Harsha Nitin Kokate vs The Saraswat Co-Op. Bank Ltd. & … on 20 April, 2010

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MNM




                                                                                          
                                                                  
                IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                   ORDINARY ORIGINAL CIVIL JURISDICTION 

                         NOTICE OF MOTION NO. 2351 OF 2008




                                                                 
                                         IN
                               SUIT NO. 1972 OF 2008

Harsha Nitin Kokate                                             ...Plaintiff




                                                     
     Vs.
The Saraswat Co-op. Bank Ltd. & Ors. ig                         ...Defendants

Mr. A.K. Maheshwari for Plaintiff
Ms. Shyama Parkar i/b. M.P.Rege & Co., for Defendant No.1
                                   
Mr. H.S. Shreepad Murthy for Defendant No.3


                                              CORAM : SMT. ROSHAN DALVI, J.

DATED : 20TH APRIL, 2010

JUDGMENT. :

1. The Plaintiff married one Nitin Kokate on 3rd December 2004. Her
husband expired on 5th July 2007. Nitin Kokate held certain shares in D-
mat Account with the Depository Participant Cell of Defendant No.1. Her

husband executed a nomination in the prescribed form following the
prescribed procedure set out by the Depository Participant, Defendant No.1
Bank in favour of the Defendant No.3, his nephew on 11th July 2006. The
Plaintiff claims an interest in the said shares as his heir and legal

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representative. She claims to have them sold.

2. This Suit is not concerned with the reason why she claims the sale of the
shares. The Plaintiff must show her legal right, title and interest in those

shares. If that is shown, the Plaintiff would be entitled to sell or transfer
those shares or to hold them as her own.

3. The Defendant No.3 claims right, title and interest in the shares pursuant
to the nomination executed in his favour. The nomination has been

executed well prior to the death of the deceased and well after his

marriage with the Plaintiff. The Defendant No.1 Bank has stated that the
nomination is executed as required and has been so registered with the

Depository Participant. The effect of the nomination is, therefore, to be
seen. The nomination form itself shows that the rights of transfer and/or
the amount payable in respect of the securities held by Nitin Kokate,

Defendant No.3 vests in him as the said nominee.

4. The law relating to nomination is set out in 109A of the Companies Act

pursuant to the amendment which came into effect on 31st October 1998. It
is common knowledge that prior to 1996 shares were not held in de-
materialised form. Consequent upon the Dematting of the shares the Share

Certificates in physical form are not mandatorily required to be issued by
the Limited Companies listed on the Stock Exchanges. Shares can be
transferred by word of mouth or on the Internet from person to person.
Upon such transfer the membership rights of the holder of the shares
changes. Since the share is an intangible movable property it is

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bequeathable estate The nomination in respect of the shares is, therefore,
important. Section 109A sets out the rights of the holder of shares to

nominate as well as the rights of the nominees thus:-

S.109A. Nomination of shares – (1) 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.
(2) ………..

(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 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

become 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.

(4)………

It can be seen from the aforesaid provision that nomination is
required to be made in the prescribed manner. Upon such nomination the

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shares would vest in the nominee in the event of the death of the holder.
Further upon it being made in the prescribed manner the nominee would

become entitled to all the rights in the shares of the Company to the
exclusion of all other persons. That is the effect of vesting the shares in the

nominee.

5. Mr. Maheshwari drew my attention to the Depositories Act 1996. Section
9.11 thereof relates to transmission of securities in the case of nomination.
Section 9.11 runs thus:-

9.11. TRANSMISSION OF SECURITIES IN THE CASE OF
NOMINATION:

9.11.1. In respect of every account, the Beneficial Owner(s)
(“Nominating Person(s)”) may nominate any person (“Nominee”)
to whom his securities shall vest in the event of his death in the
manner prescribed under the Business Rules from time to time.

9.11.2. The securities held in such account shall automatically be

transferred in the name of the Nominee, upon the death of the
Nominating Person, or as the case may be, all the Nominating
Persons subject to the other Bye Laws mentioned hereunder.

9.11.3……..

