What will prevail in case of death of shareholder – A Probate of Will or Nomination under the Companies Act?

Introduction: 

The law of nomination by a shareholder is contained in Section 72 of Companies Act, 2013 (the Act).  The corresponding provision in the Companies Act, 1956 was section 109A.

It states that, every holder of securities of a company may, at any time nominate any person to whom his securities shall vest in the event of his death in prescribed form (Form SH-13). The purpose of this provision is to ease stipulation for the company in case of transmission of shares after the death of shareholder.

Further Sub-section (3) of Section 72 reads as follows:

“Sec. 72 (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 the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.”

After the plain reading of section 72(3), it infers that being the non-obstante clause and the expression of ‘vest” in the section, once the nomination is made as per the prescribed manner of law, the shares/securities shall vest to the nominee on the death of the holder of shares/securities.

So does it mean, a nominee of a holder of shares or securities on the basis of nomination under section 72 of the Act is entitled to all rights in respect of the shares or securities and excludes other persons who are entitled to inherit securities or shares under law of inheritance?

Harsha Nitin Kokate V. Saraswat Co-op Bank Ltd. [2010] -

Single judge bench of Bombay High Court (hereinafter referred as the “Kokate”) in this case has held that the nominee becomes the owner of the shares thereof after the death of the original owner, Upon such nomination which as per procedure prescribed by law, all the rights incidental to ownership would follow. The learned judge said:

“A reading of section 109A of the Companies Act 1956 and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case. These sections are completely different from section 39 of the Insurance Act set out which require a nomination merely for the payment of the amount under the Life Insurance Policy without confirming any ownership rights in the nominee or under section 30 of the Maharashtra Cooperative Societies Act which 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 are 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. The express legislature intent under Section 109A of the Companies Act and Section 9.11 of the Depositories Act is clear”

Another interesting point to be raised here is does it mean any nomination make the legal heirs completely lose right to inherit property of the deceased as the nominee is the only legal heir of the deceased shareholder?

Jayanand Jayant Salgonkar V. Jayashree jayant Salgaonkar [2015]: 

The matter again rose up  before the single bench of Bombay High Court in Jayanand Jayant Salgonkar V. Jayashree jayant Salgaonkar and Ors. [2015] 190 Comp Cas 44 (Bom) on 1 December, 2016. The judge stated that the decision of Kokate case(Supra) it was per incuriam,  that legal heirs and not the nominees will obtain the ownership rights of share certificates. 

The learned judge fittingly observed:

Nominee has the fiduciary duty to hold the proceeds as a trustee for the rightful heirs of the deceased!

“The interpretation on Section 109A and Bye-Law 9.11 placed by the Kokate Court does not seem to me to be reconcilable with the explicit decisions of the Supreme Court and of this Court. What was the 'mischief', if any, sought to be avoided by those two statutes? The succession law is unchanged. There are no further complications on account of testamentary or intestate succession. The nature of corporate instruments and securities has, however, undergone a massive change and so has the way corporations (including banks and depositories) conduct their business. 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, quite clearly, 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.”

Further the provisions relating to nominations under various Enactments have been consistently interpreted by Apex court, In Sarbati Devi v. Usha Devi [1948] 55 Comp Cas 241, supreme court held that a mere nomination made under section 39 of the Insurance Act does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of policyholder. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of liability under the policy. The amount however can be claimed by the heirs of the assured, i.e., policyholder, in accordance with the law of succession governing them.

The Court held that that the rights of a nominee to shares of a company cannot override the rights of legal heirs of deceased and therefore the amount received by the nominee can be claimed by the legal heirs of the deceased

Conclusion:

The said judgment has cleared the controversy and restored the law to what clearly is the correct position – a nomination of shares/securities is only a facility to enable the company to discharge its obligation. However, the nominee has the fiduciary duty to hold the proceeds as a trustee for the rightful heirs of the deceased.