Legal heir or Nominee? Who is the rightful owner?

January 10, 2020
Law order

By Rupin Chopra and Nihit Nagpal

Legal Heir v. Nominee

The Indian Judiciary has time and again been confronted with the contentious issue whether the rightful ownership of asset (including shares/securities, properties etc.) rests with the legal heir or nominee? The obscurity pertaining to this legal aspect has compelled nominees and legal heirs to knock the doors of justice which has resulted in settling the legal principle that nominees only hold the assets on behalf of the legal heirs of the deceased and that mere nomination of shares does not amount to beneficial ownership of an asset.

What does the law say?

The provisions governing the law relating to nomination of shares and the power to nominate are enumerated under the Companies Act.

Nomination of Shares- Section 109A of the Companies Act, 1956 provides for the nomination of shares and states that 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 persons, unless the nomination is varied or cancelled in the prescribed manner. Section 109B of the Companies Act provides for transmission of shares.

The statutory provisions under Section 109A and B were elaborately discussed by the Division Bench of the High Court of Bombay in the case of Shakti Yezdani v. Jayanand Jayant Salgaonkar , wherein the Court while interpreting the provisions was of the view that the nominee of a holder of shares or securities appointed under Section 109A of the Companies Act, 1956 is not entitled to the beneficial ownership of the shares or securities subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estate of the holder as per the law of succession. Thus, the High Court held that nomination does not override the law in relation to testamentary or intestate succession. The provision regarding nomination are made with a view to ensure that the estate or the rights of the deceased subject matter of the nomination are protected till the legal representatives of the deceased take appropriate steps .

Judiciary’s Stance

Recent order by NCLAT- rightful ownership of shares remains with the legal heir and not the nominees-Oswal Greentech v. Mr Pankaj Oswal and Ors.[1]

Brief facts: In this case, the deceased namely Mr. Abhay Oswal held majority shares in Oswal Agro Mills Limited. The deceased had filed nomination in favour of one, Mrs. Aruna Oswal (nominee). After the death of deceased, the nominee filed request for registration of the impugned shares in her favour and the Company accordingly transferred the shares in the name of nominee. Thereafter, Mr. Pankaj Oswal (hereinafter referred to as ‘legal heir/ representative’), approached the National Company Law Tribunal (‘NCLT’) and contended that the transfer of shares to the nominee was in contravention of the law. The NCLT considering the above, held that the petition was maintainable. Aggrieved by the decision of the NCLT, the Company approached the NCLAT.

NCLAT’s order: The NCLAT passed an order in favour of the legal heir to hold that the shares of the deceased ultimately vest with the legal heir. The nominee appointed by the deceased is in possession of the shares only till the ownership is not transferred to the legal heir.

“The right arising out of an instrument does not vest with nominee automatically on the death of the original holder of the instrument. Nominee does not mean that the amount or the share belongs to the nominee. On the death of the holder of the instrument, the amount/ share vests with the legal heirs, the nominee merely holds the amount/ share herein till the matter of vesting is decided in favour of the legal heirs.”

It was further noted by the Appellate Tribunal that nominees only hold the assets on behalf of the legal heirs of the deceased and that mere nomination of shares does not amount to beneficial ownership of an asset.

The Courts have time and again reiterated that the legal heir and not the nominees have the rightful position to obtain ownership of the assets of the Deceased. In another case of Smt. Sarbati Devi and Anr. V. Smt. Usha Devi, the Hon’ble Supreme Court has held that a nomination cannot be given the same position as that of a will. Nomination and will are two different concepts and nomination could not be given the same legal status as that of a will. A nominee could not be considered as owner of a property. Mere nomination does not bestow beneficial ownership of assets to the nominees.

Other similar judgments on the issue are Uma Sehgal and Ors. vs Dwarka Dass Sehgal And Ors. , wherein the High Court of Delhi remarked that a nominee is nothing but a person who receives the payment on behalf of the heirs of the assured. Similarly in the case of Shipra Sengupta vs Mridul Sengupta & Ors. , the Supreme Court held 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.

Exceptions to the Rule

Laws of Insurance– In catena of cases, it has been held by different High Courts that under Section 39 of the Insurance Act, the nominee is nothing more than an agent to receive the money due under the life insurance policy and that the money as such received remains the property of the assured during his life time and on his death forms part of his estate subject to the law of succession applicable to him .

However, the Legislature enacted the Insurance Law (Amendment) Act, 2015 which while altering the earlier settled position under the Laws of Insurance states that where a policyholder dies after the maturity of the policy but the proceeds and benefit of his policy has not been made to him because of his death, in such a case, his nominee shall be entitled to the proceeds and benefit of his policy .

RBI Circular- The Reserve Bank of India’s Master Circular on Nomination facility for Relief/Savings bonds provides that a the holder of a Relief/Savings bond, may nominate one or more persons who in the event of death of the holder would be entitled to the Relief/Savings bond and to the payment thereon.

Key Take Away

The highly speculated law has been set to rest by the decision of the Courts and Tribunals and it is now abundantly clear that the legal heir is the rightful owner of property of deceased and that the nominee only holds the property “in trust” and that the legal heir is free to make a claim over the property against the nominee.
However, many a times the concept of nomination in matters of inheritance and succession leads to misunderstanding, on account of which nominees often end up making wrong claims of ownership of property of the deceased. In order to avoid such conflicts within the family it is always recommended that a person has a well planned Will in which he/she clearly sets out the terms of succession and nomination.

[1] Company Appeal (AT) No 410 of 2018

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