Nominee/s in Life insurance policyholders are just Trustee/s-SC
Life insurance policyholders in quandary over nominations following SC verdict
Post SC’s verdict, life insurance holders worry if nominees will be owners of the proceeds or merely trustees.
In accordance with Section 39(7) of the Insurance Act, 1938, if the nominees are the policyholder's parents, spouse, or children, they are designated as the owners of the policy proceeds. However, a recent Supreme Court judgment has clarified that all nominees, including parents, spouses, or children, are merely trustees and not owners of the proceeds.
In the case of Shakti Yezdani & Anr. Vs. Jayanand Jayant Salgaonkar & Ors., the Supreme Court of India elucidated the status of nominees under Section 109A of the Companies Act, 1956, particularly in the context of succession laws. On December 14, 2023, the court underscored that nominations are made for convenience and do not override the laws of succession. The ruling emphasized that the ownership of financial assets, such as shares, would pass to the legal successors through either legal or testamentary means, rather than to the nominee. Moreover, the court declared that a nominee cannot refuse the claim when the legal successors assert their right to the deceased's property.
The judgment also addressed the nomination provisions in the Companies Act, the Depositories Act, 1996, and Section 72 of the 2013 Act, stating that these provisions cannot supersede the rules of succession as outlined in the Indian Succession Act, 1925, or the personal succession laws of the deceased shareholder. The court noted that nominations do not confer absolute ownership of the subject property to the nominee and do not exclude legal heirs from their rightful inheritance.
This Supreme Court ruling effectively overturns the perspective held in the case of Aruna Oswal vs. Pankaj Oswal & Ors., where it was asserted that the non-obstante clause in Section 72(3) of the Companies Act, 2013—which is similar to Section 109A—granted absolute vesting of shares to the nominee.
Supreme Court’s Observations
Object behind the introduction of Section 109A under the Companies Act
The Supreme Court observed that the Companies Act, 1956 was introduced to address the "incorporation, regulation, and winding up of corporations." The primary intent behind the introduction of Sections 109A and 109B through the 1999 Amendment was to stimulate investment in the corporate sector rather than to address issues of succession. The provision for nomination was introduced to reduce the burden on legal heirs and to foster a favorable environment for corporate investment in the country. The Court held that there was no material evidence to suggest that the Amendment aimed to provide absolute ownership of the property to the nominee.
Concept of ‘nomination’ under the Companies Act, 1956 and its connection to the law of succession
The Court referred to the concept of ‘nomination’ as defined by various courts under different legislations, such as the Government Savings Certificate Act, 1959. It was noted that, due to the lack of a universally accepted definition and interpretation regarding the rights and ownership of a nominee concerning the relevant property, the Court would rely on commonly understood meanings. The Court acknowledged that the Act does not envision a "statutory testament" that overrides the laws of succession. It does not concern itself with succession laws. Nomination under the Act does not undergo the same strict requirements as those applicable to the creation and validity of a will under succession laws.
Implications of the Term ‘Vest’ and the Non-Obstante Clause as Used Under Section 109A of the Companies Act, 1956 and Bye-Law 9.11.1 of The Depositories Act, 1996
The Court held that the term ‘vest’ can have multiple meanings depending on the context in which it is used in a provision or legislation. The mere usage of the term does not automatically grant absolute entitlement over the subject matter. Similarly, the non-obstante clause must be understood in the context of the object and scheme of the legislation under consideration.
The Court further stated that the term ‘vest’ should be interpreted in line with Section 211 of the Indian Succession Act, 1925. Under Section 211, ‘vest’ does not confer ownership upon the administrator or executor but only entitles them to hold the property until it is distributed among the legal heirs. Section 109A of the erstwhile Act was meant to address the vesting of shares or debentures from a holder to their nominee upon the holder’s death. The non-obstante clause temporarily vests securities in a nominee, to the exclusion of others, to assist the company in discharging its liability regarding various claims by the successors of the deceased shareholders until such matters are resolved and the securities are ready for transfer to the successors.
