NOMINEE v/s LEGAL HEIRS

The Hon'ble Bombay High Court in its very recent decision, Harsha Nitin Kokate Vs. The Saraswat Co-op. Bank Limited & Others, held that position of a nominee under section 109A of the Companies Act is not merely that of a trustee for the estate of the deceased, and it further held that, " 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." This means that, the nominee will be made the beneficial  owner thereof and all the rights incidental to ownership of shares would follow i.e. the right to transfer, pledge or hold the shares.

The court based its decision on the express provisions of the section which provide as follows:

­S. 109A. Nomination of shares – (1) Every holder of shares in, or holder of debentures of a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in or debentures of, the company shall vest in the event of his death.
(2) ...........
(3) 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.
(4).........



This Judgment has been criticized by some legal authors ( a view expressed by Mr. Somasekhar Sundaresan in Business Standard may be accessed here) because until now the settled law, as laid down by the Supreme Court in Sarbati Devi v. Usha Devi in respect of nomination under Section 39 of the Insurance Act is that a nominee is merely a trustee for the estate of the deceased and nomination does not operate as succession. This principle has been followed in areas other than insurance as well.

For example
 in Ramdas Shivram Sattur v. Rameshchandra Popatlal Shah, the Bombay High Court, relying on Sarbati Devi, held that "the purpose of nomination under Section 30 of the Maharashtra Cooperative Societies Act, 1960 is essentially to provide for the discharge of the societies’ obligation and that a nomination does not lay down any special rule of succession of properties of a deceased member overriding the general rules of inheritance prescribed by the personal law of the member of a cooperative society."

Similarly, in Arnab Kumar Sarkar v. Smt. Reba Mukherjee and Ors., the Calcutta High Court in respect of nomination u.s 45Z of the Banking Regulation Act held, “just as section 39 of the Insurance Act, 1938 is for discharge of insurer's obligations, the purpose of Section 45Z of the Banking Regulation Act, 1949 is to provide for the discharge of the Bank’s obligation.”

Distinguishing two important judgments ( Sarbati Devi v. Usha Devi, AIR 1984 SC 346 and Ramdas Shivram Sattur v. Rameshchandra Popatlal Shah, 2009(3) BomCR 705) , the Hon'ble High Court in  Harsha Nitin Kokate Vs. The Saraswat Co-op. Bank Limited & Others,  held as follows

"A reading of Section 109A of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed,, as has been done in this case. These Sections are completely different from Section 39 of the Insurance Act which require a nomination merely for the payment of the amount under the Life Insurance Policy without confirming any ownership rights in the nominee or under Section 30 of the Maharashtra Cooperative Societies Act which allows the Society to transfer the shares of the 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 Cooperative Society without vesting the ownership rights in the Insurance Policy or the membership ights in the Society upon such nominee..."

In my opinion, though the judgment of the Bombay High Court in Harsha Nitin Kokate v. The Saraswat Co-op. Bank Limited & Others, has been crticized for departing from a settle position in law,  it has correctly restricted the application of Sarbati Devi v. Usha Devi and other similar judgments by distinguishing them on the wordings of the respective statutes and given due regard to the express provisions of Section 109A of the Companies Act.

I will disucss in greater depth the dispute on the legal status of a nominee in subsequent posts.