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April 22, 2010 Nominee – Whether Owner or Trustee : Bombay High Court decides In its recent decision in the matter of Harsha Nitin Kokate Vs. The Saraswat Co-op. Bank Limited & Others (“Judgment”)1 the Bombay High Court (“High Court”) has held that a nominee shall be eligible to acquire the shares of a deceased shareholder instead of the legal heirs of such shareholder as evidently clear under Section 109A (Nomination of shares) of the Companies Act, 1956 (“Companies Act”). Brief facts of the case The deceased Mr. Nitin Kokate had executed a nomination in respect of certain shares held by him in dematerialized form. The nomination was made in the prescribed form, set out by the Saraswat Co-op. Bank Limited (“Defendant 1”), in favour of his nephew. The said nomination was executed prior to his death and well after his marriage with Mrs. Harsha Nitin Kokate (“Plaintiff”). The Plaintiff claims an interest in the said shares of the deceased being his heir and legal representative. Whereas the nephew (“Defendant 2”) of the deceased claimed that as the nomination was executed as prescribed manner and as the same has been registered with the Defendant 1, Defendant 2 assumes the right, title and interest in the shares pursuant to the nomination executed in his favour and under Section 109A of the Companies Act and Section 9.11 of the Depositories Act, 1996. Seeking to ascertain as to who would be entitled to own such shares of the deceased person, Plaintiff initiated the suit against the Defendants viz. nominee and the Defendant 1 (Depository Participant), where Notice of Motion came up for hearing before the High Court. Plaintiff’s arguments Counsel appearing for the Plaintiff contended that the nomination only makes a nominee a trustee for the shares and the nominee holds the shares in trust for the estate of the deceased. In reference to the present case, Plaintiff argued that as the deceased died intestate, hence, the Plaintiff as the widow would be entitled to the shares to the exclusion of the nominee. Plaintiff placed reliance on the provisions of Section 39 of the Insurance Act in respect to an Life Insurance Policy and the Section 30 of The Maharashtra Co-operative Societies Act in respect of shares in a housing society. Insurance Act Section 39 of the Insurance Act deals with nomination by a policy holder whereby the nomination entails payment by the insurance company to the nominee to obtain a complete discharge. Upon payment of the amount under the policy to be nominee, the nominee would hold it in trust or estate as there is no legislative provision under the Insurance Act providing the nominee with any other right. The Maharashtra Co-operative Societies Act (“MCS Act”) Similar to the provisions of the Insurance Act, Section 30 of the MCS Act refers to nomination by a member of a society. In event of the death of such member, the society shall transfer the shares of the deceased member to a nominee which would effectively discharge the society against any person making a demand. Such a transfer cannot result in vesting of the flat in such nominee. Hence, the nominee is merely a trustee for the estate of the deceased. The society is not concerned with the dispute amongst the heirs of the deceased member. Defendant’s arguments As the dispute in the present case is related to ownership of shares held by the deceased, the Defendant relied directly on the Section 109A of the Companies Act. Section 109A (1) sets out the rights of the holder of shares to nominate, in the prescribed manner, a particular person to whom his shares shall vest, in the event of his death. Section 109A (3) of the Companies Act is as follows: “Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, the company, 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, on the death of the shareholder or holder of debentures of the company or, as the case may be, on the death of the joint holders become entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint holders, in relation to such shares in, or debentures of the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.” Thus, Section 109A provides that if the nomination is made in the prescribed manner, then in the event of death of the holder, the nominee would become entitled to all the rights in the shares of the company to the exclusion of all other persons. Judgment Hon’ble Judge Smt. Roshan Dalvi interpreted and examined the main premise of nomination under Section 109A of the Companies Act. They are as follows: 1. Nomination has to be made in the lifetime of the holder; 2. The said nomination must be as per procedure prescribed by law; 3. If the procedure is followed, the nominee would be entitled to all the rights in the shares; and 4. Such right in the shares shall be exclusive in favour of the nominee and shall exclude all other persons. Therefore, such nominee would be made the owner thereof and all the rights incidental to ownership of shares would follow. This would include the right to transfer, pledge or hold the shares. Hon’ble Judge held that Section 109A of the Companies Act is completely different from the Section 39 of the Insurance Act and Section 30 of the MCS Act. The court held that Section 39 of the Insurance Act required a nomination merely for the payment of the amount under the policy without confirming any ownership rights in the nominee. Similarly, Section 30 of the MCS Act allows the society to transfer the shares of a member which would be valid against any demand made by any other 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 an Insurance Policy of the membership rights in the society upon such a nominee. Thus, it was held that as the nomination of the shares, having been properly executed, in favour of the Defendant 2, the Plaintiff would not be entitled to claim any ownership or any other right thereof. Analysis This present Judgment highlights a clear distinction between nominations made under the Companies Act vis-à-vis the Insurance Act and the MCS Act. While under the Companies Act the effect of the nominations imparts ownership as against giving mere trusteeship under Insurance and MCS. The Hon’ble Judge also places emphasis on the correctness in making such nomination and the benefit thereof in terms of transmitting the ownership of the shares to the nominee.
_________________ 1 Notice of motion number 2351 of 2008 in suit number 1972 of 2008
- Sambhav Ranka & Chittaranjan Datar
You may direct your comments to Ramya Krishnan-AniL +91 900465 0363 |
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