Process of Nomination does not override the succession laws - 2023 INSC 1076

 Process of Nomination does not override the succession laws - 2023 INSC 1076

Therefore, offering a discharge to the entity once the nominee is in picture is quite distinct from granting ownership of securities to nominees instead of the legal heirs. Nomination process therefore does not override the succession laws. Simply said, there is no third mode of succession that the scheme of the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and Depositories Act, 1996 aims or intends to provide. 

2023 INSC 1076

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7107 OF 2017

SHAKTI YEZDANI & ANR. APPELLANT(S)

 VERSUS

JAYANAND JAYANT SALGAONKAR & ORS. RESPONDENT(S)

J U D G M E N T

Hrishikesh Roy, J.

1. Heard Mr. Abhimanyu Bhandari, learned counsel appearing

for the appellants. Also heard Mr. Rohit Anil Rathi, learned counsel

representing respondent no. 1. Mr. Aniruddha A. Joshi, learned

counsel appears for respondent nos. 4, 6, 7 and 8.

2. The appellants and respondent nos. 1 to 9 are the legal heirs

and representatives of an individual – Jayant Shivram Salgaonkar.

The family patriarch executed a will on 27.06.2011 making

provisions for the devolution of his estates upon the successors.

Page 1 of 43

Apart from the properties mentioned in the will, the testator had

certain fixed deposits (FDs) for the sum of Rs. 4,14,73,994/- in

respect of which the respondent nos. 2, 4 and appellant no. 2 were

made nominees. Additionally, there were certain mutual fund

investments (MFs) of the amount of Rs. 3,79,03,207/- in respect of

which appellants and Jay Ganesh Nyas Trust (respondent no. 9)

were made nominees. The testator Jayant Shivram Salgaonkar

passed away on 20.08.2013.

3. On 29.04.2014, the respondent no. 1 filed Suit No. 503/2014

with the prayer for declaration inter alia that the properties of the

testator may be administered under the court’s supervision and

seeking absolute power to administer the same. He also prayed for

permanent injunction restraining all other respondents and

appellants from disposing, transferring, alienating, assigning

and/or creating any third-party interests in respect of the

properties in Exhibit A.

4. In their reply to the notice of motion in Suit No. 503/2014, the

appellants pleaded that they were the sole nominee(s) to the MFs.

The essence of their claim was that the appellants being nominees

Page 2 of 43

were absolutely vested with the securities on the testator’s death.

The appellant no.2 was additionally nominated and entitled to the

FDs of the testator in the IDBI Bank. It was also the appellants’

contention that nominations made under/in Jayant Shivram

Salgaonkar’s MFs/shares were made as per Section 109A & 109B of

Companies Act, 1956 and bye-law 9.11.7 of the Depositories Act,

1996. Section 109A and 109B of the Companies Act, 1956 must be

read as a code in themselves, wherein the meaning of words ‘vest’

and ‘nominee’ are to be seen from the statute alone bearing in mind

the non-obstante clause contained therein. Therefore, the provisions

should be interpreted without reference to any outside

consideration.

5. On 31.03.2015, the learned Single Judge of the Bombay High

Court while passing the order in the Notice of Motion mainly

considered whether the law laid down in the case of Harsha Nitin

Kokate v. The Saraswat Co-operative Bank Limited and Others1

 was

per incuriam. Further, the contentions of the appellants were

rejected by the court by observing that S. 109A & S. 109B of the

Companies Act, 1956 cannot be read in a vacuum and it is

1

 (2010) SCC Online Bom 615.

Page 3 of 43

permissible for the court to look at pari materia provisions in other

statutes. The court, while considering the argument of a ‘statutory

testament’ raised in Sarbati Devi v. Usha Devi2

, expressly negated

those and opined that it would not be proper to limit the ratio in

Sarbati Devi (supra) to the narrow confines of Section 39 of the

Insurance Act, 1939. The same was thereafter reaffirmed in Vishin N.

Khanchandani and Anr. v. Vidya Lachmandas Khanchandani &

Anr.3

, Shipra Sengupta v. Mridual Sengupta & Ors.4

, Ramchander

Talwar & Ors. v. Devendra Kumar Talwar & Ors.5

, Nozer Gustad

Commissariat v. Central Bank of India & Ors.6 and Antonio Joao

Fernandes v. Asst. Provident Fund Commissioner7

. According to the

learned judge, the decision in Kokate (supra) failed to consider the

decision of the Supreme Court in Khanchandani (supra), Shipra

Sengupta (supra) or even those of the Single Judge of the Bombay

High Court in Nozer Gustad Commissariat (supra) and Antonio Joao

2

 (1984) 1 SCC 424

3

 (2000) 6 SCC 724

4

(2009) 10 SCC 680

5

 (2010) 10 SCC 671

6

 (1993) 1 Mah LJ 228

7

 (2010) 4 Mah LJ 751

Page 4 of 43

Fernandes (supra), although each of these decisions were binding on

the court, while it was deciding Kokate.

6. It was accordingly expressed that the decision in Kokate

(supra) is per incuriam as it was rendered without considering

relevant and binding precedents. The learned Judge also opined

that the fundamental focus of S. 109A & S. 109B of the Companies

Act, 1956 and Bye-law 9.11.7 of the Depositories Act is not the law of

succession nor it is intended to restrict the law of succession in any

manner. Addressing the mischief that was sought to be avoided by

the two statutory provisions, the court observed that it was

intended to afford the company or the depository in question, a

legally valid quittance so that it does not remain answerable forever

to succession litigations and endless slew of claims under the

succession law. It was therefore opined that the statutory provisions

allow for the liability to be moved from the company or the

depository to the nominee but the nominee continues to hold the

shares/securities in fiduciary capacity and is also answerable to all

claims in the succession law.

