Nomination of shares u/s 109A of the Companies Act: Contravention to the law of inheritance?

- Bhaskar jyoti Mukherjee.

“A son can bear with equanimity the loss of his father, but the loss of his inheritance may drive him to despair.”

-Niccolo Machiavelli

Con t rove r s y

Who can rightfully claim the shares of a deceased share-

holder?

Harsha Nitin Kokate

v.

The Saraswat Co-op. Bank Limited & Ors.

[2010] 159 CompCas 221 (Bom);

(2010) 3 CompLJ508 (Bom)

Deceased Shareholder

Legal Heirs

Nominees

Legal Heirs

• Islamic Law of inheritance

When a Muslim dies, after payment of his funeral expenses, debts and legacies, his property is divided into the following class of persons:

The Principal Classes:

1. Sharers or Quranic heirs

2. Residuaries

3. Distant kindred

• Hindu Law of inheritance

Section 10 of the Hindu Succession Act, 1956 lays down 4 rules, in accordance to which the property of an intestate shall be divided among the heirs in class I of the schedule to the Act.

Nominee

• According to the New York times Dictionary of Money and Investing, a nominee is “a person or firm to whom securities or other properties are transferred to facilitate transactions, while leaving the customer as the actual owner.”

• The legal position of a nominee under most of the statutes has always been accepted to be that of a trustee.

• Smt. Sarbati Devi v. Smt. Usha Devi AIR 1984 SC 346

Section 30 of the Maharashtra Co-operatives Act

• nominee is a mere trustee with whom the Society can initially or prima facie deal.

• the nominee cannot exclude the heirs.

Nominee (Life Insurance)

• Section 39 of the Insurance Act deals with nomination by a policy holder. According to LIC website:

“…The Nominee does not get any other benefit except to receive the policy moneys on the

death of the Life Assured…”

• Nominee entitled to the policy amount only in event of death of the policy holder.

• Nomination ensures easy settlement of claims.

• The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money.

Nominee (Banking)

• Section 45ZA of the Banking Regulation Act, 1949 and the Banking Companies (Nomination) Rules 1985 speak about nomination in Saving/Current/FD/RD account in Banks and also in safe-deposit lockers and safe custody articles.

• Ram Chander Talwar v. Devender Kumar Talwar (2010)159CompCas646 (SC)

“Section 45ZA(2)… by no stretch of imagination make the nominee the owner of the money lying in the account.”

It needs to be remembered that the Banking Regulation Act is enacted to consolidate and amend the law relating to banking. It is in no way concerned with the question of succession.

Nomination as u/s 109A of the Companies Act, 1956.

• Inserted by the Companies (Amendment) Act, 1999.

• The absence of any such provision in the Act created hardship to the survivors or successors of deceased members or debenture-holders. They had to obtain probate, letters of administration of succession certificate which is a time consuming and expensive procedure.

• Section 109A of the Companies Act, 1956.

• Section 9.11 of the Depositories Act 1996. (TRANSMISSION OF SECURITIES IN THE CASE OF NOMINATION)

Harsha Nitin Kokate v. The Saraswat Co-op. Bank Limited & Ors.

• The position of a nominee under Section 109A of the Companies Act, 1956 is not merely that of a trustee for the estate of the deceased.

• On the death of the share holder, the nominee would become entitled to all rights in the shares to the exclusion of all other persons.

• Sarabati Devi v. Usha Devi restricted to insurance law only.

• Under the provisions of the Companies Act and the Depositories Act (Acts which govern the transfer of shares) the role of a nominee was different.

Section109A of the Companies Act vis-à-vis

Section 45ZA of the Banking Regulation Act.• (3) Notwithstanding anything contained in any other law for the time

being in force or in any disposition, whether testamentary or otherwise… where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in, or debentures of, the company, the nominee shall… become entitled to all the rights in the shares or debentures of the company…

• (2) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise… where a nomination made in the prescribed manner purports to confer on any person the right to receive the amount of deposit from the banking company, the nominee shall… become entitled to all the rights of the sole depositor … in relation to such deposit…

Nomination as u/s 109A of the Companies Act.

• Vest: 1. To confer ownership of (property) upon a person.

2. To invest (a person) with the full title to property.

3. To give (a person) an immediate, fixed right of present or future enjoyment.

• Vested right: A right that so completely and definitely belongs to a person that it cannot be impaired or taken away without the person's consent.

• Vested interest: An interest the right to the enjoyment of which, either present or future, is not subject to the happening of a condition precedent.

• Vested estate: An estate with a present right of enjoyment or a present fixed right of future enjoyment.

• VESTED LEGACY: A legacy the interest in which is so fixed as to be transmissible to the personal representative of the legatee.

• The Fruit & Vegetable Merchants Union v. The Delhi Improvement Trust AIR 1957 SC 344

“It would thus appear that the word "vest" has not got a fixed connotation... It may vest in title, or it may vest in possession, or it may vest in a limited sense, as indicated in the context in which it may have been used in a particular piece of legislation.”• Dr. M. Ismail Faruqui v. Union of India AIR 1995 SC 605

“vesting of the disputed land was limited to holding it by the Civil Government as Statutory Receiver”

• Municipal Corporation of Greater Bombay v. Hindustan Petroleum Corporation (2001) 8 SCC 143

“the vesting of watercourse in the Municipal Corporation was held not to be except for entrustment of the duty of the Municipality to maintain them in the manner provided under Section 220A of the Bombay Municipal Corporation Act, 1888.”

Judicial Pronouncements

Companies Bill, 2011

• Clause 72: Power to nominate-Exact reproduction of section 109A of Companies Act.- the words “Shares and debentures” replaced by “securities”

Section 109A under the light of the Constitution of India.

• Article 14 - The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

• Test of reasonable classification

-The classification must be found on an ‘intelligible differentia’.

-The differentia must have a ‘rational relation’ to the object sought to be achieved by the Act.

Section 109A under the light of the Constitution of India.

No intelligibl

e differenti

a in differentiating the

legal heirs

from the nominee

s.

Here unequal

are treated

as equal in the like

circumstances.

No “rational relation”

in the differentia to the object sought to be

achieved as

nominees will then

override the

rights of legal heirs.

ConclusionThank You!