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'Nominee of shares superior to legal heirs'

Somasekhar Sundaresan  |  New Delhi 

The law on nomination of shares held in companies has taken a new meaning with perhaps the first interpretation of the provisions governing nomination in the Companies Act, 1956 by the Bombay high court.

Interpreting Section 109A of the Companies Act, the court has ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed.  In other words, what one writes in one’s will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the will. 

So far, the law on nomination has consistently been understood to be the law laid down by the Supreme Court in the case of insurance proceeds – that although the insurance company would pay the amounts due on death to the nominee, such amount could be claimed by the heirs to whom property of the deceased has been bequeathed. 

The Bombay high court has differentiated from the Supreme Court’s opinion citing a difference in the language of applicable law. Section 109A of the Companies Act provides that upon the death of a shareholder, the shares would “vest” in the nominee. The provision adds that the nominee shall become entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. Therefore, regardless of what is stated in privately executed wills, a company would have to only deal with the nominee as a person now exercising the rights of the deceased shareholder. 

However, that ought not to take away the right of the heirs under a will or the natural heirs in the absence of a will, from claiming the shares forming part of the property of the deceased. The court has ruled otherwise. In a sweeping interpretation, the court has ruled that “…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, depositories have made bye-laws under the Depositories Act, 1996, which are a substantive reproduction of Section 109A of the Companies Act.  The court took note of the bye-laws, wrongly noting them as sections of the Depositories Act, 1996 (an Act of Parliament) rather than as subordinate legislation, and further emphasised its conclusion that the nominee’s rights over the securities in the demat account would override the rights of heirs to whom the property is bequeathed.

Interestingly, the nomination made under the Companies Act is a nomination made under an Act of Parliament and is filed with the company. The nomination made under the bye-laws of the depository is a different nomination and is filed with the depository participant. There could in fact exist, a variation between the two nominations – for example, a shareholder could nominate his son to get his holdings in Tata Steel, and his daughter to his holding in Tata Motors. 

Therefore, the nomination facility of a depository is purely an administrative mechanism.  So long as the depository moves the shares to the nominee, he would not have to bother himself with the contents of a will or of the records filed with every company whose securities are dematerialised. Such a framework ought not to result in the right of heirs to claim the securities forming part of the property being taken away, or for that matter, the rights arising out of a nomination made pursuant to an Act of Parliament.

“Section 9.11 of the Depositories Act 1996 (note: the reference ought to be to Bye-law 9.11) makes the nominee’s position superior to even a testamentary disposition,” the court has said. “The non-obstante Clause in Section 9.11.7 gives the nomination the effect of the Testamentary Disposition itself.” The Companies Act too has identical language. 

The court has added: “Section 9.11.7 further shows that the last of the nominations would prevail…. shows the revocable nature of the nomination much like a Testamentary Disposition….. later nomination would be relied upon ….. for conferring of all the rights in the shares to such last nominee.” Every nomination under any law can be changed from time to time – be it a nomination of a bank deposit, bank account, shares in a co-operative society, insurance contract or securities of a company. 

Differentiating the Supreme Court’s opinion on nomination of an insurance contract, the court has stated: “….completely different from... the Insurance Act... made merely to give a valid discharge... without vesting the ownership rights… upon such nominee. The express legislature intent under Section 109A of the Companies Act and Section 9.11 of the Depositories Act is clear.” Such differentiation is incorrect. A nominee under an insurance contract can deal with the money paid to him by the insurance company immediately on receipt. Similarly, a nominee of securities would have rights over the securities. All such enjoyment ought to be subject to the ability of the heirs to claim the property.

Shareholders will now have to be alert to changing their nominations every time they change their will. In any case, they would be unable to make different nominations for different securities held in the same demat account.The judgement presents an immediate and urgent agenda item for investor education on the law governing succession and nomination. 

(The author is a partner of JSA, Advocates & Solicitors.  The views expressed herein are his own.)  

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First Published: Mon, May 10 2010. 00:09 IST