Page 5 of 43

7. With the above understanding of the legal provisions, the

learned Judge declared that the view in Kokate (supra) generates

inconsistencies as it renders a nomination under the Companies Act

the status of a ‘superwill’ that is bereft of the rigour applicable to a

will for its making or the test of its validity under the Indian

Succession Act, 1925. According to the ruling, S. 109A & S. 109B of

the Companies Act, 1956 and the Bye-law 9.11 of the Depositories

Act, 1996 does not displace the law of succession nor does it

stipulate a third line of succession.

8. Even while declaring Kokate (supra) to be per incuriam, it was

made clear that the aforesaid judgment (31.3.2015) does not

dispose of the Notice of Motion No. 822/2014 in Suit No. 503/2014

and Chamber Summons No. 72/2014 in Testamentary Petition No.

457/2014 and those were posted for final hearing on the basis of

the law as declared.

9. The appellants being aggrieved by the decision (dated

31.3.2015) of the learned Single Judge, filed Appeal No. 313/2015

to challenge the order. Appeal No. 311/2015 was also filed in the

Testamentary Petition No. 457/2014.

Page 6 of 43

10. While dealing with the appeals, the Division Bench at the

outset noticed that the consideration to be made is whether the

view taken by the learned Single Judge vis-a-vis the Kokate (supra)

judgment is the correct opinion. Accordingly, the following questions

were formulated for decision in the appeals:

“(i) Whether a nominee of a holder of shares or securities

appointed under Section 109A of the Companies Act, 1956

read with the Bye-laws under the Depositories Act, 1996 is

entitled to the beneficial ownership of the shares or

securities subject matter of nomination to the exclusion of all

other persons who are entitled to inherit the estate of the

holder as per the law of succession?

(ii)Whether a nominee of a holder of shares or

securities on the basis of the nomination made under the

provisions of the Companies Act, 1956 read with the Byelaws under the Depositories Act, 1996 is entitled to all rights

in respect of the shares or securities subject matter of

nomination to the exclusion of all other persons or whether

he continues to hold the securities in trust and in a capacity

as a beneficiary for the legal representatives who are

entitled to inherit securitie or shares under the law of

inheritance?

(iii) Whether a bequest made in a Will executed in

accordance with the Inidan Succession Act, 1925 in respect

of shares or securities of the deceased supersedes the

nomination made under the provisiosn of Sections 109A

and Bye Law No. 9.11 framed under the Depositories Act,

1996?”

11. To appreciate the precise ratio in Kokate (supra), the following

two paragraphs of the Kokate judgment were extracted by the

Division Bench:

Page 7 of 43

“24. In the light of these judgments section 109A of the

Companies Act 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. The act sets out that the nomination

has to be made during the life time of the holder as per

procedure prescribed by law. If that procedure 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. 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 would show expressly the

legislative intent. Once all other persons are excluded and

only the nominee becomes entitled under the statutory

provision to have all the rights in the shares, none other can

have it. Further, section 9.11 of the Depositories Act 1996

makes the nominee's position superior to even a testamentary

disposition. The non-obstante Clause in section 9.11.7 gives

the nomination the effect of the Testamentary Disposition

itself. Hence, any other disposition or nomination under any

other law stands subject to the nomination made under the

Depositories Act. Section 9.11.7 further shows that the last of

the nominations would prevail. This shows the revocable

nature of the nomination much like a Testamentary

Disposition. A nomination can be cancelled by the holder and

another nomination can be made. Such later nomination

would be relied upon by the Depository Participant. That

would be for conferring of all the rights in the shares to such

last nominee.

25. A reading of section 109A of the Companies Act and byelaw 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 (supra) 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

Page 8 of 43

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.”

12. The Division Bench under the impugned judgment (dated

01.12.2016) observed that the object and provisions of the

Companies Act, 1956 is not to either provide a mode of succession

or to deal with succession at all. The object of S. 109A Companies

Act, 1956 is to ensure that the deceased shareholder is represented,

as the value of the shares is subject to market forces and various

advantages keep on accruing to the shareholders, such as allotment

of shares & disbursement of dividends. Moreover, a shareholder is

required to be represented in the general meetings of the Company

and therefore, the court opined that the provision is enacted to

ensure that commerce does not suffer due to delay on part of the

legal heirs in establishing their rights of succession and then

claiming shares of a Company. Adverting to and interpreting the

pari materia provisions relating to nominations under various

statutes, the Division Bench felt that the consistent view in the

various judgments of the Supreme Court and the Bombay High

Page 9 of 43

Court must be followed and those do not warrant any departure. It

was expressly opined that the so-called ‘vesting’ under S. 109A of

the Companies Act, 1956 does not create a third mode of succession

and the provisions are not intended to create another mode of

succession. In fact, the Companies Act, 1956 has nothing to do with

the law of succession. Accordingly, the Division Bench declared that

the nominee of a holder of a share or securities is not entitled to the

beneficial ownership of the shares or securities which are the

subject matter of nomination to the exclusion of all other persons

who are entitled to inherit the estates of the holders as per the law

of succession. Answering the third question, the Division Bench

held that a bequest made in a Will executed in accordance with the

Indian Succession Act, 1925 in respect of shares or securities of the

deceased, supersedes the nomination made under the provision of

S. 109A of Companies Act and Bye-law 9.11 framed under the

Depositories Act, 1996. The bench accordingly ruled that an

incorrect view was taken in Kokate (supra).

13. The object of S. 109A(3) of the Companies Act, 1956, according

to the Division Bench, is not materially different from S. 6(1) of the

Page 10 of 43

Government Savings Certificates Act, 1959 and S. 109B of the

Companies Act, 1956 is likewise similar to S. 45-ZA(2) of the Banking

Regulation Act, 1949. The law relating to S. 6(1) of the Government

Savings Certificates Act, 1959 has already been settled in the case of

N. Khanchandani (supra) where the Supreme Court upheld the law

declared in Sarbati Devi (supra).

