.png)
The author is Srujan Sangai, a third-year student at National Law School of India University, Bengaluru.
Introduction
On December 14th 2023, the Supreme Court of India gave its decision in the case of Shakti Yezdani v. Jayant Jayanand Salgaonkar (“Yezdani”) (where there was a dispute between the law of succession and company law. The court held that the company law does not provide a ‘third line of succession’ and does not override the law of succession. The order stems from a family dispute where the testator made the successors the sole nominees of the mutual funds/shares and the issue was whether nominations made under Section 109A of the Companies Act, 1956 (pari materia with Section 72 of Companies Act, 2013) have the effect of transferring the title of the shares. Section 72 of the Companies Act, 2013 provides every securities holder of a company, the power to nominate any person to whom the securities shall vest in the event of the death of the holder.
This paper seeks to examine and critique the decision of the court and argues that the text of the statute should be given precedence. The paper argues that Section 72 provides an overriding effect to nominations over succession laws and critiques the SC decision through an Exclusive Legal Positivism (“ELP”) perspective since it has ignored the text of the statute. To that end, the paper has been divided into three parts. Part I briefly summarises and critiques the approach of the SC and its decision. Part II argues that the Court failed to consider the principles of interpretation of statutes. Part III then seeks to demonstrate the application of the Meld Model to the case and its flagrant violation by the Court.
Part I: Demystifying The Intent of The Legislature
The Court in Yezdani notes that nominations were allowed to be made through Section 109A to provide an “impetus to the corporate sector” and to ease the cumbersome process of obtaining multiple letters of succession from various authorities’, placing reliance on the Statement of Objects & Reasons of the Companies (Amendment) Act 1999 to gauge the intention of the legislature. A bare reading of the same would indicate that the amendment was sought to streamline the process and make nominations a method of succession to avoid other hassles.
However, the court states and assumes that “the ownership of the securities is not granted to the nominee” and there is no action by the legislature to revamp the current position of law. It concludes that the intention to introduce nominations “was to confer absolute title of ownership of property/shares, on the said nominee”. Rule 19(1) of Companies (Share Capital & Debentures) Rules, 2014 (“CSCD Rules”) and Form SH-13 provides that the nomination can be made in favour of third parties or minors. It is important to note that if the purpose of the nomination is to avoid creating a lacuna in the functioning of the company, then having a provision allowing for a minor to become a nominee is not pragmatic since the guardian of the minor would hold the rights until the minor attains majority [Rule 19(5)]
Additionally, the person nominated has the option to either register himself as holder of securities or transfer the securities as the deceased holder could have done [Rule 19(5) of CSCD]. The same provisions find mention in Section 109B of the Companies Act, 1956 which has been incorporated in Rule 19 of CSCD Rules, 2014. A holder of securities has all rights over the said securities including ownership title.
It is pertinent to note Regulation 29A of SEBI (Mutual Funds) Regulations, 1996, which provides for nomination facility for mutual funds (which is a security). The Schedule of the said regulations contains the Form for Nominations and instructions for the asset management company. Instruction 5 of the said form reads as follows: “Transfer of units in favour of a Nominee shall be valid discharge by the asset management company against the legal heir.” Thus, it can be inferred through other legislative instruments that the facility of nomination at least in the Company Law context includes transfer of ownership to the nominee and not the legal heirs and it can be reasonably concluded that the legislature intended to give ownership to the nominee.
We also need to consider the policy implications of whether nominations or successions should be given primacy in company law matters. First, prioritising nominations may promote transparency and meritocracy in the appointment process since such nominations may involve a deliberate, structural approach based on skills and suitability for the role. Second, effective corporate governance is essential for maintaining the integrity of the company and safeguarding the interests of stakeholders. Nomination processes, when properly structured, contribute to good governance by ensuring that board members are independent, competent, and capable of fulfilling their fiduciary duties. This, in turn, enhances compliance with regulatory requirements and reduces the risk of conflicts of interest or unethical behavior.
Part II: Interpretation of Statutes: Critical Assessment of Section 72
The appellants in the Yezdani case argued that the term ‘vest’ in Section 109A of Companies Act, 1956 “indicates intent to bestow ownership of securities upon the nominee on the shareholder’s death”. The Court delves into the interpretation of ‘vest’ as has been interpreted in previous judgements in different contexts and concludes that the word ‘vest’ does not confer ownership and is merely to avoid uncertainty and for “smooth functioning of the affairs of the company”
The second issue arising before the Court was the effect of the ‘non-obstante’ clause provided in Section 109A conferring an overriding effect to the nomination over any other law and disposition, testamentary or otherwise, and entitles the nominee absolute rights over the shares/securities. The Court places reliance on non-obstante clauses in other legislations such as the Banking Regulation Act, 1949 and Government Savings Certificate Act, 1959 and case laws to observe that the given clause must be interpreted in light of the scheme and intent of Section 109A.
