D. Ross Porter vs Pioneer Seed Co. Ltd.
1989 Latest Caselaw 145 Del

JUDGMENT

G.C. Jain, J.

1. The short question which falls for determination in this application is whether the director of a company has an absolute and unfettered right to inspect the records of the company. It has arisen in these circumstances.

2. Pioneer Hi-bred International Inc., USA (hereinafter to be referred as "PHI"), is organized and is existing under the laws of the State of low and was its registered office at 700, Capital Square, Des Monies 50309, USA. It is engaged worldwide in the business of research and development, production and sale of hi-bred seeds of various agricultural crops. The said business is being conducted for the last 62 years and is stated to have achieved enormous success and is regarded as a leader and pioneer in the seed business. The plaintiff, Mr. D. Ross Porter, is the Assistant General Counsel to the said company and is one of its directors.

3. Pioneer Seed Co. Ltd. (PSCL), the defendant, is a company incorporated under the provisions of the Companies Act, 1956, having its registered office at A-311, Ansal Chamber, I-3, Bhikaji Cama Place, New Delhi. It was incorporated on February 28, 1977, with the object of developing, growing, raising, processing, buying and selling, export, import and dealing in all kinds of seeds. PSCL is stated to have been set up and financed by PHI. The authorised capital of PSCL is Rs. 30 lakhs. Its subscribed and paid up capital is Rs. 5 lakhs. PHI holds 2,000 shares of the face value of Rs. 100 each Dr. Surinder M. Sehgal and Mrs. S. Kapoor hold 1,000 and 1,996 shares of Rs. 100 each, respectively. Remaining four shares are held by shares. Dr. Sehgal transferred his entire shareholding in in PSCL to Asian Investment Inc., a company wholly owned by Dr. Surinder M. Sehgal.

4. Till March, 1988, Dr. Sehgal was the vice-president of PHI and being a trusted employee of PHI, he and his sister, Mrs. Kapoor, were allotted the shares mentioned above. Till April 22, 1988, PHI, it is stated, was controlling and managing PSCL and running its affairs. PHI, besides holding 40% shares in PSCL, allegedly provided technical assistance in research information materials and funded the entire research activities amounting to Rs. 2,09,34,682. PHI advanced a loan of one million dollars to PSCL under agreement dated July 31, 1986. PSCL was also given critical plant of the value of Rs. 10,55,568 free of cost. PSCL had also a balance owing to it on export advance account of Rs. 44,40,150.

5. At all material times prior to April 22, 1988, the board of PSCL comprised Dr. Sehgal, Mrs. Kapoor and the plaintiff. However, disputes arose thereafter and on April 22, 1988 Dr. Sehgal, because of his majority shareholding, caused appointment of four directors on the board creating a majority for himself and reducing the representation of PHI to a minority. Presently, there are eight directors on the board including Mr. P. D. Ranjan. The defendant, however, disputes the appointment of Sh. P. D. Ranjan.

6. On or about October 17, 1988, the plaintiff received a notice from PSCL informing that a meeting of the board of directors was to be held on October 24, 1988. The plaintiff, by letter dated October 17, 1988, intimated PSCL that he was unable to attend the meeting and that he had nominated Mr. Brij Anand, a chartered accountant, as alternative director on the board of PSCL PSCL was requested to affect Mr. Anand's appointment at the beginning of the meeting itself in order to enable Mr. Anand to participate in the said meeting. On October 24, 1988, Mr. Anand reached the office of the PSCL to attend the board meeting. He was informed that the board of directors had discussed the matter of his appointment as alternative director and had rejected the same which decision was allegedly illegal.

7. On these allegations, the plaintiff filed a suit seeking a decree for declaration declaring that PSCL had no power to reject or refuse the appointment of Mr. Brij Anand as an alternative director for the plaintiff; the rejection was wholly illegal, invalid, arbitrary and that the resolutions passed at the board meeting dated October 24, 1988, were non-est, illegal, invalid and of no effect whatsoever.

8. This suit was resisted by the defendants on various grounds. It was averred, inter alia, that the plaintiff was placed in a fiduciary relationship but had violated the obligations and was guilty of misfeasance and breach of trust inasmuch as he became a director in Regency Megnatics Pvt. Ltd. along with Mr. Brij Anand, Mr. K. N. Mishra and Mr. P. D. Ranjan of which PHI was funding the entire operation. The purpose of floating of which PHI was funding the entire operation. The purpose of floating this company was to have an alternative to PSCL and to set up competition in India and that there was conflict of duty and interest and the plaintiff had violated laws of India in a conspiracy to defraud the defendant-company and its majority shareholders.

9. In the suit, the plaintiff had filed an application (I.A. No. 7194 of 1988) for granting temporary injunction restraining the defendant from implementing the resolutions passed in its meeting held on October 24, 1988, and directing the defendant to ensure that the plaintiff was duly represented in the board meeting though Mr. Brij Anand. This application was vehemently opposed. The main defense was that the plaintiff had set up two companies which had competitive interest with the defendants.

10. After examining the facts and circumstances of the case, P. K. Bahri J. by order dated January 18, 1989 (D. Ross Porter v. Pioneer Seed Co. Ltd. [1989] 66 Comp Case 363 (Delhi) allowed the application and directed the defendant to accept Mr. Brij Anand as an alternative director in place of the plaintiff to enable him to attend the meeting of the board of directors of the defendant.

11. Mr. Brij Anand went to the registered office of the defendant-company on March 3, 1989, with a letter requesting inspection of the books of account under section 209(4) of the Companies Act, 1956. He was, however, not allowed the inspection. Consequently, he filed the present application for directing the defendant-company to produce the books of the defendant-company referred to in the letter dated March 3, 1989, in court and allow Mr. Brij Anand to inspect the same. The books of which he wants inspection are (1) minute books of directors' and shareholders' meetings from April 22, 1988, till date; (2) bank accounts of the company for the period from July, 1988, till date; and (3) financial books of account including cash/bank books, ledgers and fixed assets registers maintained as well as records pertaining to sale/purchase and physical verification thereof. This application was vehemently opposed.

12. Section 209(4) of the Companies Act provides :

"The books of account and other books and papers shall be open to inspection by any director during business hours."

13. These provisions confer an unconditional right on a director of a company to inspect the account books and all other books and papers of the company.

14. Mr. Kapil Sibbal, learned counsel appearing for the defendant, however, contended that a director, no doubt, had a statutory right to inspect account books, etc., of the company but at the same time he was under certain obligations. There was a fiduciary relationship between him and the company. His position vis-a-vis the company was similar to the position of an agent or of a trustee and if there was conflict between rights and obligations, the court would refuse interim mandatory injunction.

15. Reliance was placed on the following statement appearing in para 63-13 of Palmer's Company Law, twenty-fourth edition :

"Like other fiduciaries, directors are required not to put themselves in a position where there is a conflict (actual or potential) between their personal interests and their duties to the company .... It has been seen earlier that the position of a director vis-a-vis the company is that of an agent who may not himself contract with his principal and that it further is similar to that of a trustee who, however, fair a proposal may be, is not allowed to let the position arise where his interest and that of the trust may conflict."

16. A Division Bench of the Bombay of the Bombay High Court in Life Insurance Corporation of India v. Hari Das Mundhra [1966] 36 Comp Case 371, 411, observed :

"A director is in the position of a agent of the company; charged with the obligation of carrying on its business. The nature of his duties is determined party by statue and partly by the law of agency. As agent, he owes two duties to the company - the duty of care. Breach of these duties, speaking generally, amounts to breach of trust and misfeasance."

17. To me, it is clear that sub-section (4) of section 209 of the Companies. Act confers on there director a statutory right of inspection of the books of account and other books and papers of a company. At the same time, there is a fiduciary relationship between the director and the company. His position is similar to the position of an agent and a trustee.

18. Is the court bound to grant a mandatory temporary injunction to enforce the statutory right of a director of inspection of a account books, etc., if there is a conflict between the rights of a director and his obligations ?

19. An injunction is a judicial process whereby the parties are required to do or refrain from doing any particular act. It cannot be disputed that the jurisdiction to grant injunction is, as in the case of specific performance, discretionary. An interlocutor mandatory injunction is granted in exceptionally and extremely rare cases.

20. For granting injunction, the court has to examine, inter alia, the comparative mischief or inconvenience which is likely to issue from granting or withholding the injunction sought for.