14. Looking at the provisions relating to nominations under

different statutory enactments and the way the courts have

interpreted those to the effect that the nominee does not get

absolute title to the property which is the subject matter of

nomination, the Division Bench interpreting the provisions under S.

109A & S. 109B Companies Act, 1956 declared that they do not

override the law in relation to testamentary or intestate succession.

The judgment in Kokate (supra) was declared to be incorrect as it

failed to consider the law laid down in Khanchandani (supra) and

Talwar (supra) as these cases preceded Kokate (supra).

ARGUMENTS

15. The learned counsels for the appellants and the respondents

put forth the following arguments for consideration:

Page 11 of 43

15.1 Mr. Abhimanyu Bhandari, the learned counsel for the

appellants argues that the scheme of nomination as provided in the

Companies Act, 1956 is not analogous to nomination as provided

under other legislations. Unlike in other legislations, the term

‘vesting’ & ‘to the exclusion of others’ along with a ‘non-obstante

clause’ are placed together in the Companies Act, 1956. Therefore, it

would be incorrect to rely on the ratio of the judgments pertaining

to other legislations (such as the Insurance Act, 1939, Banking

Regulation Act, 1949, National Savings Certificates Act, 1959,

Employees Provident Fund and Miscellaneous Provisions Act, 1952) to

then interpret the provisions of S. 109A & S. 109B of the Companies

Act, 1956. Provisions pertaining to the same in other legislations

cannot be the basis for interpretation of the term ‘nomination’ under

the Companies Act as those are not pari materia with S. 109A & S.

109B (now S. 72 of the Companies Act, 2013) of the Companies Act,

1956.

15.2 It is contended that S. 109A & S. 109B (now S. 72 of the

Companies Act, 2013) introduced in the Companies Act, 1956 by the

legislature on 31.08.1988 with the language so used makes it clear

Page 12 of 43

that a nominee, upon the death of the shareholder/debenture

holder, will secure full and exclusive ownership rights in respect of

the shares/debentures for which he/she is the nominee. In fact,

adverting to the hierarchy laid down under the provision,

shareholding in an individual capacity (S. 109A(1)), then a joint

shareholder owning the shares jointly (S. 109A(2)) and then finally,

a nominee (S. 109A(3)) in whom the shares shall vest in the event of

death of the shareholder/joint shareholders, it is contended that the

intent is clear that such nomination would trump any disposition,

whether testamentary or otherwise.

15.3 It is further contended that S. 187C & S. 109A(3) of the

Companies Act, 1956 have to be read together, to mean that shares

shall ‘vest’ with the nominee to the exclusion of all other persons

unless nomination is varied or cancelled. It is argued that S. 187C

itself provides for the mechanism to vary the nomination by making

appropriate declaration and therefore, these provisions are to be

understood as complete codes within themselves. When read

together, no declaration varying the nomination would imply that

the intention was to grant beneficial ownership of the shares to the

Page 13 of 43

appellants through a mechanism of nomination of rights. As Mr.

Jayant S. Salgaonkar’s Will had categorically mentioned all other

properties of the deceased except the shares for which the

appellants were named as nominees, the implication is naturally

that the ownership rights of such shares would pass on to the

nominees after the death of the testator i.e., the appellants’

grandfather.

15.4 The learned counsel for appellants would then refer to Byelaw 9.11 of the Depositories Act, 1996 which provides for

transmission of securities in case of nomination. Within the

provision, the presence of a non-obstante clause would reasonably

imply that the effect of nomination under the said bye-law is that it

would vest in the nominee a complete title of the shares

notwithstanding anything contained in the testamentary

disposition(s) or nomination(s) made under other laws dealing with

securities.

15.5 In addition, it is argued that the nomination for shares i.e.,

Form SH-13 provided under Rule 19(1) of the Companies (Share

Capital & Debentures) Rules, 2014 indicates that the shareholder or

Page 14 of 43

joint shareholder may nominate one or more persons as nominee in

whom all rights of the holder shall vest. Since such nomination can

also be in the favour of a third party or a minor (who can never be a

trustee or executor), it is argued that the legislature under the

Companies Act intended to give complete ownership to the nominee.

15.6 Mr. Bhandari then refers to Regulation 29A of SEBI (Mutual

Funds) Regulations, 1996, by virtue of which an asset management

company is required to provide the option to its unit holder to

nominate a person in whom all rights of the units shall vest in the

event of the death of the unit holder. It is contended that when a

joint shareholder cannot make any change to the nomination

without the consent of the other joint shareholder (since such

shares continue in the ownership of the remaining shareholders in

the event of the death of one of the shareholders), the same cannot

be done by way of a Will or testamentary disposition or law of

succession either.

15.7 Therefore, as per Mr. Bhandari, the interpretation accorded

by the High Court is not in sync with the developments of law

intended by insertion of S. 109A & S. 109B to the Companies Act,

Page 15 of 43

1956. The ease of succession planning which the legislature

intended would be rendered otiose if the interpretation given by the

High Court on the implication for the nominee under S. 109A & S.

109B of the Companies Act is accepted.

16. Canvassing the opposite view, Mr. Rohit Anil Rathi, the

learned counsel appearing for Respondent No. 1 would argue that

on account of the consistent view taken by this Court while

interpreting various legislative enactments pertaining to

nominations and more particularly, in view of the latest

interpretation in the case of Indrani Wahi v. Registrar of Cooperative

Societies and Others8

, departure from the consistent view is not

warranted and ‘vesting’ provided under S. 109A would not create a

third mode of succession.

