BPL COMMUNICATIONS LIMITED Vs. PUNJ LLOYD LIMITED

JUDGEMENT

(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 Annexure-A to the plaint. They are represented by defendant No.2 by virtue of power of attorney executed by them in favour 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 Annexure-A 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 Annexure-A 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 fulfillment 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 because of non fulfillment of the conditions precedent i.e non approval of the shareholders of the plaintiff which resulted in the termination of the share purchase agreement and Escrow agreement and release of Escrow agent. Consequently, the parties were restored back to their original position that obtained before the agreement was entered into by entering into an agreement dated 12.7.2001. It was an implied term of the said agreement that the defendant would refund Rs.5 crores when the shares will be returned to the defendant. On 12.7.2001 the Escrow agent returned the share to the defendant and the defendants became liable to refund the amount immediately after receiving the original share certificate and share transfer deeds. The defendants were under obligation to repay the advance of Rs.5 crores to the plaintiff. On 19.9.2001 BPL Broadband Networks ltd a sister concern of the plaintiff against whom the defendant no.1 was claiming some money wrote to the defendant no.1 that after adjustment the alleged outstanding payment from the advance of Rs.5 crores already paid by the plaintiff to the defendant for the purchase of the shares the balance may be refunded as per agreement dated 12.7.2001. But the defendant no.1 did not agree to this arrangement. Despite reminders the defendants no.1 & 3 have not cared to repay the balance. They are liable to pay interest at the rate of 20% per annum from 12.7.2001 till the date of payment. A sum of Rs.1,60,00,000 has accrued as interest till the date of filing of the suit. The plaintiff sought the following relief in the suit:-

(2.) At the hearing counsel for the plaintiff has stated that relief in paragraph (a), is not pressed as the plaintiff has already sought amendment of the plaint for deletion of this relief in IA No.143/03. The relief in clause (a) is sought to be substituted by a relief "declare that the share purchase agreement dated 29.3.2001 has been mutually terminated by the parties with effect from 12.7.2001 and hence is of no force and effect."

(3.) The defendants did not file the written statement instead they have filed the present application IA No.12085/02 under Section 8 of the Act for making reference of the dispute between the parties for resolution by arbitration. In the application after referring to the relief claimed in the suit it was contended that the issues which arise in the suit are whether clause 27.2.1 of the share purchase agreement was null and void; whether the alleged forfeiture of Rs.5 crores by the defendant no.1 and 2 and other sellers was illegal and void and; whether the defendant and or the other shareholders were liable to pay Rs.5 crores alongwith interest to the plaintiff. It was submitted that all these issues arose in connection with the share purchase agreement dated 29.3.2001 executed between the plaintiff and the defendants and other shareholders and the defendant no.3 company which stipulated that all disputes arising out of and in relation to the said agreement would be referred to an arbitrator. Clause 23 of the share purchase agreement which provided for arbitration was reproduced and it was submitted that in view of the arbitration clause the suit was not maintainable and the claim of the plaintiff was liable to be referred to the arbitrator under Section 8 of the Act. Copy of the share purchase agreement dated 29.3.2001 was annexed to the application.