9.11.4. Beneficial Owner(s) may substitute or cancel a
nomination at any time. A valid nomination, substitution or

cancellation of nomination shall be dated and duly registered
with the Participant in accordance with the Business Rules
prescribed therefor. The closure of the account by the Nominating
Person(s) shall conclusively cancel the nomination.

9.11.5. A Nominee shall not be entitled to exercise any right

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conferred on Beneficial Owners under these Bye Laws, upon the
death of the Nominating Person(s), unless the Nominee follows
the procedure prescribed in the Business Rules for being registered

as the Beneficial Owner of the securities of the Nominating
Person(s) in the books of the Depository.

9.11.6. A nominee shall on the death of the Nominating
Person(s) be entitled to elect himself to be registered as a

Beneficial Owner by delivering a notice in writing to the
Depository, along with the certified true copy of the death
certificate issued by the competent authority as prescribed under
the Business Rules. Subject to scrutiny of such election, the

securities in the Account shall be transmitted to the account of the
Nominee held with any depository.

9.11.7. Notwithstanding anything contained in any other

disposition and/or nominations made by the Nominating
Person(s) under any other law for the time being in force, for the
purposes of dealing with the securities lying to the credit of
deceased Nominating Person(s) in any manner, the Depository

shall rely upon the last nomination validly made prior to the
demise of the Nominating Person(s). The Depository shall not be

liable for any action taken in reliance upon and on the basis of
nomination validly made by the Nominating Person(s).

9.11.8……

(underlining supplied)

6. Upon such nomination the securities automatically get transferred in the
name of the nominee upon the death of the holder of shares. The

nomination is required to be dematted duly registered with the Depository
Participant (Bank) in accordance with the Business Rules. The nominee is
required to follow the prescribed procedure in the Business Rules. Upon
the death of the holder of the shares the nominee would be entitled to elect

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to be registered as an beneficiary owner by notifying the Bank along with
the certified copy of the death certificate. The Bank would be required to

scrutinise the election and nomination of the nominee registered with it.
Such nomination carries effect notwithstanding anything contained in a

Testamentary Disposition or nominations made under any other law
dealing with the Securities. The last of the many nominations would be

valid.

7. Under the said Section the holders of the shares would nominate any

person in whom the securities would vest in the event of his death. This

nomination has to be made in the manner prescribed under the Business
Rules.

8. It can be seen that since all the shares are held in Demat form with the
Depository Participant and the portfolio of the holder may change each day.

Hence one nomination is specifically required to be made as provided in

the aforesaid legislation. The nomination would have the effect of vesting
in the nominee complete title in the shares. He would be entitled to elect

to be registered as a beneficial owner of the shares or he would have the
right to transfer the shares. These are inter alia the rights of every
shareholder of a listed Companies. These rights show that the vesting of

the shares is upon the death of the shareholder provided only that the
nomination is made as per the procedure set out by the Depository
Participant. This procedure is the registration of the form of nomination
constituting the nomination of the nominee with his photograph signed by
the holder as well as the nominee and witnessed by at least 2 persons and

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registered with the Bank. The purpose and object of this Section is clear. It
is simplifies the procedure relating to the transmission of shares which is

otherwise an intangible movable property. As the shares are now held in
Dmat form and can be purchased and sold in the market by word of mouth

or on the Internet, and no physical share certificates are issued by
Companies, only one nomination for all the shares in all the companies

need be made. That can be registered only with the Depository Participant
who records all the share transactions of the holder of the shares who is
mandatorily required to open a Dmat account with the Depository

Participant. Hence the legislature has simplified and specified the

procedure for vesting of shares by nomination made in the prescribed
manner.

9. Mr. Maheshwari on behalf of the Plaintiff contends that the nomination
only makes a nominee a trustee for the shares. He holds the shares in trust

for the estate of the deceased, the deceased died intestate and hence the

Plaintiff as the widow would be entitled to the shares to the exclusion of
the nominee.

10.Mr. Maheshwari drew my attention to the case of Smt. Sarbati Devi Vs.
Smt. Usha Devi, A.I.R. 1984 SC 346 for which a nomination made under

the Insurance Act in respect of the Life Insurance Policy under Section 39
of the Act came to be considered.