16.1 The learned counsel submits that the Companies Act has

nothing to do with the law of succession. In support of his

contention, Mr. Rathi would refer to 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

8

 (2016) 6 SCC 440

Page 16 of 43

debentures’. Adverting to the aforesaid provisions, it is argued that

the limited object is to provide a facility for transfer of shares or

debentures through a proper instrument of transfer and

consequential actions such as registration and in case of

grievances, appeal thereof. The introduction of S. 109A & S. 109B

merely provides for facility of nomination aiding in the process of

such transfer. Therefore, no third mode of succession by way of

nomination has been contemplated and the position has remained

unaltered, despite numerous amendments made to the Companies

Act from time to time.

16.2 On the other hand, the object behind the Indian Succession

Act, 1925 is to provide for an act to consolidate and amend the law

applicable to intestate and testamentary succession. It is argued by

Mr. Rathi that the legislature in no uncertain terms recognised a

transfer being made by a legal representative as a valid mode of

transfer and the legal representative is vested with the properties of

the deceased as a custodian subject to devolution in terms of the

applicable law i.e., the Indian Succession Act, 1925 as per S. 211

within Part VIII of the same.

Page 17 of 43

16.3 Further, it is argued by the learned counsel for the

Respondent No. 1 that the terms ‘transfer’, ‘transmission’ and

‘transmission by operation of law’ are distinct and convey different

meanings, i.e., transfer inter vivos in case of the term ‘transfer’ and

devolution by operation of law in case of ‘transmission’. Since these

phrases have been retained even under the Companies Act, 2013,

there is no alteration of the position of law on transfer and

transmission of securities. In addition, several provisions provide

an unfettered power to a company to register any person to whom

rights to shares/debentures had been transmitted by operation of

law as a shareholder/debenture holder (second proviso, S. 108 of

the Companies Act, 1956). Moreover, there is an obligation to inform

the transferor, transferee or the person who gave intimation of

transfer, the reason for refusing the registration or transmission by

operation of law (S. 111 of the Companies Act, 1956).

17. Mr. Aniruddha Joshi, learned counsel for the Respondent

Nos. 4 and 6 to 8 would argue that in light of the consistent view

taken by this Court and most High Courts on the question of

nominee not becoming a full owner of the estate of which he has

Page 18 of 43

been nominated by the deceased owner of the property, the nominee

by virtue of S. 109A & S. 109B of the Companies Act, 1956 cannot

impact the rights of the legal heirs/legatees obtained through

application of the succession law.

17.1 The learned counsel accepts the position that the languages

used in the enactments interpreted by the court are not alike. Some

enactments possess a non-obstante clause while some do not. Few

use the term ‘vest’ while others do not. However, since none of the

Acts define the terms ‘nominee’ and ‘nomination’, it is contended by

Mr. Joshi that those terms are to be considered as ordinarily

understood by persons making the nomination, for their moveable

or immovable properties.

17.2 Mr. Joshi therefore argues that the term ‘vest’ must be

understood in a limited sense and would not necessarily confer

ownership. Addressing the implication of the non-obstante clause in

the Companies Act, the counsel submits that the same is intended

to offer a discharge to the company and to facilitate the company in

their dealings after the death of the shareholder/securities holder.

More specifically, it is to protect the company from being dragged

Page 19 of 43

into a succession litigation. Therefore, the term ‘vest’ must be

interpreted in a limited sense to the effect that the nominee would

deal with the company but not in the capacity as a title holder but

more in the nature of a trustee holding the estate for the lawful

successor(s) and would be accountable to the successor(s) of the

estate. In the same context, the term ‘vest’ as used in the Indian

Succession Act, 1925 would be understood to mean that neither the

administrator nor the executor would become the owner of the

property. Such vesting is therefore limited to the specific purpose of

distribution of the estate amongst the lawful successor(s).

17.3 The counsel submits that the Companies Act, 1956 and/or

the Companies Act, 2013 is referable to Entry 43 and/or Entry 44 of

List I, Schedule VII of the Constitution which provide for

incorporation, regulation and winding up of companies. Therefore,

the legislation deals with the limited aspects of birth of a legal

entity/company, its management/the affairs of the company and its

death/winding up of the company. It was argued that the widest

interpretation of the same would still not attract or cover succession

or estate planning of an individual, even if the said person were to

Page 20 of 43

be a member of a company. On the other hand, the Indian

Succession Act, 1925 or Hindu Succession Act, 1956 or other

enactments pertaining to succession relate to Entry 5 in List III,

Schedule VII of the Constitution. Therefore, their source of power is

entirely different. In light of the same, it is argued that a third mode

of succession not contemplated by laws would be provided through

an interpretative exercise instead of a legislative exercise.

17.4 As per Mr. Joshi, if the contention of appellants were to be

accepted, nomination would be rendered similar to a ‘will’ or a

‘testamentary disposition’ to the extent of securities, of a particular

company. However, the Indian Succession Act, 1925 prescribes a

detailed judicial process to obtain letters of administration or

succession certificates or probates, as the case may be. Therefore,

in case the contentions of the appellants are accepted, the judicial

process for determination of successors’ rights would not be

required at all and the nominee(s) would be able to claim the estate

without verification of the claimants’ rights by the prescribed

judicial process.

Page 21 of 43

17.5 Finally, it is submitted that as per Article 141 of the

Constitution, only this Court’s interpretation on provisions become

binding. It cannot however be said that the legislature has taken

note of the interpretation of the High Court judgment and accepted

the interpretation.

DISCUSSION

18. Before we proceed any further, it would be appropriate to

indicate the position of the contesting parties vis-à-vis the testator,

Jayant Shivram Salgaonkar.

