CASE COMMENT HARSHA NITIN KOKATE v THE SARSWAT
The Bombay High Court in its recent decision has held that a nominee shall be entitled to the shares of a deceased shareholder instead his legal heirs. The judgment has created a lot of controversy because it has departed from the settled law of nomination in India.
Narration of Facts :-
The deceased Nitin Kokate had got married to Harsha Nitin Kokate (“plaintiff") in December 2004. The deceased had executed a nomination of shares held by him in demat account with The Saraswat Co-op Bank Ltd. (“defendant no.1") in favour of his nephew (“defendant no.3"). The nomination is executed well prior to death of deceased in 2007. The nomination has been executed in as per procedure prescribed by defendant no.1.
The plaintiff claims an interest in the disputed shares of deceased being legal heir of the deceased. The defendant no.3 claimed ownership in the shares as the nomination was executed as prescribed by defendant no. 1.
DEFINING OF ISSUES
What is the purpose of nomination under various Indian statutes and what is the legal position of nominee?
What is the meaning of word vest used in section 109A of Companies act, 1956 in instant case?
Will a nomination executed under Depositary act would override principle of law of succession?
Who is entitled to ownership of disputed share -nominee or legal heir?
Statement of arguments:
Plaintiff contended that the nomination only makes a nominee a trustee for the In this case, plaintiff argued that as the deceased died intestate. Therefore, the plaintiff being the widow would be entitled to the shares to the exclusion of the nominee. Plaintiff supported his arguments by following provisions:
Insurance Act, 1938:-
Section 39 of the Insurance Act deals with nomination by a policy holder wherein it is given that, insured nominates a person who will receive policy amount after insured’s death. Upon the payment of the amount under the policy to be nominee, the nominee would hold it in trust.
The Maharashtra Co-operative Societies Act, 1960 (“MCS Act"):-
Section 30 of the MCS Act refers to nomination by a member of a society. In the 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 and he will act as trustee.
The defendant relies on the Section 109A of the Companies Act, 1956 which reads as follows:
“…….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 ……become entitled to all the rights in the shares or debentures of the company ……to the exclusion of all other person….."
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 get all rights in the shares of the company to the exclusion of all other persons.
Summary of court decision:
The Court held that a nomination under Section 109A of Companies Act does not make a nominee trustee but vests the property in the shares in the nominee, in case of death of shareholder. Court 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 and Section 30 of the MCS Act required a nomination merely for the payment of the amount under the policy without conferring any ownership rights in the nominee. 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 policy amount or society in nominee
Further it was held that, Section 9.11 of Depositories Act, 1996 makes nominee’s position superior to even a testamentary disposition and Section 9.11.7 gives the nomination the effect of testamentary disposition itself and thus it will prevail over nomination under any other law.
Thus, it was held that nomination of the shares was properly executed in favour of the Defendant 3, the Plaintiff would not be entitled to claim any ownership and subsequently the notice of motion was dismissed.
So far, the law on nomination in India has been consistent. The Supreme Court in various cases has laid down that although the insurance company would pay the amounts due on insured’s death to the nominee, only the legal heirs of the deceased could claim the property.
Now the court said that the rights of a nominee to shares of a company would override the rights of legal heirs of deceased. The law laid down by the Court is flawed because of the following reasons:
Purpose of nomination misunderstood:-
Insurance companies have facility of nomination whereby a policyholder nominates a person who shall receive the proceeds of the policy from the insurance company after the death of the person. The liability of the insurance company is discharged after handing over the policy amount to the nominee who shall hand over it to the heirs.
On death of insured, , a trustworthy person is nominated to get the money out of company and hand over the money to legal heirs. Otherwise, if a person dies and hasn’t nominated anyone, his legal heirs will have to go through the process of submitting various certificates like death certificates, proof of relation etc., and the whole process is really cumbersome. So, if a nominee exists, such trouble is avoided. The company thus discharges its liability and then, it is between nominee and legal heirs.
In Sarbati Devi v. Usha Devi  , the Apex court held that a nominee cannot receive the policy does not become owner of policy amount because;
1) Nothing in Section 39 indicates that it will operate as a third kind of succession
2) The section provides that “the money shall be payable to the nominee" and not that it shall belong to the nominee.
