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
Page 43 of 43