Page 22 of 43

19. Having considered the submissions and the materials

placed on record, the following issues require our careful

attention and have been discussed at length below:

(i.) The scheme, intent & object behind the Companies

(Amendment) Act, 1999,

(ii.) The implication of the scheme of ‘nomination’ under the

Companies Act, 1956 as well as other comparable legislations,

(iii.) The use of the term ‘vest’ and the presence of the nonobstante clause within the provisions of the Companies Act, 1956,

(iv.) Nomination under the Companies Act, 1956 vis-à-vis law of

succession.

SCHEME OF THE COMPANIES ACT

20. Both sides’ lawyers have relied on the intent & purpose

behind the introduction of S. 109A & S. 109B in the larger context

of the Companies Act, 1956 or the pari materia provisions (Section

72, Companies Act, 2013) in support of their respective stand.

Having perused the scheme behind the Companies Act, 1956 and

the Companies (Amendment) Act, 1999 that also introduced S.

109A & S. 109B of the Companies Act, 1956, the relevant extracts

are reproduced as follows:

Page 23 of 43

“…………….2. (b) to provide for nomination facility to the holders of

shares, debentures and fixed deposit holders;

……………………………

…………………….. 3. The corporate sector is going through difficult

times. The capital market is also at low ebb, which requires

immediate morale boosting efforts on the part of the Government to

promote investors' confidence. Besides, the economy needs certain

impetus for promoting inter-corporate investments considering slow

flow of funds in new investments. In order to overcome these adverse

conditions faced by the corporate sector. it was felt that the company

should be permitted to buy-back their own shares, to make

investments or loans freely without prior approval of the Central

Government, to provide for nomination facility to the holders of

shares, deposits and debentures and also to make provision in law

for establishment of Investors Education and Protection Fund broadly

on the line of provisions contained in the Companies Bill,

1997…………………………………..”

9

“…………… Under the Companies (Amendment) Act, 1999, the

shareholders have been allowed to nominate a person for their

shares, debentures and deposits………. Earlier, holders of shares

and debentures in a company did not enjoy the nomination facility

for shares, debentures and deposits, which caused hardships to

them. They were required to obtain a letter of succession from the

competent authority. The facility of nomination is intended to make

the company law in tune with the present-day economic policies of

liberalisation and deregulation. This is also intended to promote

investors’ confidence in capital market and to promote the climate for

inter-corporate investment in the country.”10

21. The object behind the introduction of a nomination

facility as can be appreciated was to provide an impetus to the

corporate sector in light of the slow investment during those

times. In order to overcome such conditions, boosting investors’

confidence was deemed necessary along with ensuring that

9

 Statement of Objects & Reasons, The Companies (Amendment) Act 1999

10 Press Information Bureau, Press Release, July 23, 1999

Page 24 of 43

company law remained in consonance with contemporary

economic policies of liberalisation. In fact, the provision of

nomination facility was made in order to ease the erstwhile

cumbersome process of obtaining multiple letters of succession

from various authorities and also to promote a better climate for

corporate investments within the country. In contrast, one must

note that ownership of the securities is not granted to the

nominee nor there is any distinct legislative move to revamp the

extant position of law, with respect to the same.

22. At this juncture, it would hold us in good stead to note

what the Court succinctly held in Salomon v. Salomon & Co.11:

“In a Court of Law or Equity, what the Legislature intended

to be done or not to be done can only be legitimately

ascertained from that which it has chosen to enact, either

in express words or by reasonable and necessary

implication."

In this context, the act of the legislature to enact S. 109A in

the Companies Act, 1956 and provide a nomination facility to

holders also aids in ascertaining the intent. The Companies Act,

1956 and subsequent amendments as parliamentary legislations

are rooted in Entry 43, List I of Seventh Schedule, which deals

11 (1897) AC 22, 38

Page 25 of 43

with incorporation, regulation and winding up of corporations.

There is no mention of nomination and/or succession within the

provisions or the statement of objects & reasons or any other

material pertaining to the Companies Act, 1956. Same is also not

seen in subsequent amendments to the Act.

23. Reading the provision of nomination within the

Companies Act, 1956 with the broadest possible contours, it is not

possible to say that the same deals with the matter of succession

in any manner. There is no material to show that the intent of the

legislature behind introducing a method of nomination through

the Companies (Amendment) Act, 1999 was to confer absolute title

of ownership of property/shares, on the said nominee.

24. In fact, while interpreting other enactments that are

similar in nature by virtue of the fact that the provision of

nomination within the statute begins with a non-obstante clause

and/or is armed with the term ‘vest’ such as the (Banking

Regulation Act, 1949, the Government Savings Certificate Act, 1959

and/or the Employees Provident Fund Act, 1952), multiple courts

have rejected the argument that the nominee would become the

Page 26 of 43

absolute owner to the exclusion of the legal heirs. To hold

otherwise would, in our opinion, exceed the scope and extent of S.

109A of the Companies Act, 1956.

NOMINATION UNDER VARIOUS LEGISLATIONS

25. In an illuminating list of precedents, this Court as well as

several High Courts have dealt with the concept of ‘nomination’

under legislations like the Government Savings Certificate Act

1959, the Banking Regulation Act, 1949, the Life Insurance Act,

1939 and the Employees Provident Fund and Miscellaneous

Provisions Act, 1952. It would be apposite to refer to what the

Court said on nomination, in reference to these legislations:

Case Law/Precedent Held

Sarbati Devi & Anr. v. Usha

Devi12

Nomination under S. 39 of the Insurance Act

1938 is subject to the claim of heirs of the

assured under the law of succession.

Nozer Gustad Commissariat

v. Central Bank of India13

Nomination under S. 10(2) of the EPF & Misc.

Provisions Act 1952 cannot be made in favour

of a non-family person. Relied upon Sarbati

Devi (supra) to state that the principles

therein were applicable to the Employees

Provident Funds Act as well and not merely

restricted to the Insurance Act.

