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21 May 2020
The issue of legatees versus nominees continues to cause confusion despite numerous judicial decisions which clearly confirm that legal heirs inherit assets over nominees.
On 14 November 2019 this position was confirmed once again when the National Company Law Appellate Tribunal (NCLAT) held in Oswal Greentech v Mr Pankaj Oswal(1) that:
The matter was decided by Justice SJ Mukhopadhyaya and Justice AIS Cheema, who considered the question of maintainability of the petition in question under Sections 241 and 242 of the Companies Act 2013.
The earlier decision of the Bombay High Court in Shakti Yezdani v Jayanand Jayant Salgaonkar(2) had settled the controversy regarding the rights of legal heirs as opposed to nominees. In that case, the court held that the rights of legal heirs supersede the rights of a shareholder's nominee. This decision was reaffirmed in Oswal.
Abhey Kumar Oswal (the deceased) held 53.5 million shares in Oswal Agro Mills Limited. In 2015 the deceased filed a nomination under Section 72 of the Companies Act in favour of Aruna Oswal (the nominee). The nomination provided that "[t]his nomination shall supersede any prior nomination made by me/ us and also any testamentary document executed by me/us".
After the deceased's death, the nominee made a registration request as the shareholder. Her request was granted on 16 April 2016.
In February 2017 Pankaj Oswal (the legal heir) filed for a suit of partition before the Delhi High Court, claiming 25% of the shares in the property. While that suit was pending, the legal heir also instituted a petition before the National Company Law Tribunal (NCLT), alleging acts of oppression and mismanagement of the affairs of Oswal Agro Mills on the premise that the company had transmitted the shares to the nominee in contravention of the law. However, one of the prerequisites for instituting said proceedings under the Company Act is that the shareholder must own at least 10% of the total capital of the company, unless a waiver has been given.
Unfortunately, the legal heir held only 0.03% of shares in the company. However, he claimed that he was entitled to more than 10% of the total capital on the basis that he was one of the four heirs on the deceased's intestacy. Thus, the resultant holding would be 10% of the total capital.
On 13 November 2018 the NCLT accepted the legal heir's claim and held that the petition was maintainable.
Oswal Agro Mills appealed to the NCLAT. The company argued that in view of the nomination filed by the deceased during his lifetime and the registration of the nominee after his death, the legal heir was not entitled to exercise any rights over the shares. The company relied on Section 72 of the Company Act and the accompanying rules, according to which:
Oswal Agro Mills further relied on the Delhi High Court's decision in Dayagen Private Limited v Rajendra Dorian Punj,(3) wherein the court held that Section 72 overrides the general law of succession and vests in a nominee full and exclusive ownership rights in respect of shares.
However, the NCLAT relied on the Supreme Court's ruling in World Wide Agencies Pvt Ltd,(4) which states that an interpretation that legal representatives of a deceased shareholder cannot have the same rights as a member would be a hypertechnical view which is counterintuitive to justice. The Supreme Court further stated that:
legal representatives of a deceased member represent the estate of that member whose name is on the register of members. When the member dies, his estate is entrusted in the legal representatives. When, therefore, these vesting's are illegally or wrongfully affected, the estate through the legal representatives must be enabled to petition in respect of oppression and mismanagement and it is as if the estate stands in the shoes of the deceased member.
Accordingly, the NCLAT held that on an individual's death, their legal heirs are entitled to their assets. Any nominee merely holds the assets until the matter of vesting has been decided in favour of the legal heirs. Thus, a nominee is a caretaker of the deceased's property until it is distributed among the legal heirs.
While these cases continue to reinforce the fact that legal heirs are the rightful owner of a deceased's property, confusion remains as to how this relates to nominees. To make it explicitly clear, a nominee (pursuant to a nomination by the deceased during their lifetime) acts only as a trustee on behalf of the rightful legal heirs, holding any property until the matter of succession or inheritance has been decided and implemented.
As an example, a man bequeaths his bank accounts to his children equally in his will. During his lifetime, he makes a nomination in favour of his wife. On his death, his wife would merely hold the accounts on behalf of their children until the matter of succession was concluded. This could lead to a family dispute if the children claimed the bank balance and their mother refused to hand it over.
A properly implemented and well-thought-out succession plan must avoid conflicting intentions. In the above example, a better approach would have been for the deceased to nominate the bank accounts in his wife's name and make a will bequeathing them to her first and then – in the event that she died before him – to their children equally. If the wife survived her husband, her will could have left her husband's account (now coming under her estate) to their children. An even better approach would have been for the husband to open separate accounts in the name of each of his children. Each new account could be nominated in favour of his children individually and bequeathed to them under his will. His wife could similarly have had a self-contained account. Had this approach been taken, the same result would be achieved but without any conflict or confusion.
In addition to making nominations, an individual must create a will. It is also prudent to ensure that the contents of the will are harmonised, with the nominees and the legal heirs under the will being the same. Reference can be made to the following bank nomination policies:
Oswal has hopefully settled this issue once and for all. As discussed above, individuals should note that there is a clear difference between the rights of nominees and legal heirs in order to ensure that their estate passes smoothly to their heirs.
For further information on this topic please contact Rishabh Shroff, Varsha Reddy or Aditya Karekatte at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.
(2) Shakti Yezdani v Jayanand Jayant Salgaonkar and Nanak S Ghatalia v Swati Shatishchandra Ghatalia, Appeal 313/2015, Notice of Motion 822/2014 Suit 503/2014 and Appeal 311/2015 in Testamentary Petition 457/2014. Further information on this case is available here.
(5) Further information is available here.
(6) Further information is available here.
(7) Further information is available here.
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