Inheritance of shares

Inheritance of shares
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Dispute of inheritance of shares is a civil dispute and cannot be decided in petition of oppression and mismanagement

Introduction

The petition of oppression and mismanagement under Sections 241 and 242 of the Companies Act, 2013 (“Act”) can be maintained by a person who satisfies the requirement of Section 244 of the Act. The person should represent the body of shareholders holding requisite percentage of shares (at present 10%- Section 244 of the Act) in company. Section 241 of the Act deals with an application to the tribunal for relief in cases of oppression, mismanagement etc. Section 242 of the Act deals with powers of tribunal. Section 244 of the Act deals with the members who have right to apply under Section 241 of the Act.Recently, in the matter of Aruna Oswal vs Pankaj Oswal and Ors., Civil Appeal No. 9340 of 2019 (“Case”) before Supreme Court (SC) decided on July 6, 2020, the following issues cropped up - (1) what would be the effect of nomination of shares by the deceased as per the provisions of the Act and (2) whether a legal representative can maintain a petition under Sections 241 and 242 of the Act at the time when the dispute of inheritance of shares is pending before civil court. The judgment in the said Case is delivered by the Division Bench comprising Justice Arun Mishra and Justice S. Abdul Nazeer; the judgment is made reportable.

Brief Facts of the Case

On or about June 18, 2015 Mr. Abhey Kumar Oswal (deceased on March 29, 2016) filed a nomination according to Section 72 of the Act in favour of his wife, Aruna Oswal. Two witnesses duly attested the nomination in the prescribed manner. Section 72 of the Act provides that every holder of securities of a company may nominate any person to whom his securities shall vest in the event of his death. The name of Mrs. Aruna Oswal was registered as a holder on March 16, 2014 as against the shares as held by her deceased husband. Mr. Pankaj Oswal (son of the deceased) filed a suit for partition claiming entitlement to one-fourth of the estate including shares of the deceased. In suit for partition, the court directed the parties to maintain status quo concerning shares and other immovable property. Mr. Pankaj Oswal thereafter filed a company petition claiming oppression and mismanagement in the affairs of company and claimed his eligibility to maintain the petition on the ground of being a holder of 0.03% shareholding and claiming entitlement and legitimate expectation to 9.97% shareholding in company by virtue of his being the son of the deceased. The maintainability of the petition was questioned before the National Company Law Tribunal, Chandigarh (NCLT) which held it to maintainable and the same was affirmed by National Company Law Appellate Tribunal (NCLAT). The appeal was preferred against the judgment and order of NCLAT before the SC.

Effect of nomination under Section 72 of the Act

The SC in the Case observed that it is quite apparent from a bare reading of the provisions of section 72(1) of the Act, that every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death. In the case of joint holders also, they have a right to nominate any person to whom “all the rights in the securities shall vest” in the event of death of all joint holders. Subsection (3) of section 72 of the Act 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. Rule 19(2) of the Companies (Share Capital and Debentures) Rules, 2014 (“Rules 2014”) framed under the Act, also indicates to the same effect. Under Rule 19(8) of Rules 2014, a nominee becomes entitled to receive the dividends or interests and other advantages to which he would have been entitled to if he were the registered holder of the securities; and after becoming a registered holder, he can participate in the meetings of the company.The SC in the Case further observed that admittedly, in a civil suit for partition, Mr. Pankaj Oswal is also claiming a right in the shares held by the deceased to the extent of one-fourth. The question as to his right 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.Thus, the SC though gave its apparent view on the bare reading of relevant provisions in respect of nomination but left open the question to be decided by civil court.

Inheritance of shares is a civil dispute

The SC in the Case followed Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad (Dead) through LRs. and Ors., (2005) 11 SCC 314 (“Sangramsinh’s Case) and observed lucidly what was held in Sangramsinh’s Case 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, i.e., NCLT, NCLAT jurisdiction under sections 397 and 398 of the Companies Act, 1956 (which is pari materia to sections 241 and 242 of the Act). Adjudication of the question of ownership of shares is not contemplated under Section 397 of Companies Act, 1956.Maintainability of petition under Sections 241 and 242 of the Act by legal representative at the time when the dispute of inheritance of shares is pending before civil court.The SC in the case observed that in World Wide Agencies Pvt. Ltd. & Anr. vs Margarat T. Desor & Ors. (1990) 1 SCC 536 (“World Wide Agencies Case”), the SC held that a legal representative has a right to maintain an application regarding oppression and mismanagement without being registered as a member against the securities of a company. However, the question of nomination was not involved in the said decision, as such, the SC was not required to decide the question of the effect of nomination whether it vests all the rights in the securities in nominee to the exclusion of legal representatives.However, in the Case, the nomination had been made, and the nominee is registered as the holder of shares. What is the effect of the same is required to be decided to determine the extent of shareholding of Mr. Pankaj Oswal, concerning which civil suit filed earlier in point of time is pending consideration?The SC in the Case distinguished the decision in World Wide Agencies Case and held that the basis of the petition is the claim by way of inheritance of 1/4th shareholding so as to constitute 10% of the holding, which right cannot be decided in proceedings under section 241/242 of the Act. Thus, filing of the petition under sections 241 and 242 seeking waiver is a misconceived exercise, firstly, Mr. Pankaj Oswal has to firmly establish his right of inheritance before a civil court to the extent of the shares he is claiming; more so, in view of the nomination made as per the provisions contained in Section 72 of the Act.Thus, the SC in the case in the facts and circumstances of the instant case, observed that in order to maintain the proceedings, Mr. Pankaj Oswal should have waited for the decision of the right, title and interest, in the civil suit concerning shares in question. The entitlement of Mr. Pankaj Oswal is under a cloud of pending civil dispute. Thereby, the SC deem it appropriate to direct the dropping of the proceedings filed before the NCLT regarding oppression and mismanagement under sections 241 and 242 of the Act with the liberty to file afresh, on all the questions, in case of necessity, if the suit is decreed in favour of Mr. Pankaj Oswal and shareholding of Mr. Pankaj Oswal increases to the extent of 10% required under section 244 of the Act.

Conclusion

The SC in the Case gave the liberty to the parties to file afresh on all the questions in respect of oppression and mismanagement in case of necessity. At the same time, it holds a precedential value that a legal representative on the basis of legitimate expectation of holding of shares, when the nomination of shares exist under the Act, cannot maintain a petition of oppression and mismanagement unless he represents the body of shareholders holding requisite percentage of shares (at present 10%- Section 244 of the Act) in company. Further, it has been endorsed that inheritance of shares is a civil dispute and right, title or interest in the same is to be decided by civil court and the same cannot be decided in parallel proceeding of petition of oppression and mismanagement; no waiver in meeting the requirement under section 244 of the Act is appropriate that too in view of nomination done as per the Act and entitlement needs to be decided first.

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