21. Mr. Anil Diwan, learned counsel for the plaintiff, contended that once it was held that a director has a statutory right to inspect the account books of the company, there was no discretion left with the court and the court was required to enforce this right. The legislature, it was argued, knew that there would be some disputes among directors and, in spite of that, conferred this right on the director. Reliance was placed on Conway v. Petronius Clothing Co. Ltd. [1978] 1 All ER 185. At page 201, it was observed :

"The right exists but it is a right conferred by the common law and not by statute. Although the Legislature, in section 147 of the 1948 Act (and its predecessors), implicitly recognised the existence of this right at common law, it conferred no new right; the purpose of that section and its predecessors was to impose criminal sanctions in the event of proper books of account not being kept or not being made available for inspection or in the event of a breach of any of the other duties imposed by the section ..... The right not being a statutory right, the court is left with a residue of discretion whether or not to order inspection."

22. I am afraid, prima facie I cannot accept the contention that the right to inspect being a statutory right, the court had discretion in the matter. In my opinion, the relief is a discretionary relief and the court has to keep in view all the facts and circumstances of the case, namely, whether the plaintiff had a right which he wants to enforce; whether it is likely to suffer irreparable injury and whether comparative mischief or inconvenience which is likely to issue from withholding the injunction will be greater than that which is likely to arise from granting it.

23. In Cuff v. London and County Land and Building Company Ltd. [1912] 1 Ch D 440, Farwell L.J., at page 449, observed as under :

"It is one thing to say that a man has a statutory right and it is quite another thing to say that the court, in the exercise of its judicial discretion, is bound to grant a mandatory injunction in order to give effect to such right."

24. In support of this contention that the discretionary relief of temporary mandatory injunction should not be granted, Mr. Kapil Sibbal, counsel for the defendant, has relied on the deposition of Mr. Kamendra N. Mishra, made before the Iowa District Court for POLK Country. On behalf of the plaintiff, an objection was raised that this deposition was governed by a protective order. This fact was denied on behalf of the defendant. In any case, no law was shown to me that this court could not read this deposition in evidence. If the defendant has violated any law of the USA, by producing it in this court, it would face the consequences.

25. A perusal of this deposition reveals that Regency Magnetics (RM), an Indian company, was set up and funded by Pioneer. It was carrying on seed business in India. It was set up as an alternative to PSCL in India because PSCL was under dispute. It further discloses that on April 22, 1988, all the employees of PSCL resigned and were employed wither by Pioneer Overseas Corporation or RM. This deposition, prima facie, shows that the plaintiff was running the same business in India under the name RM. It was a competitive business. In these circumstances, it was argued by learned counsel for the defendant that it would not be fair and just to allow inspection as demanded by Mr. Anand.

26. Mr. Anil Diwan, learned counsel appearing for the plaintiff, pointed out that the plaintiff had funded several crores of rupees in PSCL. His interests were at stake. He supplied the entire know-how and gave technical assistance. He simply wanted to know whether there was any misappropriation of the funds of the company in which he had 40% share. It was explained that the plaintiff was forced to float RM because of breach of trust by his one-time trusted employee, Dr. Sehgal. No injury, argued learned counsel, was likely to be caused to the defendant if inspection of documents, as requested by Mr. Anand, was allowed. It was also pointed out that the question of breach of fiduciary obligation had been duly considered by Justice Bahri in his order dated January 18, 1989, directing the defendant to accept Mr. Brij Anand an alternative director in place of the plaintiff.

27. I have carefully considered the respective contentions of the parties. There is no doubt that Bahri J., while passing the order dated January 18, 1989, had taken note of the contention of the defendant that the plaintiff was guilty of breach of faith. However, the question whether Mr. Anand was entitled to inspect the account books did not fall for determination before Bahri, J. in that application.

28. The main apprehension of the defendant is that if the plaintiff was allowed inspection of all the documents mentioned in his letter of request, it was likely to cause irreparable injury to PSCL inasmuch a these names of the suppliers and names of the customers and various other essential information would be gathered and passed on to the rival company. On the other hand, the main purpose of Mr. Anand to inspect the account books, etc., is to see that there is no misappropriation of the funds of the company.

29. Balancing the equities between the parties and being conscious of the fact that Mr. Anand had a statutory right to inspect the records of the company, I think it would be proper if Mr. Anand is allowed inspection of the following books :

1. Bank statements from July 22, till date. Bank statements mean the statements furnished by the bank from time showing the debit and credit entries, cash reconciliation statement, bank reconciliation statement;

2. The accounts of the banks, financial institutions from whom loan, if any, has been taken by the PSCL or has been advanced, contained in the ledger for the period from April, 1988, till date; and

3. The register of movable assets, if any.

30. Mr. Anand had admittedly inspected the minute books of directors' and shareholders' meetings from 22nd April, 1988, till date and fixed assets register. I order accordingly. This is only a prima facie view point.