Nomination and Succession Law

On a recent trip with my tennis buddies, the conversation turned to the importance of naming a nominee either in a bank account or for shares issued by a limited corporation. This was probably because the median age of the group was closer to 60 years and some of them were finally conscious of their mortality! I witnessed an animated conversation and heard a somewhat heated argument on the rights of a nominee as opposed to that of an heir of the deceased or a legatee / beneficiary named in a Will. Being the sole advocate on the trip, everyone turned to me to get my view. As someone who is not shy on sharing an opinion on all things legal, I could not resist the opportunity and promptly gave my two bits. But as free legal advice was tendered coupled with the fact that I did not have immediate access to case law, I think I did not make much of an impact. Hence I was driven to write this article.

Several High Courts have dealt with the concept of ‘nomination’ under legislations like the Government Savings Certificate Act 1959, the Banking Regulation Act, 1949, the Life Insurance Act, 1939 and the Employees Provident Fund and Miscellaneous Provisions Act, 1952.

Set out below is the case law on nomination, in reference to these legislations:

• Sarbati Devi & Anr. v. Usha Devi (1984) 1 SCC 424

Nomination under S. 39 of the Insurance Act 1938 is subject to the claim of heirs of the assured under the law of succession.

• Nozer Gustad Commissariat v. Central Bank of India (1993) 1 Mah LJ 228

Nomination under S. 10(2) of the EPF & Misc. Provisions Act 1952 cannot be made in favour of a non-family person. Relied upon Sarbati Devi to state that the principles therein were applicable to the Employees Provident Funds Act as well and not merely restricted to the Insurance Act.

• Vishin N. Khanchandani & Anr. v. Vidya L. Khanchandan (2000) 6 SCC 724

Nominee entitled to receive the sum due on the savings certificate under S. 6(1) of the Govt. Savings Certificate Act 1959, but cannot utilise it. In fact, the nominee may retain the same for those entitled to it under the relevant law of succession.

• Ram Chander Talwar & Anr. v. Devender Kumar Talwar & Ors. (2010) 10 SCC 671

Nomination made under provisions of S. 45ZA of the Banking Regulation Act 1949 entitled the nominee to receive the deposit amount on the death of the depositor.

?The Courts have taken a consistent view while interpreting the related provisions of nomination under different statutes. It is clear from the referred judgments that the nomination so made would not lead to the nominee attaining absolute title over the subject property for which such nomination was made. In other words, the usual mode of succession is not impacted by such nomination. The heirs therefore have not been excluded by virtue of nomination.

The Hon’ble Supreme Court of India has conclusively laid the matter to rest in Shakti Yezdani & Anr. vs. Jayanand Jayant Salgaonkar & Ors (CIVIL APPEAL NO. 7107 OF 2017). In this case, Jayant Shivram Salgaonkar had made nominations for his fixed deposits and mutual funds. The dispute arose over whether the nominees were entitled to the assets absolutely or if they were merely holding them in trust for the legal heirs. The Appellants argued that the nominations under Sections 109A and 109B of the Companies Act, 1956, and the Depositories Act, 1996, vested absolute ownership of the securities in the nominees. On the other hand, the Respondents contended that the nominees were only custodians and the assets should be distributed according to the will and the Indian Succession Act, 1925.

The Supreme Court examined the legal framework and previous judgments, including the case of Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited reported in (2010) SCC Online Bom 615 and observed that treating nominations as a "superwill" would undermine the rigorous requirements for making a valid will under the Indian Succession Act, 1925. The Court held that nominations under the Companies Act do not override the testamentary succession laws. The nominees are entitled to receive the assets but must distribute them according to the Will or the applicable succession laws.

Lest there is any further doubt, here are the exact words used by the Supreme Court:

“45. The vesting of securities in favour of the nominee contemplated under S. 109A of the Companies Act 1956 (pari materia S. 72 of Companies Act, 2013) & Bye-Law 9.11.1 of Depositories Act, 1996 is for a limited purpose i.e., to ensure that there exists no confusion pertaining to legal formalities that are to be undertaken upon the death of the holder and by extension, to protect the subject matter of nomination from any protracted litigation until the legal representatives of the deceased holder are able to take appropriate steps. The object of introduction of nomination facility vide the Companies (Amendment) Act, 1999 was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.

46. Additionally, there is a complex layer of commercial considerations that are to be taken into account while dealing with the issue of nomination pertaining to companies or until legal heirs are able to sufficiently establish their right of succession to the company. Therefore, offering a discharge to the entity once the nominee is in picture is quite distinct from granting ownership of securities to nominees instead of the legal heirs. Nomination process therefore does not override the succession laws. Simply said, there is no third mode of succession that the scheme of the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and Depositories Act, 1996 aims or intends to provide”.

The law now stands clarified that nominations are not a substitute for a Will and cannot be used to bypass the law of succession. It reinforces the importance of proper estate planning and the need for clear testamentary documents to avoid disputes among heirs.

-????????? Advocate Sandeep H. Parikh