Wednesday, May 12, 2010

Nomination vs. Succession on Shares

In his column in the Business Standard, guest contributor Somasekhar Sundaresan analyzes a recent judgment of the Bombay High Court that establishes the superiority of the nomination process over succession (whether testamentary or otherwise) in respect of shares of a company. He observes:

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.
He then goes on to discuss some variations (that arguably lead to complexities) in nomination system under the Depositories Act and regulations and byelaws issued thereunder. He concludes:

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.
Although there continue to be some lingering complications as set out above, the judgment is important for emphatically stating that the nomination process would override any title or interest of legal heirs.

For a further discussion and links to the relevant judgments, please see Mihir’s post in Law and Legal Developments and Preeti Sukhtanker’s post in Perspectives on Law.


Sheshashayee.N.S said...

It appears the Hon’ble Bombay High Court’s opinion is similar to Delhi High Court’s opinion laid down in 2008.

Dayagen Private Limited v Rajendra Dorian Punj and Another, 2008 INDLAW DEL 1105
“40. The submission of Mr. Shakdher based on Sarbati Devi (supra), that a nominee merely holds the estate of the deceased for the benefit of the legal heirs of the deceased, and that the legacy does not vest in the nominee does not appear to be correct, in view of the express language of Section 109A of the Act. From a plain reading of Section 109A, it is abundantly clear that the intendment of the Legislature is to override the general law of succession and to carve out an exception in relation to nomination made in respect of shares and debentures.

The section expressly vests the nominee, who is nominated in the prescribed form, upon the death of the share/debenture holder with full and exclusive ownership rights in respect of the shares/debentures of which he is the nominee.

The prescribed manner, to which repeated reference is made in Sections 109A, is to be found in Form No.2B”

Bhagavandas said...

I wish that the same should be taken as a precedence for Bank Deposit Nomonations also.
Bank Nomination forms should be made explicit with options for "Nominee to Receive Only without ownership rights" or "Nominee to Receive with ownership rights".
There is urgent need to make the succession act more explicit to aviod harassment my legal heirs who will be waiting for the death of the depositor and susequently make claims and harass the nominees for whom it may be really meant for by the depositor. Most bank depositors take 'nomonation' on the face value or common parlance and are not aware of the intricacies/implicatios of the Succession act.