Introduction The problems of inheritance and succession are inevitable especially in a country like India where many businesses are still family owned or controlled. Many a times bitter succession battles have destroyed otherwise well established businesses.
A Will is the last wish of a deceased individual and it determines how his estate and assets are to be distributed. However, in several cases, the deceased has not only made a Will, but he has also made a nomination in respect of several of his assets.
Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository/demat accounts, mutual funds, Government bonds/securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death. A question which often arises is which is superior – the will or the nomination made by the deceased member. While the position was quite clear that a nominee was not superior to the legal heir, a judgment rendered in the context of shares in a company had taken a contrary view. A recent decision of the Bombay High Court suggests that the tide has turned, or has it?
Effect of Nomination
The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face which whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc., and the nominee.
The nomination seeks to avoid any confusion in cases where the will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.
Which is Superior?
A nomination continues only up to and until such time as the will is executed. No sooner the will is executed, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is, for all purposes, a trustee of the property. He cannot claim precedence over the legatees mentioned in the will and take the bequests which the legatees are entitled to under the will.
The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), had an occasion to examine this issue in the context of a nomination under a life insurance policy. The Court held, in the context of the Insurance Act, 1938, that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.
The Supreme Court, once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), examined the effect of a nomination in respect of a National Savings Certificates. The issue here was whether the nominee of a National Savings Certificate can claim that he is entitled to the payment in exclusion to the other heirs. The Court examined the National Savings Certificate Act and various other provisions and held that, the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest.
Again, in Shipra Sengupta vs. Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.
The Supreme Court again reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299.
In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee.
In Gopal Vishnu Ghatnekar vs. Madhukar Vishnu Ghatnekar, (1982) 84 Bom LR 41, the Bombay High Court, observed, in the context of a nomination made in respect of a flat in a co-operative housing society, that the purpose of the nomination was to make certain the person with whom the Society has to deal and not to create interest in the nominee to the exclusion of those who in law will be entitled to the estate. The persons entitled to the estate of the deceased do not lose their right to the same. Society has no power, except provisionally and for a limited purpose to determine the disputes about who is the heir or legal representative, it, therefore, follows that the provision for transferring a share and interest to a nominee or to the heir or legal representative as will be decided by the Society was only meant to provide for interregnum between the death and the full administration of the estate and not for the purpose of conferring any permanent right on such a person to a property forming part of the estate of the deceased. The idea was to provide for a proper discharge to the Society without involving the Society into unnecessary litigation which may take place as a result of dispute between the heirs’ uncertainty as to who are the heirs or legal representatives. Even when a person was nominated or even when a person was recognised as an heir or a legal representative of the deceased member, the rights of the persons who were entitled to the estate or the interest of the deceased member by virtue of law governing succession were not lost and the nominee or the heir or legal representatives recognised by the Society held the share and interest of the deceased for disposal of the same in accordance with law. It was only as between the Society and the nominee or heir or legal representative that the relationship of the Society and its member were created and this relationship continued and subsisted only till the estate was administered either by the person entitled to administer the same or by the Court or the rights of the heirs or persons entitled to the estate were decided in the Court of law. Thereafter, the Society was bound to follow such decision.
The Bombay High Court reiterated its stand on a nominee being subordinate to a legal heir in its judgments in the cases of Nozer Gustad Commissariat vs. Central Bank of India, 1993 Mh LJ 228 and Antonio Joao Fernandes vs. Assistance Provident Fund Commissioner, 2010 (4) Bom. CR 208, both rendered in the context of provident fund dues. Decisions of the other High Courts which have taken similar views include, Leelawati Singh vs. State of Delhi, 1998 (75) DLT 694; Hardial Devi Ditta vs. Janki Das, AIR 1928 Lah 773; D Mohanavelu Mudaliar vs. Indian Insurance & Banking Corporation, AIR 1957 Mad 115; Shashikiran Ashok Parekh vs. Rajesh Agarwal, 2012 (4) MhLJ 370.
Thus, the legal position in this respect is very clear. Nomination is only a legal relationship and not a permanent transfer of interest in favour of the nominee. If the nominee claims ownership of an asset, the beneficiary under the will can bring a suit against him and reclaim his rightful ownership.
Companies act – Nominee is superior
Section 109a of the Companies act, 1956, was added by the amendment act of 1999. Section 109a provided that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder/debenture holder, prevail over any law or any testamentary disposition, i.e., a will. thus, in case of shares or debentures in a company, the nominee on the death of the shareholder/debenture holder, became entitled to all the rights to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. In case the nominee is a minor, then the shareholder/debenture holder can appoint some other person who would be entitled to receive the shares/debentures, if the nominee dies during his minority. This position continues under the Companies act, 2013 in the form of section 72 of this act read with rule 19 of the Companies (Share Capital and debentures) rules, 2014. a similar position is contained in Bye Law
9.11 Made under the depositories act, 1996 which deals with nomination for securities held in a dematerialised format.
A Single judge of the Bombay high Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014. interpreting section 109a of the Companies act, 1956 and the depositories act, the Court ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed. In other words, what one writes in one’s will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the will. The high Court ruled that securities automatically get transferred in the name of the nominee upon the death of the holder of shares. the nominee is required to follow the prescribed procedure in the Business rules. Upon the death of the holder of shares the nominee would be entitled to elect to be registered as a beneficiary owner by notifying the Bank along with a certified copy of the death certificate. The bank would be required to scrutinize the election and nomination of the nominee registered with it. Such nomination carries effect notwithstanding anything contained in a testamentary disposition (i.e. Wills) or nominations made under any other law dealing with Securities. the last of the many nominations would be valid.
