Abstract
Clause 109A (1) of companies Act 1956 states that ‘every holder of shares in, or holder of debentures of, a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in, or debentures of, the company shall vest in the event of death. A reading of Section 109A of the Companies Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights there under in the nominee upon nomination validly made as per the procedure. Now the question arises that Is Nominee the absolute owner of the assets? What does Section 109A actually talks about? And, what was the purpose of including this particular section through amendment act of 1999?
In this Research Paper the aspects of Section 109A of Companies Act 1956 will be critically discussed and analyzed. Why this provision is important for the companies and for the shareholders, who can be termed as Nominee and many more question regarding the transferability of shares will be clear to the readers by the end of this Research paper
Key words
Company law, Nominee, shareholder right, Sec 109A, Companies Act 1956, legal heir, Transfer of assets
Introduction
Sec 109(A) is the extension of Sec. 109 of companies act. Sec 109 deals with the transfer of shares and other interests in the company of deceased to his legal representative. The ‘legal representatives’ is a term of wide meaning and connotation and would have to be given the meaning as given to it under the Code of Civil Procedure. Sec. 2(11) of CPC states that a legal representative is the person in law who represents the estate of deceased and includes any person who intermeddles with the estate of deceased and where a party sues or sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued. Having said that Sec.109(A), clearly states about the transferability of shares or debentures to the nominated person by the person so deceased. Now the person so nominated may also be the legal representative or may not be. Generally, people tend to believe that Nominee and Legal representative is synonymous, but it’s not. Nominee is someone who is like the caretaker of the asset and legal representative is the one who is the owner of the asset. But, in the cases of certain shares, nominee is the real owner until a will is produced that suppressed it.
Sec. 109(A) includes the matter regarding –
Transferability of shares to nominated person, Transfer of shares or debentures held by more than one person jointly, Transfer of share or debentures in the case in which nominee is a minor.
The objective of introduction of nomination via the Companies (Amendment) Act, 1999 was only to provide an impulse to the investment climate and ease the burdensome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.
The vesting of shares or debentures within the nominee under Section 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 particular period of time i.e., to ensure that there prevails no confusion in legal formalities that are to be undertaken upon the death of the holder, to protect the subject matter of nomination from any protracted litigation until the legal representatives of the deceased are able to take appropriate steps.
The research paper aims on giving a clear understanding of sec. 109A. It further focuses on the rights of Nominee and legal heir.
Research Methodology
This paper is of descriptive nature and the research is based on secondary sources for the deep analysis of companies act with view of sec. 109A along with rights of nominee and legal heir. Secondary sources of information like newspapers, journals, and websites are used for the research.
Review of Literature
Sec. 109A deals with the nomination of shares. Nominee a term, that means a person who is so nominated to hold shares is nowhere defined in the law. Some of the High Court are of the view that “nominee” under section 39 of insurance act is merely an agent to collect money for the benefit of heirs and legal representatives, others are of the view that nominee receives money in the right of full capacity. Same can be applied with the view of Companies act when it comes for the nomination of a person to whom the securities of a deceased person will be transfer to.
The management structure of the close or closely held corporations is largely dependent on the desire of the shareholder. In a typical corporate scenario, ownership is vested in the shareholders who elect a board of directors. The board of director elect officers and the officers are the generally the same person who look after the management of the business. Now in such a scenario share of shareholder and rights of shareholder plays a key role in the management of the business. If a shareholder died, his or her shares would be transferred to the spouse in case or child[ren], or to the nominated person. This might have a negative impact on the whole decision-making process of the business. With this view sec. 109A comes as a savior for the disputes or the unnecessary litigation that might place for the ownership of securities. It vests the assets in the hands of nominee till the legal heirs take any necessary steps.
In the case of U.S an absolute prohibition on transfer is against public policy and would be adjudged void, no matter how short the time specified. Reasonable restrictions, however, are sanctioned. A number of state statutes expressly authorize specific restrictions. If we compare on this regard with U.S restriction with regard to the transferability of shares can be seen in India as well. The so-called restrictions are already mentioned in the deed that was made before the buying the shares, however to ease the process of this transferability, sec.109A provides with a clear mechanism.