Similarly, Bye-law 9.11.1 under the Depositories Act, 1996, provides for the nomination by shareholders. In this context, as with Section 109A, the term ‘vesting’ is used in a limited manner. The non-obstante clause is included to facilitate the depository's management of securities in the event of the shareholder's death, ensuring that the securities are handled appropriately until the rightful successors are determined.
Impact Analysis
There is growing concern about whether a policyholder’s parents, spouse, or children, who are appointed as nominees for their life insurance policy in accordance with Section 39(7) of the Insurance Act, 1938, will become the owners of the claim amount payable by insurance companies or will receive this amount merely as trustees for all legal heirs, as per the conventional legal understanding of the concept of a nominee.
Let's understand this through an illustration. The head of family A has three children. Initially, he nominated his wife as the sole beneficiary of his insurance policy, intending for her to be the sole owner of the proceeds, with their children having no claim over it. This was in accordance with Section 39(7), which states that if the nominees are parents, spouse, or children, they become the owners of the policy proceeds and do not merely act as trustees on behalf of all other legal heirs.
However, the recent Supreme Court judgment has cast doubt on this interpretation. While Section 39(7), introduced in 2015, clearly states that nominees who are parents, spouse, or children become the owners of the policy proceeds, the Supreme Court did not consider this section in its verdict. Instead, in deciding the legal position of a nominee in a depository account, the Court declared that the nominee is not the owner of the shares held in the account but merely receives them on behalf of the legal heirs as their trustee.
The Court referenced the status of a nominee under life insurance policies, suggesting that the nominee acts as a trustee for the legal heirs. It invoked its landmark judgment in Sarbati Devi vs Usha Devi of 1983, which held that nomination under Section 39 of the Insurance Act, 1938, does not establish a line of succession. Instead, any amount paid to a nominee upon the policyholder’s death forms part of the deceased policyholder's estate, to which all his/her heirs are entitled.
This ruling has significant implications, potentially altering the understanding of nominees' rights under life insurance policies. The legal heirs of a deceased policyholder may have a valid claim to the policy proceeds, even if the policyholder's intention was for the nominee to be the sole beneficiary. As such, policyholders may need to reconsider their estate planning strategies to ensure their intentions are legally upheld.
Confusion
According to Section 39(7) of the Insurance Act, 1938, if the nominees are parents, spouse, or children, they become the owners of the policy proceeds. However, the recent Supreme Court judgment states that all nominees, including parents, spouse, or children, are only trustees and not owners of the proceeds. This interpretation is based on the Supreme Court's opinion in the Shakti Yezdani case, which forms part of the ratio decidendi (the reason for the decision) of the judgment and is not a mere obiter dictum (an opinion not essential to the decision and therefore not legally binding as a precedent).
The concern is that this decision is not just a passing remark but is integral to the Court’s reasoning in reaching its conclusion. Therefore, it may become a binding precedent—a stare decisis. This ruling has created confusion among existing life insurance policyholders. They are uncertain whether this decision, which came after the 2015 amendment, effectively nullifies the amendment (insertion of Section 39(7)) and undermines their intention of making nominees the owners of the policy money.
Life insurance companies and the Insurance Regulatory and Development Authority of India (IRDAI) should consider addressing this matter with the Supreme Court to seek clarification in the interest of the large body of policyholders. This step is crucial to ensure that the policyholders' intentions are legally upheld and to remove any ambiguity regarding the ownership of policy proceeds by nominees.
Nominees vs. Legal Heirs
The longstanding debate on the conflict between the rights of nominees and legal heirs over the devolution of shares has been a source of much controversy and confusion, despite the settled legal position that holds the legal heir as the ultimate rightful owner of the property. A nominee can act only as a trustee on behalf of the legal heir and hold such property until a conclusive decision on the matter of succession is reached. However, the introduction of Section 109A by the Companies (Amendment) Act, 1999, dealing with nomination, fueled a revival of this debate.
领英推荐
The amendment under Sections 109A and 109B of the Companies Act, 1956 (“1956 Act”) first introduced provisions for nomination by a shareholder, which were eventually re-enacted as Section 72 of the Companies Act, 2013 (“2013 Act”). The Notes on Clauses appended to the Companies Bill, 2011, explain:
“This clause corresponds to Section 109A of the Companies Act, 1956, and seeks to provide that every shareholder or debenture holder may appoint a nominee or a joint nominee who shall be the owner of the instrument in the event of the death of the holder or the joint holder unless the nomination is varied or canceled.”
Controversy arose after the Bombay High Court in Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited (“Kokate”) held that the nominee is the beneficial owner after the death of the original owner of the shares—effectively making a nomination override succession. However, in Jayanand Jayant Salgaonkar v. Jayshree Jayant Salgaonkar (“Salgaonkar”), the Bombay High Court declared the Kokate judgment per incuriam and held that legal heirs, not nominees, would have ownership rights over the shares. An appeal was preferred to the Division Bench of the Bombay High Court, which ruled in favor of the view held in Salgaonkar as opposed to the one held in Kokate.
The issue was raised in the Supreme Court in Shakti Yezdani & Anr. vs. Jayanand Jayant Salgaonkar & Ors. The dispute in this case centered on the distribution of certain assets of Jayant Salgaonkar (“Testator”). The Testator had executed a will making provisions for the devolution of his estates by nominating successors. The Respondent filed a suit seeking a permanent injunction to restrain all other respondents and appellants from taking any action concerning the properties.
The Supreme Court judgment has finally put the debate to rest by holding that being a nominee in shares/securities does not entitle the person to inherit them by default. The Court also held that provisions relating to the nomination for shares of the company under Section 109A of the 1956 Act, Section 72 of the 2013 Act, and the relevant provisions in the Depositories Act, 1996 (“Depositories Act”), cannot override the rules of succession under the Indian Succession Act, 1925, or the personal laws of succession applicable to the deceased shareholder.
On the Effect of the Non-Obstante Clause
The Appellants argued that the "non-obstante clause" in Section 109A of the Companies Act, 1956, provided an overriding effect to the nomination over any other law and granted absolute rights to the nominee.
The Court referred to the judgment in Ram Chander Talwar & Anr. v. Devender Kumar Talwar & Ors., where it had rejected the argument that the non-obstante clause granted the nominee absolute ownership of the subject matter to the exclusion of legal heirs. The interpretation of general words and phrases used in a statute must align with the objectives of the statute and not be read in isolation. The application of the non-obstante clause must be in accordance with the scheme of the legislation.
The Court observed that the non-obstante clause in this case served the singular purpose of allowing the company to vest the shares in the nominee to the exclusion of any other person to discharge its liability against diverse claims by the legal heirs of the deceased shareholders. This arrangement would be temporary until the legal heirs have settled the affairs of the testator and are ready to register the transmission of shares by due process of succession law. Hence, the interpretation of Section 109A, while considering the scheme and intent of the Act, clarified that the non-obstante clause did not exclude legal heirs from their claim over the securities against the nominee.
The Supreme Court thus held that the non-obstante clause in Section 109A does not confer absolute ownership to the nominee, but rather provides a mechanism to temporarily vest the shares in the nominee, ensuring the company can discharge its immediate obligations while the legal heirs settle the succession matters.
On the Third Line of Succession Contemplated under the Companies Act
The Appellants argued that a valid nomination made under Section 109A of the Companies Act, 1956, Section 72 of the Companies Act, 2013, and the Depositories Act constituted a third category of statutory testament, overriding intestate succession. The Court rejected this argument by referring to the judgment in Sarbati Devi & Anr. vs. Usha Devi, which held that a nomination under the Life Insurance Act, 1938, did not create a statutory testament. The amount paid to a nominee on the death of the policyholder would form part of the deceased's estate and would eventually devolve upon the heirs in accordance with the personal law of succession applicable to the deceased.
The Court held that the 1956 Act and the 2013 Act did not contemplate a “statutory testament” that stood over and above the laws of succession. A perusal of the statement of objects elucidated that the Act was concerned with regulating the affairs of corporations and not with the laws of succession. Moreover, a “statutory testament” through nomination was not bound by the same stringent requirements as those applied to the creation and validity of a will under the laws of succession.
This clarification by the Court ensures that nominations under these Acts do not override the personal laws of succession and reaffirms that the legal heirs retain their rightful claims to the deceased's estate. The intention behind the Companies Acts was regulatory in nature, focused on corporate governance, and not on altering the established norms of succession.
Few Thoughts and Observations
The Indian Companies Act is largely based on the English Companies Act. However, the English Companies Act has no parallel provision, except that the English legislation provides for nomination by shareholders under Section 145 if the Articles of the Company allow for the same. This nomination does not confer absolute ownership. The intent behind the provision was to facilitate indirect investors to exercise governance rights. The intent behind introducing the section was to remove any doubts about the companies’ ability to make provisions in their Articles of Association for others to enjoy and exercise membership rights. It also enables indirect investors to enjoy information rights via the registered member. The legislation clarifies that the nomination, with respect to information rights as provided under Section 146, will terminate on the death of the shareholder under Section 148 of the Act. This is in clear contrast with the Indian position prior to the decision.
In Salgaonkar, the Court observed, “The nature of corporate instruments and securities has, however, undergone a massive change… The fundamental focus of Section 109A and Section 109B of the Companies Act and Bye-Law 9.11 of the Depositories Act is not the law of succession, nor is it intended to trammel that in any way. The sole intention is, quite clearly, to afford the company or depository in question a legally valid quittance so that it does not remain forever answerable to a raft of succession litigations and an endless slew of claimants under succession law. It allows that liability to move from the company or the depository to the nominee.”
The Supreme Court decision has cleared the confusion regarding a nominee’s status as a holder of assets versus an absolute owner. The general understanding is that the nominee cannot be equated with an heir upon the death of the holder of the instrument, considering the nomination does not confer any beneficial interest in the nominee. Following an analysis of the intent behind the provision, the Court concluded that the vesting of assets in the nominee under the 1956 Act was only for a limited purpose and the interpretation of the non-obstante clause should align with the objects of the statute. In effect, the provision had not excluded legal heirs from their claim over the securities against the nominee.
Further, the subjects of wills, intestacy, and succession fall under Entry 5 of List III of Schedule VII of the Constitution of India. Both the State Legislature and the Parliament can legislate on subjects under List III. However, the Parliament has enacted the Companies Act pursuant to Legislative Entries 43 and 44 of List I of Schedule VII, which grants only the Parliament the power to legislate. The State Legislature cannot make any changes to the same. Therefore, the Companies Act could not have governed matters relating to intestacy and succession, as it would take away the power of the State Legislature to legislate over those subjects.
In fact, the Supreme Court's decision has provided clarity on the role and rights of nominees versus legal heirs in the context of the Companies Act and related legislation. The ruling reinforces the understanding that nominations under these Acts are meant to simplify the process for companies and depositories in handling claims and are not intended to alter the established laws of succession. This ensures that the rightful claims of legal heirs are preserved, maintaining the balance between corporate regulatory frameworks and personal succession laws.
Conclusion?
The judgement plays a crucial role in delineating the rights of the nominees as nominated under Section 109A of the Act. The Supreme Court has effectively negated the view held by it in?Aruna Oswal v. Pankaj Oswal?& Ors., wherein it was stated that the non-obstante clause employed under Section 72(3) of the Companies Act, 2013 which is?pari materia?to Section 109A makes the vesting of shares unto the nominee absolute. The legal stance taken by the Apex Court aligns the rights of the nominee with those of the heirs in their respective situations, offering a method to facilitate the seamless operation of the company’s affairs.??
The decision employs rules of interpretation of a statute such as the purposive rule. The purposive rule of interpretation focuses on the intended purpose of any legislation. The judgment places major reliance on the context and objective of the Act in order to identify the impact and extent of the concept of ‘nomination’ under the erstwhile Companies Act. Emphasis is also supplied on the context of the legislation while understanding the meaning of the term ‘vest’ under the Act.??
It sets a definitive precedent, highlighting the superiority of succession laws over corporate law provisions concerning nominees. The judgment offers crucial clarity and direction for settling conflicts between nominees and legal heirs regarding the ownership of shares or securities after the original holder’s death. Further, it also provides a detailed perspective on the concept of ‘vesting’ rights and resolves uncertainties in corporate law, influencing estate planning and corporate investments.?
CA Harshad Shah, Mumbai [email protected]