Vishin N. Khanchandani & Nominee entitled to receive the sum due on

12 (1984) 1 SCC 424

13 (1993) 1 Mah LJ 228

Page 27 of 43

Anr. v. Vidya L.

Khanchandani14

the savings certificate under S. 6(1) of the

Govt. Savings Certificate Act 1959, but cannot

utilise it. In fact, the nominee may retain the

same for those entitled to it under the

relevant law of succession.

Ram Chander Talwar & Anr.

v. Devender Kumar Talwar &

Ors.15

Nomination made under provisions of S. 45ZA

of the Banking Regulation Act 1949 entitled

the nominee to receive the deposit amount on

the death of the depositor.

26. A consistent view appears to have been taken by the

courts, while interpreting the related provisions of nomination

under different statutes. It is clear from the referred judgments

that the nomination so made would not lead to the nominee

attaining absolute title over the subject property for which such

nomination was made. In other words, the usual mode of

succession is not to be impacted by such nomination. The legal

heirs therefore have not been excluded by virtue of nomination.

27. The presence of the three elements i.e., the term ‘vest’,

the provision excluding others as well as a non-obstante clause

under S.109A of the Companies Act, 1956 have not persuaded us

in the interpretation to be accorded vis-à-vis nomination, in any

14 (2000) 6 SCC 724

15 (2010) 10 SCC 671

Page 28 of 43

different manner. Different legislations with provisions pertaining

to nomination that have been a subject of adjudication earlier

before courts, have little or no similarity with respect to the

language used or the provisions contained therein. While the

Government Savings Certificates Act, 1959, Banking Regulation Act,

1949 and Public Debts Act, 1944 contain a non-obstante clause,

the Insurance Act, 1939 and Cooperative Societies Act, 1912 do

not.

28. Similarly, there are variations with respect to the word

‘vest’ being present in some legislations (the Employees Provident

Fund Act, 1952) and absent in others (the Insurance Act, 1939, the

Cooperative Societies Act, 1912). Looking at the dissimilarities and

the fact that uniform definition is not available relating to the

rights of ‘nominee’ and/or whether such ‘nomination’ bestows

absolute ownership over nominees, it is only appropriate that the

terms are considered as ordinarily understood by a reasonable

person making nominations, with respect to their movable or

immovable properties. A reasonable individual arranging for the

disposition of his property is expected to undertake any such

Page 29 of 43

nomination, bearing in mind the interpretation on the effect of

nomination, as given by courts consistently, for a number of

years. The concept of nomination if interpreted by departing from

the well-established manner would, in our view, cause major

ramifications and create significant impact on disposition of

properties left behind by deceased nominators.

29. The legislative intent of creating a scheme of nomination

under the Companies Act, 1956 in our opinion is not intended to

grant absolute rights of ownership in favour of the nominee

merely because the provision contains three elements i.e., the

term ‘vest’, a non-obstante clause and the phrase ‘to the exclusion

of others’, which are absent in other legislations, that also provide

for nomination.

EFFECT OF ‘VEST’ IN S. 109A OF THE COMPANIES ACT, 1956 & BYE-LAW

9.11.1 OF THE DEPOSITORIES ACT, 1996

30. The appellants’ case is grounded in the interpretation of

the term ‘vest’ in Section 109A of the Companies Act, 1956 and

Bye-law 9.11.1 under the Depositories Act, 1996, and according to

them, the use of the term ‘vest’ indicates the intent to bestow

Page 30 of 43

ownership of the securities upon the nominee on the

shareholder’s death. To address the aforesaid argument, it is

apposite to note how the term ‘vest’ or ‘vesting’ has been defined

by the courts, from time to time.

31. In Fruits & Vegetable Merchant Union v. Delhi Improvement

Trust,

16 the Supreme Court held that the term ‘vest’ has a variety

of meanings dependent on the context within which it operates.

“11. . . . . . . In this chapter occur Sections 45 to 48 which provide

for the vesting of certain properties in the Trust. Section 45 lays

down the conditions and the procedure according to which any

building, street, square or other land vested in the Municipality or

Notified Area Committee may become vested in a Trust. Similarly,

Section 46 deals with the vesting in the Trust of properties like a

street or a square as are not vested in a Municipality or Notified

Area Committee. These sections, as also Sections 47 and 48 make

provision for compensation and for empowering the Trust to deal

with such property vested in it. The vesting of such property is only

for the purpose of executing any improvement scheme which it has

undertaken and not with a view to clothing it with complete title. As

will presently appear, the term “vesting” has a variety of meaning

which has to be gathered from the context in which it has been used.

It may mean full ownership, or only possession for a particular

purpose, or clothing the authority with power to deal with the

property as the agent of another person or authority.”

(Emphasis supplied)

16 AIR 1957 SC 344

Page 31 of 43

32. In Vatticherukuru Village Panchayat v. Nori Venkatarama

Deekshithulu,17 this Court considered the question of the effect

of ‘vesting’ under S. 85 of the AP Gram Panchayat Act, 1964 of

the water works & appurtenant land on the Gram Panchayat. It

was held that the word ‘vesting’ in S. 85 did not confer absolute

title on the Gram Panchayat. Even after vesting, the

Government, in appropriate cases, was amenable to place

restrictions on the Gram Panchayat on enjoyment of such

waterworks & lands. It is apposite to refer to the discussion at

para 10, wherein the varied meaning of the term ‘vest’ was

considered:

“10. The word ‘vest’ clothes varied colours from the context and situation

in which the word came to be used in a statute or rule. Chamber's MidCentury Dictionary at p. 1230 defines ‘vesting’ in the legal sense “to

settle, secure, or put in fixed right of possession; to endow, to descend,

devolve or to take effect, as a right”. In Black's Law Dictionary, (5th edn.

at p. 1401) the meaning of the word ‘vest’ is given as : “to give an

immediate, fixed right of present or future enjoyment; to accrue to; to be

fixed; to take effect; to clothe with possession; to deliver full possession

of land or of an estate; to give seisin; to enfeoff”. In Stroud's Judicial

Dictionary, (4th edn., Vol. 5 at p. 2938), the word ‘vested’ was defined in

several senses. At p. 2940 in item 12 it is stated thus “as to the interest

acquired by public bodies, created for a particular purpose, in works

such as embankments which are ‘vested’ in them by statute”, see Port of

London Authority v. Canvey Island Commissioners [(1932) 1 Ch 446] in

which it was held that the statutory vesting was to construct the sea

17 1991 Supp (2) SCC 228

Page 32 of 43

wall against inundation or damages etc. and did not acquire fee simple.

