In a landmark decision, the Supreme Court has asserted that the non-obstante clause found in Section 109A(3) of the Companies Act, 1956, and Bye-law 9.11.7 of the Depositories Act, 1996, does not preclude legal heirs from rightfully claiming securities against the nominee.
The court clarified that the non-obstante clause’s primary purpose is to empower companies to transfer shares to nominees, excluding any other individual temporarily. This exclusion serves to safeguard the company against potential disputes with the legal heirs until they have settled the deceased shareholder’s affairs and completed the necessary legal processes for the transmission of shares.
Moreover, the nomination process outlined in the Companies Act, 1956, and its successor, the Companies Act, 2013, does not supersede succession laws.
Justices Hrishikesh Roy and Pankaj Mithal, comprising the bench, maintained the High Court’s decision, emphasizing that a nominee is not entitled to the beneficial ownership of shares or securities to the exclusion of other individuals inheriting the estates based on succession laws.
Background:
The case involved the estate of Mr. Jayant Shivram Salgaonkar, who had designated nominees for his mutual fund investments. Upon his demise in 2013, a legal dispute ensued between the legal heirs and the nominees. The legal heirs sought administration of the estate under the court’s supervision, while the nominees claimed absolute ownership of the securities.
The Single Judge of the High Court, citing a previous judgment, initially rejected the nominees’ claim. However, the Division Bench later overturned this decision, asserting that the provisions of the Companies Act, 1956, did not address succession matters, rendering the previous judgment per incurium.
Relevant Law:
Section 109A of the Companies Act, 1956, allows shareholders to nominate individuals to whom their shares will vest in the event of their death, with a non-obstante clause granting overriding effect to such nominations.
Supreme Court Verdict:
The court dismissed the contention that the term ‘vest’ in Section 109A indicates an intent to confer absolute ownership on the nominee. Instead, it clarified that vesting is a limited provision, enabling the company to manage securities immediately after the shareholder’s death to maintain operational efficiency.
Regarding the non-obstante clause, the court rejected the argument that it confers absolute rights on the nominee. The clause’s purpose is to facilitate the company’s prompt handling of securities after the holder’s death, and it does not exclude legal heirs from their rightful claims.
In conclusion, the Supreme Court affirmed that the nomination process does not override succession laws, upholding the Division Bench’s decision and dismissing the appeal in the case of Shakti Yezdani & Anr. V Jayanand Jayant Salgaonkar & Ors.