Decoding Sec. 109A
Sec. 109A of companies act 1956 states –
Clause (a) says, every holder of shares in, or holder of debentures of, a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in, or debentures of, the company shall vest in the event of his death.
Clause (b) says, Where the shares in, or debentures of, a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, a person to whom all the rights in the shares or debentures of the company shall vest in the event of death of all the joint holders.
Clause (c) goes like, Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, the company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in, or debentures of, the company, the nominee shall, on the death of the shareholder or holder of debentures of, the company or, as the case may be, on the death of the joint holders becomes entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint holders, in relation to such shares in, or debentures of, the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.
And the last clause of the section mentions, Where the nominee is a minor, it shall be lawful for the holder of the shares, or holder of debentures, to make the nomination to appoint, in the prescribed manner, any person to become entitled to shares in, or debentures of, the company, in the event of his death, during the minority.
- For the clear Understanding of clause (1), we have to break it down –
Holder’s right to nominate – This provision affirms the right of every shareholder in the company to appoint or to nominate a person who will inherit or receive those assets in the course of their death; Transfer of ownership – The purpose of nomination is to determine who will receive ownership of the shares and debentures. This make sure that the holder can specify the person to whom the assets will be transferred to; Flexibility – The provision emphasizes that holders have the freedom to make nominations at any time. This flexibility allows holders to update or change their nominations as their circumstances or preferences change over time.
Now to the context it is quite clear that every shareholder of every company will have to nominate a person who will be entitled to the ownership of the shares that he/she owns in the company.
In a company with regards to the ownership of the shares or securities there are two type of ownership –
Single holder of shares & Joint holder of shares.
Joint shareholding means when two more persons jointly have the ownership of the shares or debentures. Now the question that erects here is, on the death of joint shareholders what will be the process of nomination.
Clause (2) of sec.109A provides with the answer for the same.
In the case of the joint shareholders all the shareholders together nominate a person with unanimity by the procedure so prescribed who will be entitled to the ownership of the shares after the death of all the shareholder. A point to be mentioned here is that, this provision is with regard to the death of “all the shareholders”, then only shares will be transferred to the person so nominated. On the death of any co-holder, his share will be vested with other co-holders.
Clause (3) starts with Notwithstanding anything contained in any other law for the time being in force, that means this provision provides that no matter what is contained in any other law regarding the rights of nominee, when a person passes away, the rights of ownership of the shares or the securities will be vested within the nominee. An exception may arise in the case of cancellation of nomination.
To have a clear of understanding of this provision lets have detail look into –
Nomination – Nomination process as prescribed by the rule or regulation of the company; Nominee Rights – If a valid nomination has been made, and the shareholder or debenture holder passes away, the nominee becomes entitled to all the rights associated with those shares or debentures. This includes rights such as receiving dividends, attending shareholder meetings, voting on company matters, or redeeming debentures, depending on the terms of the shares or debentures and the company’s policies; Cancellation – The nominee’s entitlement can be changed or revoked. This likely includes cancelling or altering the nomination.
In a case where the nominee is minor, clause (4) comes in role. It states that during the nomination if the nominee is minor than any other may be assigned to receive them in the event of their death during the minority of the nominee.
It provides for a mechanism of substitute nominee to whom the rights of own the securities will be vested for the period of time till the real nominee is in minority.
Talking about the legal authorization, provision makes it lawful for the holder to appoint a substitute nominee in a manner prescribed.
Rights of Nominee
Nominees are the people who will be responsible to the benefits and other privileges as enjoyed by the holder of assets. Nominated person can be anyone including –
Family Member, Relative, Others
Appointment of nominee ensures that there is an interim arrangement to take care of legal and financial matters of the deceased till the time his wealth can be divided among legal heir.
As explained by various courts in India from time to time, nominees do not have an absolute ownership of the assets for instance. They are only custodian of the assets till the time legal heir of deceased claims it.
In that sense, the role of nominee is just limited to the distribution of the funds on behalf of others.