Item 4 at p. 2939, the word ‘vest’, in the absence of a context, is usually

taken to mean “vest in interest rather than vest in possession”. In item 8

to ‘vest’, “generally means to give the property in”. Thus the word ‘vest’

bears variable colour taking its content from the context in which it came

to be used.” (Emphasis supplied)

33. In Municipal Corpn. of Greater Bombay v. Hindustan

Petroleum Corpn.,18 it was observed that the term ‘vesting’ is

capable of bearing the meaning of limited vesting, in title as well

as possession, and is referrable to the context and situation

within which it operates. The above would suggest that the

word ‘vest’ has variable meaning and the mere use of the word

‘vest’ in a statute does not confer absolute title over the subject

matter.

34. Further, the term ‘vesting’ is also used in other contexts

such as 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 successor(s).

The term ‘vests’ in S. 109A of the Companies Act 1956 is

therefore required to be interpreted in these logical lines.

18 (2001) 8 SCC 143

Page 33 of 43

35. In the context of the facts of the present case, S. 109A of

the Companies Act (pari materia to S. 72 of the Companies Act,

2013) provides for vesting of shares/debentures of a

share/debenture holder unto his nominee ‘in the event of his

death’. Similarly, Bye-law 9.11.1 under the Depositories Act,

1996 provides for ‘vesting’ of the securities unto the nominee on

the death of the beneficial owner. Applying the law laid down in

the aforenoted decisions of this Court, the use of the word ‘vest’

does not by itself, confer ownership of the shares/securities in

question, to the nominee. The vesting of the shares/securities

in the nominee under the Companies Act, 1956 and the

Depositories Act, 1996 is only for a limited purpose, i.e., to

enable the Company to deal with the securities thereof, in the

immediate aftermath of the shareholder’s death and to avoid

uncertainty as to the holder of the securities, which could

hamper the smooth functioning of the affairs of the company.

Therefore, the contrary argument of the appellants on this

aspect is rejected.

EFFECT OF NON-OBSTANTE CLAUSE

Page 34 of 43

36. In a similar vein, the appellants contend that the ‘nonobstante clause’ in S. 109A of the Companies Act, 1956 confers

overriding effect to the nomination over any other law and

disposition, testamentary or otherwise, and entitles the

nominee absolute rights over the shares/securities. Such a

clause was also found in the Banking Regulation Act, 1949 and

the Government Savings Certificate Act, 1959. However, while

interpreting the provision concerning nomination in those

enactments, this Court in Talwar (supra) rejected the argument

that the nominee would be the absolute owner of the subject

matter, to the exclusion of the legal heirs, because of the non

obstante clause. In addition, in Vishin N. Khanchandani v. Vidya

Lachmandas Khanchandani19, it was held that the non-obstante

clause is to be applied in view of the scheme and object of the

enactment in question. The relevant extract on the ruling is

reproduced herein:

“11. It is contended on behalf of the appellants that the non obstante

clause in Section 6 excludes all other persons, including the legal

heirs of the deceased holder, to claim any right over the sum paid on

account of the National Savings Certificates, to the nominee. There is

no doubt that by the non obstante clause the legislature devises

19 (2000) 6 SCC 724

Page 35 of 43

means which are usually applied to give overriding effect to certain

provisions over some contrary provisions that may be found either in

the same enactment or some other statute. In other words, such a

clause is used to avoid the operation and effect of all contrary

provisions. The phrase is equivalent to showing that the Act shall be

no impediment to the measure intended. To attract the applicability of

the phrase, the whole of the section, the scheme of the Act and the

objects and reasons for which such an enactment is made have to be

kept in mind.”

 (Emphasis supplied)

37. It is settled law that general words and phrases used in a

statute, regardless of their wide ambit, must be interpreted

taking into account the objects of the statute. The clauses &

sections within a statute are not to be read in isolation, but

their textual interpretation is determined by the scheme of the

entire statute.20 Notably, a non-obstante clause is to be

considered on the basis of the context within which it is used,

as has also been observed in R.S. Raghunath v. State of

Karnataka.21 Applying the aforestated rule of interpretation, the

non-obstante clause in S. 109A of the Companies Act, 1956

should also be interpreted keeping in mind the scheme of the

Companies Act, 1956 and the intent of introduction of

nomination facility under S. 109A & S.109B of the Companies

20 Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424

21 (1992) 1 SCC 335

Page 36 of 43

Act, 1956 vide the Companies (Amendment) Act, 1999 wherein

emphasis was laid on building investor confidence and bringing

the company law in tune with policies of liberalisation &

deregulation. With this backdrop, it can be concluded that the

use of the non-obstante clause, serves a singular purpose of

allowing the company to vest the shares upon the nominee to

the exclusion of any other person, for the purpose of discharge

of its liability against diverse claims by the legal heirs of the

deceased shareholder. This arrangement is until the legal heirs

have settled the affairs of the testator and are ready to register

the transmission of shares, by due process of succession law.

