Shakti Yezdani and Another Versus Jayanand Jayant Salgaonkar

Introduction 

The case revolves around the Competition Act, 1956 and bye-law 9.11.7 of the Depositories Act, 1996. A will was executed by the family patriarch to confer his estates on his successors. Appellant no. 2 and respondent 2 and 4 were made the nominees of a fixed deposit. Respondent no. 2 filed a civil suit praying that the testator’s property be administered under the supervision of the court. He also prayed for injunction restraining other appellants and respondents from creating any third- party interests. But the appellants filed another suit and stated that they are absolutely vested with the securities upon the death of the testator. The Single Judge Bench as well as the Division Bench of the Bombay High Court rejected the contentions of the appellant. Then an appeal was filed before the Supreme Court, it rejected the appeal and upheld the decision of the Bombay High Court. 

Facts

1. The appellants and respondent no. 1 to 9 were the legal heirs of Jayanand Jayant Salgaonkar. He executed a will on 26.06.2011, conferring his estates upon his successors.
2. The will apart from having property also had fixed deposits and recurring deposits. The testator had executed the FDs in the favour of appellant no. 2 and respondent no. 2 and 4.
3. The testator passed away on 28.08.2013. Upon his death a civil suit was filed by respondent praying that the transfer of the testator’s property would be done under the supervision of court. He also prayed for permanent injunction restraining appellants and other respondents from creating any third-party interests with respect to the property. 
4. The appellants sent a reply to the civil suit filed by the respondent saying that they were the sole nominees of the FD and the RD and also, they were absolutely vested with the securities upon the death of the testator. 

Issue

1. Whether a nominee of a holder of shares under Section 109A of the Companies Act, 1956 and the Depositories Act, 1996 has absolute ownership of shares and securities excluding all other people entitled to inherit the estate as per the Law of Succession?
2. Whether a nominee of a holder of shares or securities under Section 109A of the Companies Act, 1956 and the Depositories Act, 1996 entitled to shares or securities excluding all other people entitled to inherit the estate or whether he holds securities as a beneficiary for the legal representatives who are entitled as per the Law of Inheritance?
3. Whether a bequest made in a will executed as per the Indian Succession Act, 1925 for the shares and securities supersedes the nomination made as per Section 109A of the Competition Act, 1956 and the Depositories Act, 1996?

Contention of the Appellant

1. The nomination process under the Companies Act, 1956 is different from the nomination process under other legislations. We cannot rely upon the ratio of judgments pertaining to other legislations. The terms like ‘vesting’ & ‘to the exclusion of others’ along with a ‘non-obstante clause’ are placed together in the Companies Act, 1956 this is not being done under other legislations. 
2. The language and intent behind Section of 109A of Companies Act,1956 clearly shows that the nominee upon the death of the shareholder will have an absolute and exclusive ownership over the shares of which he was the nominee. And ‘this ownership will trump any other disposition including testamentary.’
3. If Section 109A (3) and Section S. 187C of Companies Act, 1956 is read together it would mean that the nominee shall be vested with the ownership of shares excluding all other persons. The presence of non-obstante clause also implies that the nominee would have full ownership.
4. The nomination made under S.109A of Companies Act, 1956 constitutes a ‘statutory testament’ and this overrides testamentary succession. 

Contention of the Respondent

1. It was contended by the respondent that ‘vesting under S.109A of Companies Act, 1956 does not create any third mode of succession.’  “Part IV of the Companies Act, 1956 which deals with share capitals and debentures as well as S. 108 to S. 112 in Part IV which relate to ‘transfer of shares and debentures’ were referred.” S.109 A has a limited scope which only facilitates nomination and does not create any third mode of succession. ‘The Companies Act has nothing to do with the Succession Act.’
2. The high court judgment was a consistent view that the nominee cannot have the full ownership of the shares. The nominee cannot affect the rights of the legal heirs who have got the ownership as per the Succession Act.
3. The term ‘vest’ too has a limited meaning, vest does not mean that the nominee has the absolute ownership. ‘Vest’ only signifies that the nominee would not be the title holder but a trustee and also holds accountability to the successors of the estate. Non-obstante clauses only facilitates the company’s dealing upon the death of the shareholder. It protects the company from succession litigation after the death of the shareholder. 
4. According to the respondents if the contention of the appellant is accepted nomination would be similar to a will. As per the Indian Succession Act, 1925 there is a complete judicial process to obtain probate. But if the appellant’s contentions are accepted, he would be able to claim the estate without the prescribed judicial process in place to verify the rights of the claimant. 

