Section 109A(3) Of the Companies Act 1956 was inserted by the Companies (Amendment) Act, 1999 w.r.e.f. 31-10-1998. As per this section, any shareholder or debenture holder can nominate a person to receive their shares or debentures in the event of their death but the nomination must be made in a prescribed manner. In cases where the shares or debentures are held jointly by more than one person, they can collectively nominate a person to receive all rights to the shares or debentures if all joint holders die. This nomination must also be made in the prescribed manner. Clause 3 of this section is more like a Supremacy of Nomination clause. It states that the nomination supersedes any other law or testamentary disposition regarding the shares or debentures and Upon the death of the shareholder or all joint holders, the nominee gains all rights to the shares or debentures, excluding all other persons unless the nomination is varied or canceled as prescribed. In case the nominee is a minor, the shareholder or debenture holder can appoint another person to be entitled to the shares or debentures until the nominee reaches adulthood. However, this appointment must also follow the prescribed manner.
Clause 3 provides Supremacy Over Other Laws and Wills. This clause mandates that the nomination made according to the prescribed manner takes precedence over any other laws or dispositions (including wills and other testamentary documents). It confers rights on the Nominee by granting the right to receive the shares or debentures of the company upon the death of the shareholder or the death of all joint holders. After the death of the shareholder or all joint holders, the nominee automatically becomes entitled to all the rights in those shares or debentures. This means no one else can claim those shares or debentures, regardless of what other legal documents (like a will) might say. This exclusive right of the nominee can only be changed if the nomination is varied or canceled.
However, all this is subject to one requirement- nomination or cancellation has to be properly made.
A similar issue came to the Supreme Court in Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors. The facts that have risen to the instant dispute were, that oneJayant Shivram Salgaonkar executed a will on 27.06.2011, making provisions for the devolution of his estates upon successors. Apart from properties mentioned in the will, he had fixed deposits (FDs) worth Rs. 4,14,73,994/- where respondents 2, 4, and appellant 2 were nominees.
He also had mutual fund investments (MFs) worth Rs. 3,79,03,207/- where appellants and a trust (respondent 9) were nominees. After Salgaonkar's death on 20.08.2013, respondent 1 filed a suit seeking the administration of properties under court supervision. Appellants claimed they were sole nominees to MFs and FDs, and nomination vested absolute ownership in them under Section 109A of the Companies Act, 1956.
The issue before the court was whether the nominee under Section 109A of the Companies Act, 1956, becomes the absolute owner of the shares/securities, superseding testamentary or intestate succession laws.
Appellants argued that Section 109A uses terms like 'vest' and 'to the exclusion of others,' along with a non-obstante clause, all of which intends to grant absolute ownership to nominees. They further argued that nomination under the Companies Act is different from other legislations and cannot be interpreted based on judgments pertaining to those laws. As far as the non-obstante clause is concerned, according to the appellants, it overrides any other disposition, including testamentary, and hence confers absolute rights on the nominee. Consequently, nomination under Section 109A constitutes a 'statutory testament' overriding laws of succession.
Respondents contended that a plethora of judicial pronouncements hold that nomination does not make the nominee an absolute owner, excluding legal heirs. With regard to the Companies Act, as per the respondents, it does not deal with succession laws and cannot be interpreted to create a third mode of succession. The non-obstante clause is limited to enabling the company to deal with securities after the shareholder's death, not granting ownership to the nominee to the exclusion of the successors. Consequently, the nomination cannot be equated with a 'statutory testament' or a will, which requires rigorous formalities under succession laws.
After considering the rival submission of the parries, the court concluded in favor of successors. While dismissing the appeal, the court held that the nominee under Section 109A of the Companies Act, 1956, does not become the absolute owner of the shares/securities, overriding the laws of succession.
Even if the widest possible interpretation of the provision of nomination within the Companies Act, of 1956 is taken, it will not be possible to hold that the same deals with the matter of succession in any manner. In absence of any material evidence, it cannot be interpreted that the intent of the legislature behind introducing a method of nomination through the Companies (Amendment) Act, 1999 was to confer absolute title of ownership of property/shares, on the said nominee.
The provision of nomination begins with a non-obstante clause and/or is armed with the term ‘vest’ in the Banking Regulation Act, 1949, the Government Savings Certificate Act, 1959, and/or the Employees Provident Fund Act, 1952 wherein multiple courts have rejected the argument that the nominee would become the absolute owner to the exclusion of the legal heirs. If this court holds otherwise it would exceed the scope and extent of S. 109A of the Companies Act, 1956.
The court placed reliance on judgments like Sarbati Devi v. Usha Devi, Vishin N. Khanchandani v. Vidya Khanchandani, and Ram Chander Talwar v. Devendra Kumar Talwar, to conclude that the nomination does not exclude legal heirs or create a third mode of succession.
Consequently, the Court rejected the argument that nomination under Section 109A constitutes a 'statutory testament' which overrides laws of succession and held that the said deposit is a part of the deceased depositor’s estate and is subject to the
laws of succession, that govern the depositor. It further added that, unlike a will, the nomination is not subject to the rigors and formalities under succession laws for making and validating a will. Therefore, the argument by the appellants of nomination as a ‘statutory testament’ cannot be countenanced because the Companies Act, 1956 does not deal with succession nor does it override the laws of succession. It is beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. In the case of a will, it is upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession.