prpri SC: Dispute of Inheritance of Shares is a Civil dispute- cannot be decided under Companies Act SC: Dispute of Inheritance of Shares is a Civil dispute- cannot be decided under Companies Act

The Supreme Court on 6 th July 2020 in the case of Aruna Oswalvs Pankaj Oswal has categorically held that dispute about inheritance of shares is a civil dispute and the same cannot be decided in proceedings under Section 241/ 242 of Companies Act, 2013.

The brief facts of the case are that Late Abhey Kumar Oswal held  5,35,3,960 shares in M/s. Oswal Agro Mills Ltd., a listed company. He died on 29.3.2016 in Russia due to heart attack. He is survived by his wife, 2 sons and a married daughter. Before his death on 18.6.2015 Abhey Kumar Oswal filed a nomination according to section 72 of the Act in favour of Mrs.ArunaOswal, his wife which was duly attested by 2 witnesses. In the said nomination, it was explicitly provided that this nomination would supersede any prior nomination or testamentary document made by him. The name of his wife was duly registered as a holder on 16.4.2016 for the shares held by her deceased husband.

Pankaj Oswal, the elder son of late Abhay Oswal filed a partition suit in the Civil Courts claiming entitlement to one­fourth of the estate of his father including the deceased’s shareholdings. The High Court vide order dated 8.2.2017 directed the parties to maintain the status quo concerning shares and other immoveable property. As on 8.2.2017, the shares stood registered in the ownership of Mrs. Aruna Oswal, who continued to be the owner of the shares. Pankaj Oswal filed a petition before NCLT which was challenged as being non- maintainable by her mother as the inheritance of the estate of the deceased is a civil dispute and could not be said to be an act of oppression and mismanagement. It was pleaded that such a dispute could not be adjudicated in a company petition filed during the civil suit’s pendency and prayed for dismissal of company petition on the preliminary ground of maintainability.  However, NCLT held Pankaj Oswal as legal heir entitled to one ­fourth share of the property/shares. Aggrieved by the said order, three appeals were filed before NCLAT which were dismissed vide judgment and order dated 14.11.2019. Aggrieved by the said order ArunaOswal approached the Apex Court. The Apex Court offered the parties to amicably settle amongst themselves but compromise between the contesting parties could not be arrived. Hence, the matter was heard on merits by the Apex Court.

On behalf of the appellant Aruna Oswal, it was vehemently argued that the appellant was the sole nominee of shares of erstwhile shareholder Late Abhey Oswal. It was also pleaded that in view of the provisions contained in section 71 of the Act, her son cannot claim any interest in the said shares because of the nomination. It was also pleaded that in view of explicit provision in section 244 of the Act, Pankaj Oswal lacked the requisite shareholding of 10% and therefore his application was not maintainable under sections 241 and 242 of the Act.

On behalf of the Respondent, it was fervently argued that the nomination was made only to hold the shares for the benefit of legal representatives and it is permissible for a legal representative to maintain the proceedings for oppression and mismanagement in the affairs of the company although his/her name is not entered as a registered owner of the shares.

The Court referred to Section 72 of the Companies Act, 2013 which reads as under:

“72. Power to nominate (1) Every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death.

(2) Where the securities of a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of death of all the joint holders.

(3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint­holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.”

The Court noted thus:

” from a bare reading of the aforesaid provisions of section 72(1), every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death……….Sub­-section (3) of section 72 contains a non­-obstante clause in respect of anything contained in any other law for the time being in force or any disposition, whether testamentary or otherwise, where a nomination is validly made in the prescribed manner, it purports to confer on any person “the right to vest” the securities of the company, all the rights in the securities shall vest in the nominee unless a nomination is varied or cancelled in the prescribed manner. It is prima facie apparent that vesting is absolute, and the provisions supersede by virtue of a non-­obstante clause any other law for the time being in force. Prima facie shares vest in a nominee, and he becomes absolute owner of the securities on the strength of nomination.”

The Court discussed the case of Smt. Sarbati Devi &Anr. v. Smt. Usha Devi, (1984) 1 SCC 424 which dealt with section 39 of the Life Insurance Act, 1938 concerning rights of a nominee in the amount covered under policy when the assured died intestate wherein it was held that nomination was subject to a claim of the heirs of the assured under the law of succession. The Court holding so categorically held thus:

“It is difficult to hold that Section 39 of the Act was intended to act as a third mode of succession provided by the statute. The provision in sub- section (6) of Section 39 which says that the amount shall be payable to the nominee or nominees does not mean that the amount shall belong to the nominee or nominees………….We approve the views expressed by the other High Courts on the meaning of Section 39 of the Act and hold that a mere nomination made under Section 39 of the Act does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy, the amount; however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.”

