legal heirs
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This article is written by Ajay Parakkat, pursuing Diploma in Companies Act, Corporate Governance and SEBI Regulations, from Lawsikho.com.

Introduction

The tug of war between nominees and legal heirs has witnessed significant legal battles before the Indian judiciary on the question of with whom rests the rightful ownership of assets; the legal heir or the nominee? The long-held battle had a conclusive end recently by order of the National Company Appellate Law Tribunal, where the role of the legal heirs and the nominees had an exhaustive discussion and their rights were decided upon. 

Who is a nominee?

A nominee is a trustee who holds an asset as a trustee for the owner of the asset. The nature of the relationship between the owner of an asset and the nominee is of a principal and an agent. In a principal-agent relationship, the agent acts on behalf of the principal for discharging his duties for the benefit of the principal on trust. There is a fiduciary relationship between the parties where the agent acts on behalf of the principal in the best interests of the principal.

Who is a legal heir?

The common law defines an heir as an individual appointed by law to succeed the estate of the deceased where there is no will. It’s normally used to identify a person who succeeds the properties of the deceased either by a will or without a will. 

What is the difference between a nominee and a legal heir?

Nominee

Legal heir

  • Nominee is a trustee and not the owner of the asset. 
  • There is a fiduciary relationship between the owner of the asset and the nominee.
  • Any person who is of the age of majority can be appointed as a nominee.
  • Nominee is appointed generally for assets/facilities like bank accounts, insurance policy, investment in shares and other securities, etc.
  • A legal heir is the rightful owner of the properties of a deceased person. 
  • There is a definite legal right for an heir to receive the possession of the assets as per succession laws.
  • Legal heirs are identified by their relation as per the succession laws unless there is a written will of the deceased for succession of his/her estate.
  • It is a natural right envisaged by law.

Does nomination overrule succession?

A nominee is a beneficiary who has been so nominated to receive the benefits of the estate of the deceased person as evidenced by a document generally termed as ‘nomination form’. The aim of nominating an individual as a beneficiary is to simplify the procedure of settlement of the estate of a deceased person and to avoid any kind of disputes.

The position of a nominee has been recognized as an ‘agent’ or ‘trustee’ by various enactments and rulings of various courts and is not considered as a tool of testamentary succession as a substitute to a ‘will’. There have been multiple judgments by High Courts where the status of a nominee was held to be only as an agent to receive the amounts when due from time to time and it remains as the estate of the principal and are subject to the applicable law of succession upon the death of the owner/principal.

Nomination for shares under the Companies Act

The Honorable Division Bench of High Court of Bombay has through its judgment in the case of Shakti Yezdani v. Jayanand Jayant Salgaonkar stated that the nominee of a holder of shares or securities appointed under Section 109A of the Companies Act, 1956 is not entitled to the beneficial ownership of the shares or securities subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estate of the holder as per the law of succession. 

The court clarified that the nomination does not override the law of testamentary or intestate succession. The rationale behind nomination is to protect the rights and benefits of the deceased till the legal representatives can step in and take appropriate measures to secure them.

The recent order of the National Company Law Appellate Tribunal (NCLAT) in Oswal Greentech v. Mr Pankaj Oswal and Ors. (Company Appeal (AT) No. 410 Of 2018 / 07-01-2019) held that the rightful ownership of shares remains with the legal heir and not on the nominees. 

Brief facts of the case

Mr. Abhay Oswal (deceased) held majority shares in Oswal Agro Mills Limited. Mr. Abhay Oswal (deceased) had filed a nomination in favour of Mrs. Aruna Oswal (nominee) in respect of the shares held. After his death, the nominee filed a request for registration of the impugned shares in favour of her and the Company accordingly transferred the shares in the name of nominee. Mr. Pankaj Oswal (hereinafter referred to as ‘legal heir/ representative’), approached the National Company Law Tribunal (‘NCLT’) contenting that the transfer of shares to the nominee done in violation of the laid down laws and regulations. The NCLT allowed the petition and aggrieved by the decision of the NCLT, the company approached the National Company Law Appellate Tribunal (NCLAT).

NCLAT order

The NCLAT held that the shares of the deceased ultimately vests with the legal heir. The nominee of the deceased person has the possession of the title of the shares only until they are transferred to the legal heirs.

The NCLAT further noted that “The right arising out of an instrument does not vest with nominee automatically on the death of the original holder of the instrument. Nominee does not mean that the amount or the share belongs to the nominee. On the death of the holder of the instrument, the amount/ share vests with the legal heirs, the nominee merely holds the amount/ share herein till the matter of vesting is decided in favour of the legal heirs.”

What this essentially means is, the nominee will receive and hold the property of the deceased person until he/she is legally bound to transfer or distribute the estate and the rights attached to them, to the legal heirs of the deceased. Till such a legal obligation arises, the nominee is free to have the possession of the estate of the deceased and to enjoy the benefits deriving from it.

Judgments on Nominee Vs Legal heir

There have been numerous judicial pronouncements where the rights of nominees and legal heirs on the estate of the deceased have been conclusively decided. In the case of Smt. Sarbati Devi and Anr. V. Smt. Usha Devi, the Hon’ble Supreme Court has held that a nomination cannot be given the same position as that of a will. A nomination and a will are two different concepts and nomination could not be given the same legal status as that of a will. A nominee can’t be considered as the owner of a property and a nomination does not bestow all the beneficial ownership of the assets to the nominees alone.

Another significant judgment was in Uma Sehgal and Ors. vs Dwarka Dass Sehgal And Ors., wherein the High Court of Delhi, where it was held that a nominee is nothing but a person who receives the payment on behalf of the heirs of the assured.

The Supreme court in Shipra Sengupta v. Mridul Sengupta [(2009) 10 SCC 680] held that the position of nomination is no longer ‘res integra’ and the nominee is entitled to receive the benefit, but the amount so received is to be distributed according to the laws of succession among the legal heirs. Thus a nomination does not grant any beneficial right on the nominee.

Conclusion

The various Courts and Tribunals have now unequivocally made it clear that the legal heir is the ultimate owner of the properties of the deceased person and a nominee merely holds the property in trust and the legal heirs can make their claim over the estate of the deceased against the nominee. However, nominations in matters of inheritance and succession often leads to incorrect interpretation among the nominees and they end up in courtrooms fighting the battle against the legal heirs of a deceased person with the perception that a nomination transfers all the rights over the estate of the deceased to such nominees. 

While a nomination is a tool to protect the estate and the rights of the deceased, it should be noted that a will is a supreme document that sets out the absolute intentions of the testator to protect the estate and the rights attached to it. The ideal way to avoid any kind of legal battle in respect of inheritance and succession is to make a will that clearly states the distribution of the estate and the rights attached with it to each and every successor and to specifically mention the nominees wherever appointed by the deceased. 

Hence we can undoubtedly say that the legal heirs of the deceased person has the legal right over the shares held by the deceased person over the nomination made on such shares on the benefit of any person. The harmonious solution is to align the nominations on shares with the contents of the will keeping the same individuals the ultimate beneficiary of such shares.

 

Bibliography

  1. https://indiankanoon.org/doc/1308094/
  2. IndiaCorpLaw
  3. https://indianlegalsolution.com/difference-between-legal-heir-and-nominee/
  4. Vinod Kothari &Co
  5. ICSI Study materials

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