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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 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 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 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 because of non fulfilllment 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:-

5. Admittedly the plaintiff had entered into an agreement dated 29.3.2001 for purchase of shares of defendant no.3 for consideration and in accordance with the terms of agreement it had advanced a sum of Rs.5 crores to the defendant. On 12.4.2001, a memorandum was executed between the parties to the suit and Escrow Agent which acknowledged the payment of Rs.5 crores and as per plaintiff partially modified the terms of earlier agreement. But later on it failed to obtain the consent and approval of its shareholders to this deal, therefore, was unable to buy the shares and pay the balance amount due. The plaintiff then demanded the refund of the balance amount of Rs.5 crores from the defendant which refused to oblige. On 12.7.2001 the parties entered into another agreement whereby they allegedly terminated and cancelled the share purchase agreement dated 29.3.2001. According to the plaintiff the implied term of the new agreement was that the shares, which were in the custody of Escrow Agent pending completion were to be returned to the defendants and the amount of Rs.5 crores paid by the plaintiff to the defendants no.1 & 2 shall be refunded back to the plaintiff. Escrow agent on 12.7.2001 returned the shares to the defendants but the amount of Rs.5 crores is not refunded by the defendants to the plaintiff. The plaintiff accordingly filed a civil suit for recovery of the amount of Rs.5 crores together with interest accrued thereon. The relief claimed in the suit have already been reproduced in the aforementioned paragraphs. The plaintiff has challenged to the right of the defendant to forfeit the amount of Rs.5 crores purportedly by virtue of clause 27.2.1 of the share purchase agreement dated 29.3.2001. The plaintiff had filed an application for amendment of the plaint for substituting clause (a) of prayer clauses for seeking declaration that the agreement dated 29.3.2001 has been terminated by the parties with effect from 12.7.2001 and so it was inoperative and ineffective.

16. The facts of the present case may now be tested on the touch stone of the above preposition of law. The application has been filed by the defendant in a civil suit. Both the plaintiff and the defendant are parties to an arbitration agreement (share purchase agreement dated 29.3.2001). They are also parties to that subsequent agreement dated 12.4.2001 by which the earlier agreement dated 29.3.2001 was allegedly abrogated. The application has been filed by the defendant before filing their written statement. The share purchase agreement between the parties stipulated purchase of 97.8% of share holding of defendants Nos.1 and 2 and other share holders whose names are mentioned in Annexure-A to the plaint, in defendant No.3 Company. Pursuant to clause 27.2.24 of the agreement dated 29.3.2001, the plaintiff out of Rs.10 crores advance paid a sum of Rs.5 crores to the defendant and the defendants placed 26% of the shares in the custody of Escrow Agent in accordance with Escrow agreement. The plaintiff, before making the payment of balance of advance of Rs.5 crores, failed to obtain the consent and approval of its shareholders to go through the share purchase deal with the defendants and consequently, it is alleged to have cancelled the deal. The defendant declined to refund the amount of Rs.5 crores received by them from the plaintiff on the premises that it was liable to be forfeited in terms of the agreement. The dispute between the parties is in regard to this advance of Rs.5 crores, which according to the plaintiff, is liable to be refunded in terms of clause 27.2.24 of the share purchase agreement dated 29.3.2001 as the deal fell through, whereas the defendant/applicant repudiated this claim on the ground that this amount was liable to be forfeited and has been forfeited strictly in accordance with the agreement. The entire suit of the plaintiff is based on the terms and conditions contained in the share purchase agreement dated 29.3.2001 and the memorandum dated 12.4.2001. Though the counsel for the plaintiff has stated that the relief, as claimed under clause (a) of the prayer clause is being given up and an application for deleting this relief has already been filed, but relief (d) is also against the invocation of clause 27.2.1 of the share purchase agreement for exercising for power of forfeiture of the advance given by the plaintiff to the defendant. Therefore, whether the relief in clause (a) is given up or not, the main question will be whether the forfeiture of the amount of Rs.5 crores by the defendant is in accordance with the terms and conditions of the share purchase agreement dated 29.3.2001 read with the memorandum dated 12.4.2001 or not. The consequence of the memorandum dated 12.4.2001 executed between the parties qua the share purchase agreement dated 29.3.2001 will also be a question for consideration. Moreover, by the application (IA 143/03), the plaintiff is seeking substitution of relief of declaration with the relief that the hire purchase agreement dated 29.3.2001 had been mutually terminated by the parties w.e.f. 12.7.2001 and was not enforceable and effective. If this amendment is carried out, still the question for determination will remain as to what are the rights and liabilities of the parties arising under the share purchase agreement dated 29.3.2001. The defendants have allegedly exercised the powers given under share purchase agreement for withholding the amount of Rs.5 crores which is required to be decided in this suit. Relief in clause (.c) of prayer clause is about the recovery of damages with interest by the plaintiff from the defendants and the shareholders, who are mentioned in Annexure -A. This relief is also claimed on the basis of the breach of the terms and conditions of the agreement dated 27.2.2001 read with memorandum dated 12.4.2001. This issue also requires examination of the rights and obligations of the parties in the share purchase agreement dated 29.3.2001 and the memorandum dated 12.4.2001.