The Court also dealt with the case of Vishin N. Khanchandani & Anr. v. Vidya Lachmandas Khanchandani & Anr., (2000) 6 SCC 724, wherein the provisions of sections 6 to 8 of the Government Savings Certificates Act, 1959 had come up for consideration wherein it was held that the nominee was entitled to receive the sum due on the savings certificates, yet he retained the same for the persons entitled to it under the relevant law of succession. The Court also dealt with the case of Ram Chander Talwar & Anr. v. Devender Kumar Talwar & Ors., (2010) 10 SCC 671, wherein section 45­ZA(2) of the Banking Regulation Act, 1949 was considered by this Court as well as the provisions of the Hindu Succession Act, 1925 holding that nomination made under the provisions of section 45­ZA of the said Act was to receive the amount of deposit from the banking company on the death of the sole depositor. However, the Court found the aforesaid cases distinguishable as none of them dealt directly on the legal impact of nomination u/s 72 of the Companies Act, 2013 vis-a- vis the provisions of Indian Succession Act, 1925& the Hindu Succession Act, 1956.

The Court relied upon it’s own decision in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad (Dead) through LRs. and Ors., (2005) 11 SCC 314, wherein it was held that the dispute as to inheritance of shares is eminently a civil dispute and cannot be said to be a dispute as regards oppression and/or mismanagement so as to attract Company Court’s jurisdiction under sections 397 and 398. The Court followed Dwarka Prasad Agarwal v. Ramesh Chander Agarwal,(2003) 6 SC 220 wherein it is held that the jurisdiction of the civil court is not completely ousted by the provisions of the Companies Act, 1956. as regards right of inheritance between the parties is eminently a civil dispute and cannot be said to be a dispute as regards oppression of minority shareholders by the majority shareholders and/or mismanagement.

The Court while setting aside the orders of NCLT & NCLAT held thus:

 “Admittedly, in a civil suit for partition, he is also claiming a right in the shares held by the deceased to the extent of one ­fourth. The question as to the right of respondent no.1 is required to be adjudicated finally in the civil suit, including what is the effect of nomination in favour of his mother Mrs. Aruna Oswal, whether absolute right, title, and interest vested in the nominee or not, is to be finally determined in the said suit. The decision in a civil suit would be binding between the parties on the question of right, title, or interest. It is the domain of a civil court to determine the right, title, and interest in an estate in a suit for partition.……..We refrain to decide the question finally in these proceedings concerning the effect of nomination, as it being a civil dispute, cannot be decided in these proceedings and the decision may jeopardise parties’ rights and interest in the civil suit. With regard to the dispute as to right, title, and interest in the securities, the finding of the civil Court is going to be final and conclusive and binding on parties. The decision of such a question has to be eschewed in instant proceedings.”

It would to trite to refer to some important cases decided by Apex Court, which have not been cited at bar which conform to the accepted practice of prevalence of succession over nomination i.e. the rights of the nominees do not prevail over that of the successors. 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 an instrument.It has been held in Usha Ranjan Bhattacharjee vs. Abinash Chandra Chakraborty, (1997) 10 SCC 344  that even when a valid nomination is made under the West Bengal Cooperative Societies Act, 1973, the nominee does not acquire title to the property in question although the nominee is entitled to get the possession of the said flat in terms of the provisions of the said Act. The dispute of title was ordered to be decided by an appropriate forum if such challenge is made before the appropriate forum. Thus the Apex Court ultimately held, that consequent upon a valid nomination having been made under Section 69, the nominee would be entitled to possession, and further, that the issue of title had to be left to be adjudicated upon between the contesting parties in the appropriate Court.In the recent judgment in are Indrani Wahi Vs. Registrar of Cooperative Societies &Ors. (2016) 6 SCC 440,the Apex Court reiterated that the transfer of shares of the co-operative society in the name of the nominee was valid in as much as it was mandated by provisions of Co-operative Societies Act & Rules framed thereunder and is binding on the said society & held as under:.

“The Cooperative Society has no option whatsoever, except to transfer the membership in the name of the nominee, in consonance with Sections 79 and 80 of the 1983 Act (read with Rules 127 and 128 of the 1987 Rules). That would have no relevance to the issue of title between the inheritors or successors to the property of the deceased. Insofar as the present controversy is concerned, we therefore hereby direct ‘the Cooperative Society’ to transfer the share or interest of the society in favour of the appellant – Indrani Wahi. It shall however, be open to the other members of the family (presently only the son of Biswa Ranjan Sengupta – Dhruba Jyoti Sengupta; we are informed that his mother – Parul Sengupta has died), to pursue his case of succession or inheritance, if he is so advised, in consonance with law.”

The Court has left all the questions to be decided in the pending civil suit and have relegated the parties at the mercy of the civil court which is a time taking process and that too without any guidelines. The Court did not answer to the specific question whether Section 72 of the Companies Act, 2013 had an overriding effect on the law of Succession or not. It is true that the matters of inheritance are civil in nature and therefore fall in the domain of the civil court for adjudication but the Hon’ble Supreme Court had full occasion to declare the Law whether Nomination u/s 72 of the Companies Act overrides the law of Succession or not. Certainty is the essence of Judicial Discipline and the Apex Court should declare the Law as & when they are seized of the matter so that the subordinate courts dispose off the pending matters in light of the said declaration of law, binding on all authorities & courts. This will also help in unclogging of the courts & thereby reducing the pendency of cases in subordinate courts.

Author Bio

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

August 2021