Delhi High Court Bpl Communications Ltd. vs Punj Lloyd Ltd. on 3 November, 2003 Equivalent citations: 2004IAD(DELHI)8, 2004(1)ARBLR46(DELHI), [2005]125COMPCAS41(DELHI), 108(2003)DLT198, 2004(1)RAJ256 JUDGMENT Mahmood Ali Khan, J. 1. Genesis of this controversy lies in application IA No.12085/02 filed by the defendant under Section 8 of the Arbitration and Conciliation Act, 1996 (for short the Act). The plaintiff filed a civil suit against the defendant with the averment that the plaintiff was engaged in the business of establishing communication network in India through its subsidiary. The defendants No.1 & 2 were the share holders of defendant No.3. Other share holders of defendant No.3 are mentioned in AnnexureA to the plaint. They are represented by defendant No.2 by virtue of power of attorney executed by them in favor of defendant No.3. Those share holders had agreed to sell and transfer their share to the plaintiff. The present suit is filed against them also. Defendants No.1 & 2 and the share holders mentioned in AnnexureA together held 3,33,75,280 equity shares of defendant no.3 which is 97.8% of the total equity paid up share capital. The defendants and other share holders mentioned in AnnexureA in February, 2001 desired to sell their share holding and the negotiations were held with the plaintiff. Accordingly, an agreement (share purchase agreement) was executed on 29.3.2001 between the parties for the purchase of entire 97.8% share held by the defendants no.1 & 2 and other share holders as mentioned in annexure A, in the defendant no.3. The total consideration payable for this transfer was Rs.209.996 crores. This transaction was subject to fulfilllment of certain conditions precedent. One of the condition was that the plaintiff would pay a sum of Rs.10 crores to the defendant upon execution of Escrow agreement which would have authorised Escrow agents to hold the equity shares which were to be sold to the plaintiff. Escrow agreement was executed on 12.4.2001 between the plaintiff, the defendants and AIA Capital India Pvt. Ltd (Escrow agent). On payment of Rs.10 crores the defendant and other share holders were to deposit 26% shares totalling Rs.88,62,200 with the Escrow Agent. A sum of Rs.5 crores paid to the defendant no.1 by cheque on 12.4.2001 which was acknowledged in the memorandum executed on 12.4.2001. It was also agreed that the balance of Rs.5 crores was to be paid on or before 30.4.2001. The plaintiff started complying with the conditions precedent to complete the transaction. The plaintiff is held and owned by various shareholders including foreign investors and the plaintiff had to obtain their prior consent and approval before going forward with the transaction so as to comply with the condition precedent in terms with the agreement. The plaintiff called a meeting of the shareholders at the first step. On 3.5.2001 the defendants and other shareholders mentioned in Annexure A served a notice on the plaintiff demanding the balance of Rs.5 crores. The plaintiff was trying to obtain the consent and approval of the foreign shareholders, therefore, sought extension of time by letter dated 28.5.2001 in terms of the agreement. The shareholder of the plaintiff, however, refused to accord their approval for the purchase of share of defendant no.3. Crucial condition precedent, therefore, could not be satisfied and the plaintiff became entitled to the refund of advance payment of Rs.5 crores from the defendant no.1. On 3.6.2001 the plaintiff served a notice terminating the share purchase agreement and demanding the refund of Rs.5 crores. As a counter blast the defendant no.1 & 2 and other shareholders mentioned in Annexure A on 4.6.2001 and 5.6.2001 sent notices of termination of the share purchase agreement to the plaintiff. The defendants also sent a letter to the Escrow Agent on 5.6.2001 requiring it to release the shares held by it. The defendants illegally forfeited the amount purportedly under Clause 27.2.1 of the share purchase agreement. The clause is void and unenforceable in law being a stipulation in the nature of a penalty. The plaintiff through an advocate served a notice on the Escrow agent on 5.6.2001 requiring it to hold back the share. The plaintiff was entitled to the refund of the amount of Rs.5 crores advanced by virtue of clause 27.2.4 of the share purchase agreement. The defendants no.1 & 2 however in breach of Escrow agreement and share purchase agreement wrote to Escrow agent to hand over the Escrow document to the person authorised by them without informing the plaintiff. The Escrow agent got in touch with the plaintiff by letter dated 12.6.2001 in view of the conflicting instructions to him. The plaintiff again demanded refund of Rs.5 crores from the defendant by letter dated 18.6.2001 raising objection against the alleged forfeiture of the said sum. The agreement had become void