In the absence of an express forfeiture clause in a contract, a party is legally precluded from retaining or forfeiting advance payments or earnest money, even when the other party commits a breach of the underlying agreement.

JUDGMENT :

Sugato Majumdar, J.

Both the suits are taken up together since both are based on the same array of facts but on different cause of actions. Both were heard together and disposed of by this common judgment.

C.S. 124 of 2011:

Original Plaintiff of this suit was one Basudeo Agarwalla, since deceased and his son Suresh Agarwalla. On death of the original Plaintiff no. 1 his wife Uma Devi Agarwalla, his two daughters Kiran Buddhia and Usha Agarwalla and his another son Deepak Agarwalla were substituted as Plaintiff no. 1A to 1D respectively.

Defendants of this suit are Nirmal Kanodia, Rajendra Kumar Singhania, Mahendra Kumar Padia and M/s Bhoomi Minerals Ltd., the later being a company registered under the Companies’ Act 1956, having its registered office at 40B, Vivekananda Road, Kolkata – 700007 within jurisdiction of this Court. The later company being the Defendant no. 4 is pro forma Defendant.

Plaint case in nutshell:

a) The original Plaintiff no. 1 & 2 are father and son. They floated a company named as M/s Bhoomi Minerals Ltd., registered under the Companies’ Act, 1956, having registered office at 40B, Vivekananda Road, Kolkata-700007 (hereinafter referred to as “M/s Bhoomi”). M/s Bhoomi is the pro-forma Defendant no. 4. The original Plaintiffs were the directors of M/s Bhoomi and owned the controlling block of shares either by themselves or through the family members. Among other assets of M/s Bhoomi, the primary asset was a sponge iron unit with installed capacity of 100 m.t. per day. The business of M/s Bhoomi was hugely capital intensive and demanded massive investment of fund. M/s Bhoomi borrowed money from various banks and financial institutions including the Indian Overseas Bank. Repayment of loan from this Indian Overseas Bank was secured by personal guarantees of the original Plaintiff no. 1 and the Plaintiff no. 2 as well as by pledging collateral and corporate securities.

b) M/s Bhoomi could not pay debt in time to the Indian Overseas Bank, as a result of which the bank had been contemplating legal actions under the SARFAESI Act to recover dues. At this juncture, the Defendants approached the original Plaintiffs in the month of July, 2010 and evinced their interest to purchase M/s Bhoomi and take over the management for a lump sum consideration. Several rounds of discussions followed. The Defendants inspected the books and accounts of M/s Bhoomi along with bank accounts maintained in different branches of different banks; they also inspected the fixed assets, debts and liabilities. Thereafter, the original Plaintiffs agreed to acquire M/s Bhoomi on “as is where is” basis. A lump sum consideration was agreed as Rs.28.01 crores. The consideration amount was not the true value of M/s Bhoomi. But under compelling circumstances being financial hurdle the original Plaintiffs agreed to that consideration amount. The Defendants had full knowledge of the financial condition of M/s Bhoomi and that the account may be classified as non-performing asset. The Defendants were aware of impending proceeding under the SARFESI Act against M/s Bhoomi.

c) In furtherance of the modalities of transfer, the parties executed a Memorandum of Understanding dated 20/09/2010. Time was considered as essence of the contract. The M.O.U envisaged that an amount of Rs. 28.01 crores was to be paid by the Defendants to the original Plaintiffs towards total consideration for share transfer as well as satisfaction of loan advanced by Indian Overseas Bank. Upon receipt of the payments from the Defendants, the original Plaintiffs, in turn, would apportion the same towards satisfaction of loans advanced by Indian Overseas Bank and simultaneously would carry out necessary share transfer in the name of the Defendants. It was further agreed that out of the total consideration, the Defendants would pay immediately to the original Plaintiffs a sum of Rs.50,00,000/- as earnest money and the balance consideration would be paid within 30/11/2010. Simultaneous