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."
From the abovementioned Court decisions, it is made clear that the policy amount can be received by the nominee, but the amount can be claimed by the heirs of the deceased in as per law of succession. In the instant case, policy amount should be distributed according to Hindu Succession Act, 1956.
The word “vest" wrongly interpreted:-
Various cases have come before the Court regarding interpretation of word ‘vest’ used in various laws. Due to the vague nature of the said word, the most difficult question before the courts is to interpret it in terms of ownership or possession.
Lord Cranworth in Richardson v. Robertson observed:
"...the word 'vest' is a word, at least, of ambiguous import. Prima facie 'vesting' in possession is the more natural meaning. …….it cannot be disputed that the word 'vesting' may mean, and often does mean, that which is its primary etymological signification, namely, vesting in possession."
The Supreme Court in the case of M. Ismail Faruqui (Dr) v. Union of India  clearly observed that:-
"It is well-settled that the meaning of 'vest' takes colour from the context in which it is used and it is not necessarily the same in every provision or in every context."
Thus, summary of the abovementioned Supreme Court decisions is that the word "vest" is of variable import; it could mean vesting in the plenary sense - vesting of all rights, title and interest; it could also mean vesting in possession only or vesting in some limited sense. "Vesting" does not always imply ownership. The meaning of 'vest' derives its interpretation from the context in which it is used.
In the instant case, Court has completely ignored the aforesaid Supreme Court decisions and straightway interpreted the word ‘vest’ in terms of ownership.
In the statements of objects and reasons of 1999 Amendment to the Companies Act,1956 by which Section 109A was added, it is clearly said that this amendment is brought mainly to provide protection to the legal heirs and legal representatives of the deceased in case of his demise. The intention of legislature in adding Section 109A was to see that the company is discharged of its liability, the same is transmitted to the nominee.
Thus, in the light of abovementioned object and facts of instant case, the word vest used in Section 109 should have been used in terms of possession and not in terms of ownership.
Over-emphasis on Depositories Act, 1996 :-
Depositories have made bye-laws under the Depositories Act, 1996. The court instead of calling them bye-laws, wrongly called them as sections of the Depositories Act, 1996 making it an Act of Parliament rather than subordinate legislation, and made over- emphasis on it.
It would be pertinent to note that the nomination made under the Companies Act is a nomination made under an Act of Parliament and is filed with the company. The nomination made under the bye-laws of the depository is a different nomination i.e. under a subordinate legislation and is filed with the depository participant. There exists a huge difference between the two nominations. Therefore, the nomination facility of a depository is purely of administrative nature. Such nomination should not result in taking away the right of heirs to claim the property or the rights arising out of a nomination made pursuant to an Act of Parliament.
Principles of law of Succession ignored :-
In Hindu law, in case of conflict between nominations and wills, will prevails. But when a shareholder dies intestate, then the estate of deceased gets vested temporarily in nominee. The legal heir becomes the owner of the estate of deceased and not the nominee. But, this judgment declares that a nomination executed by deceased will prevail irrespective of any will made by him which is totally inconsistent with the provisions of principles of law of succession.
The parties to the suit are governed by the Hindu law of succession and therefore, disputed shares should be given to widow of deceased as per the principles of succession. The shares forms part of estate of deceased and therefore property of deceased must be devolved on the heirs as per section 6 of Hindu Succession Act, 1956 and not by nomination.
Various statutes have worded nomination in different ways, but the legal position of a nominee has always been accepted to be a trustee. A nominee cannot dispose the property when he receives it from the Insurance companies. Such rights are vested in legal heirs and not in nominee.
The Insurance Act was enacted in the year 1938 and almost all the High Courts in India have taken the view that a mere nomination Under Section 39 does not deprive the heirs of their rights in the policy amount. Parliament has not made any amendment to the Act till now on nomination. Then unless there exists a strong reason to amend the law, the Court should be slow to take a different view. The reasons given by the Bombay High Court are not satisfactory. Now the judgment has created an urgency to amend the law of succession and nomination in India.