Importance of nomination and transfer of shares and debentures
Modem corporation statutes generally provide that the business and affairs of a corporation shall be managed by or under the direction of its board of directors. Board of directors are elected by the shareholders and work on the advice of the shareholders. Ordinary resolutions such as election and removal of directors, appointment of external auditors, remuneration of directors, payment of dividend, approval of annual accounts and the routine matters relating to the conduct of a company are passed with the approval of more than 50 per cent of the shareholders present and voting. All shareholders in India have the right to participate and vote in company meetings and shareholder ballots. All matters of importance regarding a company’s functioning require shareholder approval. Shareholders have a right to vote by proxy and are entitled to appoint another person as his/her proxy, irrespective of whether the proxy is a shareholder or not.
With the view of the context so far it is quite clear that shareholders play a vital role in the regular course of business. They have direct influence on the management of the company. So, in this case their rights and shares become a matter of utmost importance to the companies. As the person who will be entitled to the ownership of the assets of the shareholders after their shares can have a significant effect on the business. The person who is so entitled will be having a direct influence on the decision, having said that choosing a specified person for the ownership of the assets become crucial. Also, another problem that can arise for the companies can be about the litigation process that can arise due to the disputes among the legal heir of the shareholders. That’s why holders making the nomination serves as the purpose of resolving the unnecessary disputes and also ensures that their rights will be inherited by the person capable enough of handling the responsibilities.
In the case of Shakti Yezdani and Anr vs Jayanand Jayanti Salonkar it was held that the specific statutory provision making the 1 2010(3) Mh.L. J 780 sng 3 appeal-313n311.15 nominee entitled to all the rights in the shares excluding all other persons would show expressly the legislative intent. Once all other persons are excluded and only the nominee becomes entitled under the statutory provision to have all the rights in the shares none other can have it. Further section 9.11 of the Depositories Act 1996 makes the nominee’s position superior to even a testamentary disposition. The non- obstante Clause in section 9.11.7 gives the nomination the effect of the Testamentary Disposition itself. Hence, any other disposition or nomination under any other law stands subject to the nomination made under the Depositories Act.
And hence, above paragraphs provide a clear insight on why the nomination and transfer of shares are important.
Case laws
Indrani Wahi v. Registrar of Co-op. Societies and Others
Usha Ranjan Bhattacharjee v. Abinash Chandra Chakraborty
Shri. Shashidhar Janardan Pandharkar … vs Shri. Sudhakar Bapurao Pandharkar and
Mr. Nanak S. Ghatalia Vs Urmila S. Ghatalia
Conclusion
Shareholders are considered to be the important part of any company or business. Their rights, responsibilities as discussed above plays a vital role in the daily course of management. Whom shares will be transferred to? How shares will be transferred in the case of joint shareholders? What will be the situation when the person so nominated is minor? All these questions can be troublesome for the companies, which can also lead to unnecessary litigation or disputes from the part of legal heirs or someone who can claim themselves as rightful owner of the assets.
Sec.109A of companies Act 1956 that deals solely with the nomination and transfer of shares provides a clear insight of all such questions. This particular section of companies act was added to promote or impulse the investment in the economy of India.
Earlier due to the hectic process of documentation and many other formalities, transferring process was difficult, which demotivated the shareholders, with the amendment and inclusion of this particular this is reduced to much extent. Any person holding share would definitely want to make sure that their assets or privileges to vest with the actual rightful owner. And hence, this section is of utmost relevance for the shareholders
From the point of view of companies as well sec. 109A benefits them in many and reduces their load that relates to the transferring of the shares. Any company have obvious interest in knowing about their next shareholder, as already mentioned shareholders play an important role in the management process of any business.
In conclusion, Sec. 109 serves its purpose of narrowing the troublesome process that relates with the transferring of shares upon the death of existing shareholder, and provides for a specified mechanism for both the shareholders and the companies for the same.
In suggestions, there should be a more comprehensive and wide scope for the laws regarding the rights of the nominee and heirs.
Both the heirs and Nominee’s should be given separate rights.