The Court referred to and noted the provisions of section 39 of insurance act and section 30 of the maharashtra Cooperative act also. it held that these are totally different from the Companies act. the key is the use of the word “vest” in the provisions of section 109a of the Companies act, 1956, which the court interpreted as giving ownership rights and not just custody rights as is the case for an insurance policy or shares of a housing society. the Bombay high Court distinguished the Supreme Court’s judgment in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC) citing a difference in the language of the applicable law. Section 109a of the Companies act, 1956 provided that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent u/s.109a of the Companies act, 1956 and Bye Law 9.11 made under the depositories act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone.
A similar view was also endorsed by a Single judge of the delhi high Court in the case of Dayagen P. Ltd. vs. Rajendra Dorian Punj, 151 Comp. Cases 92 (Del).
This decision has caused a lot of heartburn since the entire succession law in the case of shares has been thrown for a toss. It may be noted that while the Companies act deals with nomination in the case of physical shares the depositories act deals with nomination in the case of demat accounts/shares held in dematerialised format. it is submitted that a Bye Law under the depositories act does not carry the same force as a section of the Companies act. hence, it may be a moot point whether this distinction could in any manner salvage the situation?
A Twist in The Tale?
another Single judge of the Bombay high Court, very recently, had an occasion to consider the above provisions of the Companies act and the earlier decision of the Bombay high Court in jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014 decided on 31st March, 2015. The Bombay high Court after an exhaustive study of all the Supreme Court and Bombay high Court decisions on the subject of superiority of will / legal heirs over nomination, concluded as follows:
a) The earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay high Court decisions.
b) It wrongly distinguished the Supreme Court’s decision in the case of Sarbati Devi vs. Usha Devi whereas the reality was that the ratio of that decision was applicable even under the Companies act, 1956.
c) Neither the Companies act, 1956 nor the depositories act provide for the law of succession or transfer of property. They must be viewed as being sub-silentio (i.e., as being silent on) of the testamentary and other dispositive laws.
d) If a nomination is held as supreme then it cannot be displaced even by a Will made subsequent to the nomination. this obviously cannot be the case.
e) The nomination would even oust personal law, such as, mohammedan Law and become all-pervasive.
f) The nomination under the Companies act is not subject to the rigour of the indian Succession act in as much as it does not require witnesses as mandated under this act. It cannot be assailed on grounds of importunity, fraud, coercion or undue influence. there cannot be a codicil to a nomination. In short, a nomination, if held supreme, wholly defenestrates the indian Succession act. According to the judgment in harsha nitin Kokate, a nomination becomes a “Super-Will” one that has none of the defining traits of a proper Will.
g) Thus, a nomination, even under the Companies act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.
Legal Issues
The recent Bombay high Court judgment may come as great solace for those who were severely impacted by the judgment in the case of Harsha Nitin Kokate. However, it is humbly submitted that it also raises a few interesting legal issues?
Could a Single judge hold the judgment of another Single judge of the same high Court to be per incuriam or would it have been more appropriate if this question had been referred to and decided by a larger Bench?
Kanga & Palkhivala, in their commentary, the Law and Practice of income tax, 10th edition, Lexisnexis, state that a single judge of a high Court cannot give a decision contrary to an earlier judgment of a single judge of the same high Court.
In CIT vs. BR Constructions, 202 ITR 222 (AP FB) it was held that a single judge cannot differ from the earlier judgments of co-ordinate jurisdiction merely because he holds a different view on the question of law for the reason that certainty and uniformity in the administration of justice is of paramount importance. But if the earlier judgment is erroneous or adherence to the rule of precedents results in manifest injustice, differing from an earlier judgment will be permissible. Further, a precedent ceases to be binding when it is inconsistent with the earlier decisions of the same rank or when it is sub silentio or when it is rendered per incuriam. The Court even held that though a judgment rendered per incuriam can be ignored yet when a Single judge doubts the correctness of an otherwise binding precedent, the appropriate course would be to refer the case to a division Bench for an authoritative pronouncement. It also referred to Salmond on jurisprudence which held that the mere fact that the earlier decision misconstrued a Statute is no ground for per incuriam.
A similar view has been taken by the division Bench of the Bombay high Court in CIT vs. Thana Electricity Supply Ltd, 202 ITR 727 (Bom) wherein the Court held that a single judge of a high Court is bound by the decision of another single judge of the same high Court. It would be judicial impropriety to ignore that decision. judicial comity demands that a binding decision to which his attention had been drawn should neither be ignored nor overlooked. If he does not find himself in agreement with the same, the proper procedure is to refer the binding decision and direct the papers to be placed before the Chief justice to enable him to constitute a larger Bench to examine the question. the Bombay high Court took this its view based on a Supreme Court decision in the case of Food Corporation of India vs. Yadav Engineer and Contractor AIR 1982 SC 1302.
Conclusion
While one would like to believe that the position as explained by the recent Bombay high Court decision is the correct legal position in law, it would be interesting to see whether this decision is challenged before a larger forum? one feels that we may not have heard the last on the issue of nomination versus legal heirs in the context of shares in a company!
