Whether the nominee of shares has absolute rights or his rights are subject to laws of succession?


Whether the nominee of shares has absolute rights or his rights are subject to laws of succession?

Here is an interesting case wherein the nominee rights vis a vis rights of legal heir was considered by the Supreme Court.

The case detail is as under:

Shakti Yazdani & Anr Vs Jayanand Jayant Salgaonkar & Ors[Supreme court] Date:December 14,2023

Let us have a short overview of the case:

The Supreme Court of India in this case was considering the rights of a nominee of shares which was challenged by other legal heirs as according to them, the shares should be distributed as per the Indian Succession Act. While the nominee of shares argued that in view of non-obstacle clauses in Section 109A and 109B of the Companies Act,1956 (now Section 72 of the companies Act 2013), he was the sole owner of these shares. However, the other legal heirs argued that Companies Act cannot determine and/or override the law of succession. It was also argued that the word “vest” and the non-obstante clause in Section 109A/109B and/or Section 72 was only to protect the company from being dragged into a protracted litigation. Moreover the source of power in so far as enactment under the Companies Act [Entry 44 of List 1] and/or Indian Succession Act[Entry 5 of List 3] was concerned ,was different and thus the Companies Act could not have trampled upon the power under a different entry.

The Ld judges analysed the law in detail and arrived at a conclusion that the Companies Act cannot be said to have dealt with the law of succession in any manner. Moreover, the meaning of the word “vest” and interpretation of the Non obstante clause was thread bare dealt with and finally it was held that an individual while dealing with the estate planning understands the succession in a particular manner and it will not be appropriate to interpret the law which will lead to confusion and held that the shares acquired by way of nomination are subject to laws of inheritance.

Thus, it was held that a nominee of shares would only be a trustee and cannot claim absolute ownership right in view of this decision.

It is though important to note that the decision of the Supreme court in the case of Aruna Oswal Vs Pankaj Oswal (2020) 8 SCC 79(SC) was not brought to the notice of the Ld Judges which had held that the nominee under the Companies Act acquired absolute rights over the shares, though the said decision was in relation to oppression and mismanagement and not on this issue.

The copy of the present judgment is as under:

Nominee Rights