Section 39 of the Insurance Act runs thus:-

39. Nomination by policy-holder – (1) The holder of a policy of
life insurance on his own life may, when effecting the policy or at

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any time before the policy matures for payment, nominate the
person or persons to whom the money secured by the policy shall be
paid in the event of his death.”

11.Under the Insurance Act the nomination entails payment by the Insurance
Company to the nominee to obtain a complete discharge. Once the
amount under the Policy is paid to the nominee, the nominee would hold it

in Trust or the Estate because under the Insurance Act there is no
legislative provision that the nominee would obtain any other right.

12.It may be mentioned that the position under Section 30 of the Maharashtra

Co-operative Societies Act is similar for nominees in respect of shares in a
Housing Society.

Section 30 of The Maharashtra Co-operative Societies Act runs thus:-

30.(1) On the death of a member of a society, the society shall transfer
the share or interest of the deceased member to a person or persons

nominated in accordance with the rules or, if no person has been so

nominated, to such person as may appear to the committee to be the
heir or legal representative of the deceased member:

Provided that, such nominee, heir or legal representative, as the case

may be, is duly admitted as a member of the society:

Provided further that, nothing in this sub-section or in section 22 shall
prevent a minor or a person of unsound mind from acquiring by
inheritance or otherwise, any share or interest of a deceased member in

a Society.

(2)…….

(3)…….

(4) All transfers and payments duly made by a society in accordance
with the provisions of this section, shall be valid and effectual against
any demand made upon the society by any other person.

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Hence in a Co-operative Society also the shares of the member can be

simplicitor transferred to the nominee which transfer would effectually
discharge the Society as against any other person making a demand.

Such a transfer, therefore, cannot and does not result in vesting of the flat

in such nominee. Hence such nominee is merely a trustee for the estate of
the deceased. The Society is not concerned with the dispute amongst the
heirs of the deceased.

13.The provision pursuant to the amendment of the Companies Act is quite
the contrary. The nomination under Section 109A of the Co-operative Act

does not entail mere payment of the amount of shares. It specifically vests
the property in the shares in the nominee, in the event of the death of the
holder of the shares. The analogy drawn from the judgment in the case of

Sarbati Devi is completely misplaced.

14.The meaning and definition of the word “Vest” is required to be
considered. Black’s Law Dictionary 8th Edition at page 1594 shows the

meaning of “Vest” thus:-

“Vest:1. To confer ownership of (property) upon a person.

2. To invest (a person) with the full title to property.

3. To give (a person) an immediate, fixed right of present
or future enjoyment.

4. Hist. To put (a person) into possession of land by the
ceremony of investiture.

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Vested: Having become a completed, consummated right for
present or future enjoyment; not contingent; unconditional;
absolute .”

19.It is observed that the word “Vest” is a word of variable import even under

Indian Statutes. The illustrations given in the judgment are the Insolvency
Act which provides that the property vests in the Receiver. Such vesting is

held to be temporary and only for the purpose of management of the
properties of the insolvent for payment of his debts after distributing his

assets. Consequently, the Receiver would have no interest of his own in the
property vested in him. The vesting under the Land Acquisition Act is
shown to be different. Under that Act the property would vest “absolutely

in the Government free from all encumbrances”. Hence upon such vesting

the property acquired becomes the property of the Government without
any conditions or limitation either as to its title or possession.

Consequently, it is held at page 353 runs thus:-

“It would thus appear that the word “vest” has not got a fixed

connotation, meaning in all cases that the property is owned by the
person or the authority in whom it vests. It may vest in title, or it

may vest in possession, or it may vest in a limited sense, as indicated
in the context in which it may have been used in a particular piece of
legislation.”

20.Hence under that judgment which considered the provisions of theU.P.
Town Improvement Act it was held that the land vesting in the Municipal
or Legal Body was so vested only for the purpose of managing that land

and would not transfer ownership of the property to the Authority.