38. As per Bye-law 9.11.7 of the Depositories Act, 1996, the

non-obstante clause confers overriding effect to the nomination

over any other disposition/nomination ‘for the purposes of

dealing with the securities lying to the credit of deceased

nominating person(s) in any manner’. Therefore, the purpose of

invoking such a non-obstante clause is clearly delineated and

limited to the extent of enabling the depository to deal with the

securities, in the immediate aftermath of the securities holder’s

Page 37 of 43

death. The upshot of the above discussion is that the nonobstante clause in both S. 109A(3) of the Companies Act, 1956 &

Bye-law 9.11.7 of the Depositories Act, 1996 cannot be held to

exclude the legal heirs from their rightful claim over the

securities, against the nominee.

NO THIRD LINE OF SUCCESSION CONTEMPLATED UNDER COMPANIES

ACT

39. The appellants also contend that a nomination validly

made under S. 109A of the Companies Act, 1956 and Bye-law

9.11 of the Depositories Act, 1996 constitutes a ‘statutory

testament’ that overrides testamentary/intestate succession. It

is worth noting that the argument of nomination as a ‘statutory

testament’ in respect of instruments such as life insurance

policies, government savings certificates, provident fund etc.

were considered and emphatically rejected by this Court in

multiple rulings.

40. In Sarbati Devi (supra) this Court held that nomination

under S. 39 of the Life Insurance Act, 1938 does not contemplate

a third line of succession styled as a ‘statutory testament’ and

Page 38 of 43

any amount paid to a nominee on the policy holder’s death

forms a part of the estate of the deceased policy holder and

devolves upon his/her heirs, as per testamentary or intestate

succession. Further, in Ram Chander Talwar (supra), while

discussing the rights of a nominee of a deceased depositor (S.

45-ZA(2) Banking Regulation Act, 1949), this court concluded

that the right to receive the money lying in the depositor’s

account was to be conferred on the nominee but the nominee

would not become the owner of such deposits. The said deposit

is a part of the deceased depositor’s estate and is subject to the

laws of succession, that governs the depositor.

41. The appellants’ have contended that nominations under

S. 109A of the Companies Act, 1956 & Bye-law 9.11 of the

Depositories Act, 1996 suggest the intention of the shareholder,

to bequeath the shares/securities absolutely to the nominee, to

the exclusion of any other persons (including legal

representatives) and constitutes a ‘statutory testament’.

However, aforesaid argument is not acceptable for the following

reasons:

Page 39 of 43

a. The Companies Act, 1956 does not contemplate a

‘statutory testament’ that stands over and above the

laws of succession,

b. The Companies Act, 1956 as iterated above is concerned

with regulating the affairs of corporates and is not

concerned with laws of succession.

c. The ‘statutory testament’ by way of nomination is not

subject to the same rigours as is applicable to the

formation & validity of a will under the succession laws,

for instance, S. 63 of the Indian Succession Act, wherein

the rules for execution of a Will are laid out.

42. Therefore, the argument by the appellants of nomination

as a ‘statutory testament’ cannot be countenanced simply

because the Companies Act, 1956 does not deal with succession

nor does it override the laws of succession. It is beyond the

scope of the company’s affairs to facilitate succession planning

of the shareholder. In case of a will, it is upon the administrator

or executor under the Indian Succession Act, 1925, or in case of

intestate succession, the laws of succession to determine the

line of succession.

CONCLUSION

Page 40 of 43

43. Consistent interpretation is given by courts on the

question of nomination, i.e., upon the holder’s death, the

nominee would not get an absolute title to the subject matter of

nomination, and those would apply to the Companies Act, 1956

(pari materia provisions in Companies Act, 2013) and the

Depositories Act, 1996 as well.

44. An individual dealing with estate planning or succession

laws understands nomination to take effect in a particular

manner and expects the implication to be no different for

devolution of securities per se. Therefore, an interpretation

otherwise would inevitably lead to confusion and possibly

complexities, in the succession process, something that ought

to be eschewed. At this stage, it would be prudent to note the

significance of a settled principle of law. In Shanker Raju v.

Union of India, the Court held:22

“10. It is a settled principle of law that a judgment, which has held the field

for a long time, should not be unsettled. The doctrine of stare decisis is

expressed in the maxim stare decisis et non quieta movere, which means

“to stand by decisions and not to disturb what is settled”. Lord Coke aptly

described this in his classic English version as “those things which have

been so often adjudged ought to rest in peace”. The underlying logic of this

doctrine is to maintain consistency and avoid uncertainty. The guiding

22 (2011) 2 SCC 132

Page 41 of 43

philosophy is that a view which has held the field for a long time should

not be disturbed only because another view is possible.”

45. The vesting of securities in favour of the nominee

contemplated under S. 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.

46. Additionally, there is a complex layer of commercial

considerations that are to be taken into account while dealing

with the issue of nomination pertaining to companies or until

legal heirs are able to sufficiently establish their right of

Page 42 of 43

succession to the company. Therefore, offering a discharge to

the entity once the nominee is in picture is quite distinct from

granting ownership of securities to nominees instead of the

legal heirs. Nomination process therefore does not override the

succession laws. Simply said, there is no third mode of

succession that the scheme of the Companies Act, 1956 (pari

materia provisions in Companies Act, 2013) and Depositories Act,

1996 aims or intends to provide.

47. Upon a careful perusal of the provisions within the

Companies Act, it is clear that it does not deal with the law of

succession. Therefore, a departure from this settled position of

law is not at all warranted. The impugned decision takes the

correct view. The appeal is accordingly dismissed without any

order on cost.

...……………………J.

 [HRISHIKESH ROY]

………….…………..J.

[PANKAJ MITHAL]

NEW DELHI

DECEMBER 14, 2023

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