The Court places reliance on Sarbatti Devi v. Usha Devi where the Court was faced with a similar question concerning rights of a nominee when the assured died intestate. The Court held that nomination under Section 39 of the Insurance Act, 1938 was subject to a claim of heirs of the assured under the law of succession. The SC in Yezdani holds that a consistent view has been taken by courts when interpreting nomination provisions and there is no need to deviate from the same.
As has been rightly observed in Aruna Oswal v. Pankaj Oswal (“Aruna Oswal”) (which the SC interestingly is not even citing in Yezdani), the provisions of Section 39 of the Insurance Act are different from Section 72 and the “the rights of the nominee would depend upon what is provided statutorily” Furthermore, there is no vesting of interest under Section 39 or other cases, and thus the precedent is not applicable for the purposes of the Companies Act and is therefore distinguishable.
The Court in Yezdani goes on to hold that the purpose of the clause is the “discharge of its liability against diverse claims by the legal heirs of the deceased shareholder” and the arrangement of nomination is temporary until the heirs have settled any dispute and “are ready to register the transmission of shares, by due process of succession law”.
Part III: Application of the Meld Model: A Flagrant Violation of ELP
This section utilises the Meld Model to assess the decision of the Court through an ELP lens and law and economics perspective. However, the latter inquiry is only limited to transaction costs. The Meld Model can be described as the blend of ELP and law and economics enquiry. ELP can be understood as a source-based theory claiming that law is source-based and such sources are legally binding. For instance, statutes are sources of law. Anything whose origin is not based on any source of law, is not law. In the law & economics approach, transaction costs imply the costs incurred to make a particular transaction. In company law and legal context, the same would imply costs of planning, investments, resolving disputes, time of lawmakers, judges and lawyers. Thus, allocation of resources must be done in a manner that minimises the transaction costs to improve efficiency. Also, it is important to note that when judges do not follow the text of the statute (ELP), it leads to higher transaction costs and an inefficient outcome since they render the costs incurred by the State to enact the statute meaningless and also infuse instability in determining what the law is.
Interpretation of statutes dictates that the purpose of a non-obstante clause is to give an overriding effect to certain provisions over some contrary provision of either the same enactment or some other enactment. Viewed from an ELP perspective, the court has failed to appreciate the “black letter of the law”. The Court has failed to comply with the bare text of the statute and to appreciate the past decisions on the issue (Aruna Oswal). Thus, there is an apparent disregard for the sources of law.
A bare reading of Section 72(3) shows that the phrases (a) ‘any other law’, (b) ‘whether testamentary or otherwise’, (c) ‘entitled to all the rights in the securities’, and (d) ‘to the exclusion of all other persons’ construe the following interpretation: After a holder of security nominates a person, then by virtue of Section 72(3), such nomination would take precedence over succession laws (‘any other law’ including testamentary law) and would entitle the nominee to ‘all’ rights including ownership rights to the exclusion of all other persons including legal heirs. Such an interpretation finds prima facie favour in the Aruna Oswal case, however, the court is deviating from a reasonable interpretation without providing justified reasons and without considering its implications.
Rahul Singh argues that “if the Court is to prescribe the reasons outside the statute on subject matters the statute is present to cover, it is a violation of ELP”. The Court has used precedents which are distinguishable and may not be applicable, thus violating ELP.
The transaction costs involved in this particular case would include (a) costs of future litigation and (b) the cost of clarifying the legal position if a particular issue is ambiguous. Section 72 which provides for clear and unambiguous wording may need re-interpreting through more cases. Since the Court has not explicitly overruled or negated the observations made in Aruna Oswal (both cases being Division Bench decisions), it may lead to increased ambiguity. Such ambiguity “will lead to uncertainty about what the law actually is and how statutes or precedents will be used”, according to Singh.
Furthermore, there would be uncertainty over the ownership of securities in cases where the nominated person is different from the legal heir, and which forum to approach in case of a dispute. In Aruna Oswal, the Court had remanded the matter back to the trial court to settle the succession dispute. Thus, jurisdiction becomes another bone of contention which the Court has failed to clarify in this case, leading to higher transaction costs.
Conclusion
The Court concludes that the Companies Act (a) does not contemplate a statutory testament, (b) is not concerned with laws of succession but with managing the affairs of the company. It further states that any other interpretation would lead to confusion and complexities in succession planning. The purpose is therefore to protect the subject matter of nomination from any litigation until the legal heirs step in. According to the Supreme Court, ‘vest’ under Section 109A does not confer ownership to nominees and that remains with the legal heirs; and that the non-obstante clause in the Section does not have an overriding effect in favour of the nominees to supersede the claims of the legal heirs. However, as mentioned above, rather than absolving confusion, the Court has undermined the text of the statute and created legal uncertainties leading to increased transaction costs. It prevents the statute from being an ‘identifiable authoritative directive’ and fails to recognise that Section 72 is performing a function akin to a will where shares (property) can be willed away to the nominees in the event of one’s death. The Companies Act provides for a code in itself and the Court has certainly failed to recognise this.