Judgement 

A Single Judge Bench of the Bombay High court held that S.109 A of the Companies Act, 1956 cannot be read in vacuum. It has to be read in relation to other statutes and legislations. The contentions of the appellant were rejected. It was further held that the Companies Act cannot restrict the implementation of the various provisions of the Law of Succession. S.109A intended to afford the company ‘a legally valid quittance so that it does not remain answerable forever to succession.’ But the nominee holds the shares being in fiduciary capacity. 

The Division Bench of the Bombay High court held that the Companies Act does not deal with succession. The only aim of the Companies Act is to ensure that the shareholder is appropriately represented because the value of the shares keep changing to the various market forces and in such a situation the shareholder may accrue many benefits. Another important aspect of the act is to ensure that the commerce of the company does not suffer during the time when the legal heirs are establishing their rights of succession. 

Finally, the Supreme Court held that upon the death of the shareholder, the nominee cannot claim absolute ownership of the shares. The Companies Act does not deal with the Law of Succession and the courts cannot depart from what is already decided. The appeal was therefore dismissed. 

Analysis 

The Companies Act never intended to restrict the law of succession and it is not concerned with the law of succession. The Companies Act, sole task is to manage the affairs of the corporates. It was opined that the term ‘vest’ under S.109A of the Companies Act, 1956 does not create any third mode of succession. Secondly, bequest made in a Will executed under Indian Succession Act, 1925 with respect to the shares or securities of the deceased, supersedes the nomination under S. 109A of Companies Act and Bye-law 9.11 under the Depositories Act, 1996. The intention behind introducing the nomination method under the Companies Act was never to confer absolute ownership of the shares to the nominees. Other statutory provisions such as the Banking and Regulation Act, 1956 with the terms such as ‘vest’ and ‘non-obstante clause’ interpreted and nowhere in other statutory provisions it was stated that the nominee would become the absolute owner rejecting the legal heirs. Since there is no uniform definition as to the rights of the nominee or whether he has any absolute right over the shares, these terms are to interpreted the way a reasonable man making nomination would have understood. Lastly, it was decided that absolute ownership cannot be conferred simply because the Companies Act has the terms like vest, non-obstante clause and ‘to the exclusion of others’ which other legislations do not have. Vest means limited vesting, the same term is used in the Indian Succession Act, 1925 ‘wherein S. 211 vests the deceased’s estate in the administrator or executor, although neither become the owner of the said property but merely hold the same until it is distributed among the lawful successors.’ The term vest under the Companies Act also needs to be interpreted along the same lines as done under the Succession Act. The term ‘non-obstante clause’ is also mentioned in the Banking and Regulations Act, 1949 when the clause was being interpreted it was held that the nominee would not have absolute ownership excluding the legal heirs. The same interpretation of the clause also applies to the Companies Act as well. The purpose of the clause is ‘limited to the extent of enabling the depository to deal with the securities, upon the death of the shareholder.’ The rights of the nominee were also interpreted under the Banking and Regulation Act, 1949, where it was held that the nominee has the right to receive the money held with the depositor in his account but the nominee would not become the owner of these deposits. These deposits are governed by the Law of Succession. As a result, the appellant’s contention of nomination as ‘statutory testament’ was rejected because Companies Act cannot override the Succession Act.

Conclusion 

The case involves interpreting various provisions of the Companies Act, 1956. The main issue raised in the case was whether nominee of a holder of shares under Section 109A of the Companies Act, 1956 and the Depositories Act, 1996 has absolute ownership of shares and securities excluding all other people entitled to inherit the estate as per the Law of Succession? The matter first went to a Single Judge bench of the Bombay High Court, which held that the Companies Act had nothing to do with succession. The contentions of the appellant were rejected. The Division Bench of the Bombay High Court also gave the judgment along the similar lines. Finally, the matter was taken before the Supreme court which too held that the nominee cannot get absolute ownership of the shares or securities upon the death of the shareholder. The appeal was therefore dismissed. 

Written by Shraddha Thapar an intern under legal vidhiya.

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