21.In the case of Dr. M. Ismail Faruqui Vs. Union of India A.I.R. 1995 S.C.
605 the concept of vesting the property in the Acquiring Authority came to

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be considered under the Acquisition of Certain Area at Ayodhya Act (33 of
1993). Considering the pith and substance of the Act, which was for the

acquisition of the property at Ram Janma Bhoomi-Babri Masjid site under a
legislation, it was held that vesting of the disputed land (Ram Janma

Bhoomi-Babri Masjid) was limited to holding it by the Civil Government as
Statutory Receiver and vesting of the area in excess of the disputed

structure was absolute.

Hence, it is seen that the intention of the Legislature is of primary
importance in considering the effect of the term “vest” in a given

legislation.

22.In the case of Municipal Corporation of Greater Bombay Vs. Hindustan

Petroleum Corporation (2001) 8 SCC 143 the vesting of watercourse in
the Municipal Corporation was held not to be except for entrustment of
the duty of the Municipality to maintain them in the manner provided

under Section 220A of the Bombay Municipal Corporation Act, 1888.

This would be in consonance with the intention of the legislation – no land

can become of the ownership of the Municipality merely because the
Municipality is enjoined to maintain it and for which the vesting in
possession alone would take place; the ownership would not vest.

23.Considering some of these judgments it has been held in the case of
Bharat Coking Coal Ltd. Vs. Karam Chand Thapar & Bros. 2002 (8)
SCALE 388 that the term vest in common English acceptation would mean
and imply conferment of ownership of properties upon a person and in

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similar vein it gives immediate and fixed right of present and future
enjoinment. However, it is observed, following the decision in the case of

Fruit and Vegetables (supra) and Dr. M Faruqui (supra) that the term
vest is a word of variable import. In that judgment the right, title and

interest of the Coke oven plant which is vested in the Central Government
under the Coking Coal Mines (Nationalisation) Act, 1972 was considered.

In that case the Appeal of the Company, in which the right, title and
interest of the owners of the plants were to have vested under the aforesaid
legislation, was dismissed holding that pursuant to the legislation the right,

title and interest could not stand transferred to the Government Company

since no infraction by the title holders was seen.

24.In the light of these judgments Section 109A of the Companies Act is
required to be interpreted with regard to the vesting of the shares of the
holder of the shares in the nominee upon his death. The act sets out that

the nomination has to be made during the life time of the holder as per

procedure prescribed by law. If that procedure is followed, the nominee
would become entitled to all the rights in the shares to the exclusion of all

other persons. The nominee would be made beneficial owner thereof.
Upon such nomination, therefore, all the rights incidental to ownership
would follow. This would include the right to transfer the shares, pledge

the shares or hold the shares. The specific statutory provision making the
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

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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. Section 9.11.7 further shows that the last of the nominations would

prevail. This shows the revocable nature of the nomination much like a
Testamentary Disposition. A nomination can be cancelled by the holder
and another nomination can be made. Such later nomination would be

relied upon by the Depository Participant. That would be for conferring of

all the rights in the shares to such last nominee.

25.A reading of Section 109A of the Companies Act and 9.11 of the
Depositories Act makes it abundantly clear that the intent of the
nomination is to vest the property in the shares which includes the

ownership rights thereunder in the nominee upon nomination validly made

as per the procedure prescribed,, as has been done in this case. These
Sections are completely different from Section 39 of the Insurance Act set

out (supra) which require a nomination merely for the payment of the
amount under the Life Insurance Policy without confirming any ownership
rights in the nominee or under Section 30 of the Maharashtra Co-operative

Societies Act which allows the Society to transfer the shares of the member
which would be valid against any demand made by any other person upon
the Society. Hence these provisions are made merely to give a valid
discharge to the Insurance Company or the Co-operative Society without
vesting the ownership rights in the Insurance Policy or the membership

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rights in the Society upon such nominee. The express legislature intent
under Section 109A of the Companies Act and Section 9.11 of the

Depositories Act is clear.

26.Since the nomination is shown to be correctly made by her husband who
was the holder of the Suit shares, the Plaintiff would have no right to get

the shares of her deceased husband sold or to otherwise deal with the
same.

27.Consequently the Notice of Motion is dismissed.

(SMT. ROSHAN DALVI, J.)

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