Important ruling on the property rights of successors versus nominees

Upon the death of an owner, will the rights in the property be transferred to a nominee or the successor to the property? We examine what the current legal standing on the issue is, after a landmark judgement from the Bombay High Court

A legal question that has been put to test time and again before various courts, is whether the rights of nominees prevail over those of successors, in respect of various subjects of nomination, such as financial instruments, shares in a cooperative society, etc.

A division bench (two-judge bench) of the Bombay High Court, comprising of Justice Oak and Justice Sayed, recently upheld the rights of successors over nominees. The court stated that the nominees are appointed, to ensure that the subject matter of the nomination is protected, until the legal heirs or legal representatives of the deceased take appropriate steps, such as obtaining probate of the will of the deceased or letters of administration of the estate of the deceased, to claim their rights over it.

Conflicting decisions on the rights of nominees and successors

There have been some contradictory observations in the past. In one such case (Harsha Nitin Kokate v The Saraswat Cooperative Bank Limited, also known as the ‘Kokate Case’), a single judge of the Bombay High Court had ruled that the rights of the nominee prevail over that of the successors, in case of shares held in a company. Finding this decision per incuriam, another single judge of the Bombay High Court subsequently upheld the contrary, i.e., in favour of the successors. However, the competency of a single judge to review the findings of another single judge created a controversy, which was questioned in this matter before the two-judge bench of the Bombay High Court.

The Bombay High Court’s ruling on nominees’ rights

The two-judge bench of the Bombay High Court took into account the laws governing the nomination of shares under the Companies Act, 1956, (1956 Act), the succession laws governing the estate of a deceased in case of intestate (without making a will) or testate succession (estate bequeathed under a will) as per the Indian Succession Act, 1925 and the byelaws under the Depositories Act, 1996, and concluded that the provisions relating to nomination do not override the law in relation to testamentary or intestate succession. Like the 1956 Act, similar provisions are also laid down in the Companies Act, 2013 (2013 Act) and therefore, this judgment will squarely apply to all the future cases arising under the 2013 Act.

The judgment also draws references to precedents of the supreme court and various high courts, relating to the rights of the nominee vis-à-vis the rights of the successors, in case of shares held in a company, shares held in a cooperative society, investments made in financial instruments such as Employee Provident Fund, Government Savings Certificate and the right of nominees with respect to various accounts held with banks. The Bombay High Court observed that in all these cases, the provisions relating to nominations have been consistently interpreted as only giving a temporary controlling right to the nominees, for interim management of the affairs relating to such instrument.

Even in the Indrani Wahi Case, the court pointed out that the requirement for transfer of shares in favour of the nominee, is stipulated only for societies registered under the West Bengal Act and at no point had the supreme court decided that the rights of the nominees will prevail over that of the successors. In the Indrani Wahi Case, the apex court had observed that it would be open for other members of the family of the deceased, to pursue their case of succession or inheritance. Therefore, those who are claiming their rights under inheritance, will be entitled to claim the title to the shares in the society on the basis of inheritance.

Laws on nomination and succession/inheritance

There are no general laws on nomination, unlike in case of succession where special laws exist, based on religious affinity and bequests under wills of the deceased. Therefore, the rights of the nominee are determined in accordance with the laws governing the subject matter of nomination, whereas, succession rights are determined based on the personal law applicable to the deceased. Nomination, hence, is only a means and not an end.

It is a temporary arrangement, so that the shares of the deceased do not remain ownerless, during the period that succession issues are resolved.

[Housing.com]