 of 2014).
In its judgment given on March 31, 2015 in the said case, the Court has held that in case of nomination of shares, the nominee holds the shares in trust (i.e. only in a fiduciary capacity) for the benefit of the claimants under succession law and is hence answerable to all the claimants under succession law. The nomination does not displace the law of succession. Section 109A and Section 109B of the Depositories Act do not displace the law of succession in any way.
By the said judgment, the Bombay High Court has held its earlier own judgment give in the case of Harsha Nitin Kokate v. The Saraswat Cooperative Bank Ltd. & Ors. (“Kokate Case”) as per incuriam (i.e. judgment of a court which has been decided without reference to a statutory provision or earlier judgment which would have been relevant).
The Bombay High Court had concluded in the Kokate Case that:
(i) section 109A of the Companies Act, 1956 is required to be interpreted with regard to the vesting of the shares of the holder of the shares in the nominee upon his death. If the procedure of nomination as prescribed under the said Act is followed, the nominee would become entitled to all the rights in the shares to the exclusion of all other persons. The nominee would be made beneficial owner thereof.
(ii) upon such nomination, therefore, all the rights incidental to ownership would follow. This would include the right to transfer the shares, pledge the shares or hold the shares. The specific statutory provision making the nominee entitled to all the rights in the shares excluding all other persons.
(iii) the intent of the nomination is to vest the property in the shares which includes the ownership rights there under in the nominee upon nomination validly made as per the procedure prescribed.
(iv) The relevant section of Companies Act and bye-laws of the Depositories Act were different from Insurance Act (which require a nomination merely for the payment of the amount under the Life Insurance Policy without confirming any ownership rights in the nominee) and Maharashtra Cooperative Societies Act (allows the Society to transfer the shares of the member which would be valid against any demand made by any other person upon the Society. Hence, these provisions were made merely to give a valid discharge to the Insurance Company or the Co-operative Society without vesting the ownership rights in the Insurance Policy or the membership rights in the Society upon such nominee.
QUESTION OF LAW (WHICH HAD TO BE CONSIDERED BY THE BOMBAY HIGH COURT IN THE PRESENT CASE)
Whether or not the decision of the Court in Kokate Case was per incuriam?
CONTENTIONS OF PARTIES
Decision of the Bombay High Court (single judge) was per incuriam and not good law.
Even under Companies Act and Depositories Act, a nominee continued to be in fiduciary capacity vis- à-vis all other claimants, otherwise the said statutes would be in direct conflict with and defeat the provisions of Indian Succession Act.
If the nominee was to be regarded as the beneficial owner, then a testamentary disposition would be wholly defeated by a nomination, even if the will in question is actually made after the nomination and does contain a perfectly legitimate bequest of the very securities in respect of a nomination is made.
A nomination not only becomes a testamentary disposition of sorts but stands on a higher pedestal, and, at the same time, is unguarded by any of the checks, balances and tests against which the validity of a will and its due execution are to be tested. This was not, the intendment of the corporate statutes and this construct of the law is directly contrary to the earlier decisions of the Supreme Court and the High Court, each of which was binding on the Court which gave the judgment in the Kokate Case.
Depositories Act is concerned with the regulation of depositories, i.e., those entities providing depository services, and not testamentary succession or inheritance of the securities held by the securities holders.
While it was true that the bye laws framed under the Depositories Act stated that the securities would “vest” in the nominee and that the Depository shall rely upon the last nomination notwithstanding any other disposition made by the nominating person under any other law, the same:
(i) could not be considered as a silent amendment of the testamentary and other dispositive laws, ones that concern themselves with the transfers (inter vivos or by inheritance or succession) of all property, including corporate securities; and
(ii) It does not absolve the nominees of those securities from their fiduciary responsibilities to the heirs or legatees of the nominator.
Relying upon the meaning of the word “nominee” given under various law dictionaries, the Plaintiff submitted that the nominee held the title in fiduciary capacity and none other.
The purposes of a will and a nomination are identical, and both serve to disrupt a natural line of succession. Therefore, the same considerations must apply to both.
Sections109A and 109B of the Companies Act must be read as a code in themselves and their statutory intent must be gleaned, in the first instance, from the plain meaning of the words. The words ‘vest’ and ‘nominee’ are to be seen, from that statute alone and no other; and the non-obstante clause contained under bye law 9.11.7 over-rides every other statutory provision, including the Succession Act.
BOMBAY HIGH COURT’S JUDGMENT
The fundamental focus of Section 109A and Section 109B of the Companies Act and Bye-Law 9.11 of the Depositories Act is not the law of succession, nor is it intended to trammel that in any way.
The sole intention is, to afford the company or depository in question a legally valid quittance so that it does not remain forever answerable to a raft of succession litigations and an endless slew of claimants under succession law. It allows that liability to move from the company or the depository to the nominee.
The company or depository gets a legally valid discharge; but the nominee continues to hold in a fiduciary capacity and is answerable to all claimants under succession law.
The judgment given by the Court in Kokate Case generated several inconsistencies. For example:
(i) a case of a will being made after a nomination. In the ordinary law of succession, if the nomination is indeed a testamentary instrument, it would be displaced by a later will. Yet, as per the judgment given in the Kokate Case, the nomination stands apart and is unaffected by any later will.
(ii) a case of restrictions in personal laws (such as Mohammedan Law) with respect to testamentary dispositions. A nomination would oust the personal laws completely, even though there is nothing in either of the corporate statutes to indicate that this was ever the legislative intent.
(iii) A nomination, though said to be a ‘testament’, does not require compliance with the provisions of Indian Succession Act yet it would be considered as will. For example, no probate is required in case of a nomination, witnesses need not be in the presence of the nominator and need not see the nominator execute the nomination, nomination can be assailed on the ground of importunity, fraud, coercion or undue influence, there can be no codicil to a nomination. In short, a nomination becomes some sort of ‘super-will’, one that partakes of none of the defining traits of a properly executed will and none of the tests of its validity, one that is never displaced by a later, properly made will that deals with the very same property.
the nominee holds the shares in a fiduciary capacity for the benefit of the claimants under succession law and is answerable to all the claimants under succession law. The nomination does not displace the law of succession. Section 109A and Section 109B of the Depositories Act do not displace the law of succession in any way.
The Court in the Kokate Case failed to notice / consider the earlier decisions of Supreme Court and Bombay High Court which were binding on it and the Court could not have taken a contrary view to those decisions. Hence, the judgment passed in the Kokate Case was per incuriam.
OUR ANALYSIS & COMMENTS
This Judgment is a bold but rational and welcome decision. It brings the legal status of nomination and succession at par (as clarified above) with some of the other laws.
The ratio of the judgment would squarely apply to the provisions of Companies Act, 2013 as well considering the provisions contained under section 72 of the said Act which correspond with provisions of section 109A of Companies Act, 1956.
A note worthy aspect of the judgment is the emphasis on the principles of interpretation of statute in which the Court has considered the object / preamble of the statute as an aid to arrive to at its decision and how words contained under statutes have to be interpreted in light of the setting and context of the statutes.
While going forward. it is clear that, a nominee holds shares only in a fiduciary capacity for the benefit of the claimants under the Indian Succession laws, it may be debatable whether the judgment would be applicable to legal suits (relating to inter play of nomination and succession) which are pending adjudication at the time when the judgment is given.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.