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Nominee Versus Heirs – A Welcome Judgment!

Published on Fri, May 15,2015 | 23:02, Updated at Fri, May 15 at 23:02Source : Moneycontrol.com 

By: Aliff Fazelbhoy, Senior Partner, ALMT Legal

Decided by the Bombay High Court on 31st March 2015

With the recent and in the author’s view, a very welcome judgment rendered by Justice Gautam Patel of the Bombay High court, the controversy that surrounded the rights of nominees versus legal heirs has now hopefully been put to rest.

This Bombay High Court judgement (“Salgaonkar – Ghatalia judgement”) deals with a point of law that arose in two separate instances. The first being Jayanand Jayant Salgaonkar vs Jayashree Jayant Salgaonkar and Ors (“Salgaonkar case”) and the other Nanak S. Ghatalia vs Swati Shatishchandra Ghatalia (“Ghatalia case”). The issue that arose was whether all the rights to shares, debentures or other instruments would, upon the death of the holder, pass to the nominee of such shares, debentures or other instruments or would these pass to the legal heirs of the deceased. The judgement only deals with this point of law and upholds the latter view, namely that the rights of the heirs override those of a nominee.  The judgment does not relate to the merits of each case, which were subsequently heard separately.

The Salgaonkar case is an action for administration of the estate of the deceased Jayant Shivram Salgaonkar. The deceased had made several investments in Mutual Funds and had named two of his heirs as nominees to the bulk of those investments. The remaining heirs contended that the investments formed a part of his estate and were subject to succession laws. The nominees on the other hand argued that by virtue of their nomination they were the rightful owners and these should not form a part of the estate of the deceased.

The Ghatalia case relates to the Will of one Urmila S. Ghatalia. The petitioner who is one of the deceased’s sons sought for the grant of probate whereas his sister was opposed to it. The contentious issue in this case related to some of the deceased’s investments. The petitioner was named nominee for the investments and hence claimed that all the rights to those investments were vested in him. The respondent argued that the investments formed a part of the general estate of the deceased and were to be dealt with in accordance with the Will.  

The previous stand taken by the Bombay High Court in Harsha Nitin Kokate vs The Saraswat Co-Op. Bank Ltd. & Ors 2010(112)BomLR2014 (“Kokate case”) was that the nominee would be entitled to all the rights in shares and debentures, including ownership rights, to the exclusion of all other persons. This decision relied primarily on S 109A of the Companies Act, 1956 which expressly mentions the same, namely that "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 becomes 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.”

In the Kokate case the Counsel for the plaintiff relied on Smt. Sarbati Devi vs Smt. Usha Devi (1984) 1 SCC 424 (“Sarbati Devi case”). This case related to Section 39 of the Insurance Act, 1938 which provides for nominations by policy holders. The Supreme Court held that mere nomination effected under Section 39 does not deprive the heirs of their rights in the amount payable under a life insurance policy. 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. However, in the Kokate case the Judge held that as per the Insurance Act a nomination was merely for the payment of the amount under the Life Insurance Policy and would not confer any ownership rights on the nominee and hence this could not be compared to a nomination made under the Companies Act, 1956.

In the Salgaonkar – Ghatalia judgement the counsels have relied on various other Supreme Court and Bombay High Court judgements that were not considered by the Judge in the Kokate case even though they were binding on him. They are as follows:

·         Shri Vishin N. Khanchandani & Anr vs Vidya Lachmandas Khanchandani & Anr (2000) 6 SCC 724 (“Khanchandani case”): This case related to a nomination under the Government Savings Certificate Act, 1959. The Sarbati Devi case was relied on in this judgement and it was held that in spite of the nomination the certificates formed a part of the estate of the deceased and would be governed by succession law.

·         Shipra Sengupta vs Mridul Sengupta & Ors (2009) 10 SCC 680: In this dispute a nomination was made inter vivos, to specific movable property to the exclusion of the heirs. Both the Sarbati Devi and the Khanchandani cases were relied upon in this judgement. The judge held that it was abundantly clear that the amount, in any head, can be received by the nominee, but the amount can be claimed by the heirs of the deceased in accordance with law of succession governing them. In other words, nomination does not confer any beneficial interest on the nominee.

·         Antonio Joao Fernandes vs The Assistant Provident Fund Commissioner & Ors 2010 (4) Bom. C. R. 208: In this case the deceased had named two nominees for his Provident Fund account i.e. his sister and his cousin. His cousin, the plaintiff in the case, by virtue of being one of the two nominees claimed he was entitled to 50% of the account. The Judge rejected the argument and stated that a nomination cannot operate to the exclusion of legal heirs. In this case as well the Sarbati Devi and Khanchandani cases were cited and followed.

In light of the fact that the above judgements were not relied upon in the Kokate case, even though they were binding on the Court, Justice Gautam Patel held the Kokate judgement to be per incuriam i.e. that it has been decided without reference to a statutory provision or earlier judgement and hence does not have to be followed. Hence even though the shares, debentures or other securities initially pass to the nominee on the death of the holder, they are eventually distributed by the laws of succession.

Implications and Positives

This judgement cleared the ambiguity that arose from laws that were in pari materia i.e. pertaining to the same subject matter. The essence of the judgement is that there can only be two kinds of succession i.e. testamentary succession and intestate succession. The Kokate case had given rise to a third kind of succession which has been called a statutory testament. This allowed statutory provisions, relating to nomination, such as the ones mentioned below to over-ride succession laws. The provisions from the various acts are:

·         Section 109A of the Companies Act, 1956

·         Section 39 of the Insurance Act, 1938

·         Section 30 of the Maharashtra Co-operative Societies Act, 1960

·         Section 61 of the Employee Provident Fund Scheme, 1952

·         Section 45ZA of the Banking Regulations Act, 1949

What makes the so called statutory testament even more troublesome and often unfair and even absurd is that statutes like the Depositories Act and rules only allow for a single nomination. Hence, if the Kokate judgment were correct, a person wishing to leave his investments in equal shares to say his wife and three children would have to open at least four demat accounts with one nominee in each and ensure that purchases and sales were equal from all accounts to ensure an equitable distribution to his heirs.

Thankfully, in the author’s view, the Salgaonkar – Ghatalia judgement has cleared the controversy and restored the law to what clearly is the correct position – a nominee is only a convenience to enable the company or bank or insurance company to discharge its obligation. However, the nominee can only hold the proceeds as a trustee for the rightful heirs of the deceased whether under intestate law or under a valid Will.  Any other interpretation would render the law of succession to be meaningless.

 
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