Source: Supreme Court

Why in News?

Justice Hrishikesh Roy and Pankaj Mithal has observed that the non-obstante clause in both Section 109A (3) of the Companies Act, 1956 & Byelaw 9.11.7 of the Depositories Act, 1996, does not exclude the legal heirs from their rightful claim over the securities, against the nominee.

• The Supreme Court gave this judgment in the case of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors.

What is the Background of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors.?

• Mr. Jayant Shivram Salgaonkar (Testator) executed a will for the devolution of his estates upon the successors. The Appellants and Respondent No. 1 to 9 are legal heirs and representatives of the testator.
  • In the will, the testator had certain mutual fund investments (MFs) in respect of which appellants and respondent No. 9 were made nominees.
  • The testator passed away on 20^th August 2013.
• In 2014, the respondent no. 1 filed a suit, praying for declaration that the Testator's properties be administered under the court's supervision; seeking absolute power to administer the same; and seeking permanent injunction against all respondents and appellants from creating third party rights on testator's properties.
  • The appellants opposed the suit and argued that they are sole nominees of the MFs and thus absolutely vested with securities after testator's death.
• The single judge of High Court while relying on Kokate judgment, rejected the claim of appellants.
• In appeal, on 1^st December 2016, the Division Bench of HC set aside the single bench order, while holding that the provisions of act 1956 do not deal with succession at all and the Kokate judgment was per incurium.
  • The appellant filed an appeal before the SC against order dated 1^st December 2016.
• The bench rejected the contention and held that vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 is only for a limited purpose.
  • The vesting enables the company to deal with the securities in the immediate aftermath of the shareholder's death, to avoid uncertainty as to the holder of the securities, which could hamper the smooth functioning of the company's affairs.
• It was held that the nomination process under the Companies Act, 1956 (pari materia Companies Act, 2013) does not override succession laws.
  • The order of Division Bench of HC has been upheld and appeal has been dismissed.

What was the Court’s Observation?

• The vesting of securities in favour of the nominee contemplated under Section 109A of the Companies Act 1956 (pari materia S. 72 of Companies Act, 2013) & Bye-Law 9.11.1 of Depositories Act, 1996 is for a limited purpose i.e., to ensure that there exists no confusion pertaining to legal formalities that are to be undertaken upon the death of the holder and by extension, to protect the subject matter of nomination from any protracted litigation until the legal representatives of the deceased holder are able to take appropriate steps.
• The object of introduction of nomination facility vide the Companies (Amendment) Act, 1999 was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession, from different authorities upon the shareholder's death.

What is Section 109A of Companies Act, 1956:

• Section 109A: Nomination of Shares:
  • (1) Every holder of shares in, or holder of debentures of, a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in, or debentures of the company shall vest in the event of his death.
  • (2) Where the shares in, or debentures of, a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, a person to whom all the rights in the shares or debentures of the company shall vest in the event of death of all the joint holders.
  • (3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of the company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in or debentures of the company, the nominee shall, on the death of the shareholder or holder of debentures of the company or, as the case may be, on the death of the joint holders become entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint holders in relation to such shares in, or debentures of the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.
  • (4) Where the nominee is a minor, it shall be lawful for the holder of the shares, or holder of debentures, to make the nomination to appoint in the prescribed manner any person to become entitled to shares in or debentures of the company, in the event of his death, during the minority.

What is the Landmark Judgment Cited in the Case?

• Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd and Ors., (2010):
  • The Bombay High Court had held that the legal heirs of deceased would get ownership rights of share certificates and not the nominees.