Inheritance disputes: SC judgment in Oswal case brings clarity

D Varadarajan | Updated on July 28, 2020 Published on July 28, 2020

By observing that inheritance of shares is a civil matter and cannot be decided by company tribunals, the Apex Court has set a precedent that will do away with parallel proceedings in future disputes

Disputes as to right, title and interest in the shares of companies among the legal heirs, representatives and siblings after the demise of the original owner are not infrequent, eventually opening up the floodgates of litigation at many a forum. The corporate world has witnessed succession wars and boardroom coups aimed at controlling the rights of companies, notwithstanding any clear and specific nomination made by the original shareholder during their lifetime in favour of one of the heirs. The plurality of proceedings with ingenuity at various forums, forum shopping, etc, by making self-serving allegations and seeking specious and speculative relief are not uncommon occurrences, and cases dockets often travel from deck to deck through the hierarchy of th court system, ultimately landing up in the Supreme Court of India, which is the final arbiter.

Only a few days ago, the Supreme Court decided eminently and authoritatively a dual legal battle as to inheritance of shares involving the family members of an industrial house, in the matter of Aruna Oswal vs Pankaj Oswal & Ors(Civil Appeal No. 9340 of 2019, decided on July 6, 2020). The latest judgment of the Supreme Court will bring clarity to the corporate sector while dealing with such disputes.

Inheritance of company shares

The case is the outcome of a family tussle. The patriarch, during his lifetime, made a nomination in the prescribed manner in favour of his wife in respect of his shares (amounting to 39.88 per cent) in Oswal Agro Mills Ltd. The disgruntled son (respondent 1) filed a partition suit in the High Court, claiming entitlement to one-fourth of the estate of the father, including one-fourth of the shares inherited by his mother from his father in the said Company, and similarly one-fourth of the shares out of the 11 per cent in another company as inherited by the mother from his father. The High Court passed an interim order to maintain status quo concerning shares and other immoveable property. It is to be noted that as on the date of the interim order, the shares stood registered in the name of the mother, who continues to own the shares.

While the suit was pending, respondent 1 also moved the National Company Law Tribunal (NCLT) alleging ‘oppression and mis-management’ under the provisions of the Companies Act, 2013, without even owning the threshold limit of 10 per cent of the shares in the company. His mother filed an application before the NCLT challenging the maintainability of the oppression and mismanagement petition on various grounds, including that she was the absolute owner of shares as per the provisions of the Act.

In essence, it was the principal contention of the mother that the main dispute raised as to inheritance of the deceased father’s estate was a civil dispute and could not be said to be an act of ‘oppression and mismanagement’, and parallel proceedings on the same issue were not appropriate. However, curiously, the NCLT directed filing of reply to the petition, without deciding the question of maintainability. This was challenged before the National Company Law Appellate Tribunal (NCLAT), which in turn directed the NCLT to decide the question of maintainability of the petition. The NCLT thereafter dismissed the challenge to maintainability and held that the son, being a legal heir, was entitled to one-fourth of the shares. Therefore, the matter eventually reached the Supreme Court of India.

Right to vest

According to Section 72 of the Companies Act, every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death. Section 72(3) overrides anything contained in any other law 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, and all the rights in the security shall vest in the nominee, unless the nomination is varied or cancelled in the prescribed manner. Prima facie, once shares vest in a nominee, he becomes absolute owner of the securities on the strength of nomination and can participate in the company meetings.

The Court observed that there was no doubt that in the absence of nomination, a legal representative cannot be denied the right to maintain a petition regarding oppression and mismanagement. In this case, however, the nomination has been made and the nominee is registered as the holder of shares. What is the effect of the same is to be decided by the civil court in the pending civil suit. The right of the nominee would depend upon what is provided statutorily.

The decision in the civil suit would be binding between the parties on the question of right, title or interest, and it is the civil court’s domain to determine in a suit for partition. Dispute as to inheritance of shares, is eminently a civil dispute and cannot be said to be a dispute as regards ‘oppression and mismanagement’ so as to attract company law jurisdiction.

Thus, the Supreme Court, after weighing a catena of cases cited at the Bar, held that the respondent has nothing to do with the affairs of the company and that he was not a registered owner of shares. He did not represent the body of shareholders holding requisite percentage of shares in the company necessary in order to maintain the petition for oppression and mismanagement.

The question of right, title and interest is essentially an adjudication of civil rights between the parties as to the effect of nomination. The decision taken in a civil suit will govern the rights of the parties; it would not be appropriate to entertain parallel proceedings. Hence, the Supreme Court directed dropping of the proceedings before thr NCLT regrading ‘oppression and mismanagement’ by setting aside the orders of both the NCLT and NCLAT.

The writer is advocate, Supreme Court of India

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Published on July 28, 2020
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