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A Glaring Look At Some Of The Major Legal Challenges: Post Covid-19

Immediately after declaring lockdown amid the Pandemic of COVID-19 the Central Government through gazette dated 24th March 2020[i]raised the minimum threshold for initiating proceedings under the Insolvency and Bankruptcy Code, 2016 (hereinafter shall be referred to as the Code for the convenience) will be Rs. 1 Crore.Not only this, Ministry of Finance (Department of Expenditure Procurement Policy Division) had issued a memorandum stating that the present pandemic was to be treated as natural calamity and that clause of force majeure may be invoked as a consequence whatsoever considered appropriate.

Considering the present position the move of the Government is very crucial. The move will definitely help MSMEs and will save them from the frivolous litigation which is more often filed by the Operational Creditors for the recovery of debts which many a time does not involve a high amount. The present situation is no doubt a most unforeseen and unpredicted and equally novel situation which would be the most contingent and unforeseen event and which might not have been defined in any statutes whatsoever.

The Pandemic has shaken the entire world and the aftermaths of this may come up as very critical and various sectors will face innumerable challenges. There will not be a second thought that this may even create chaos in the commercial world giving rise to many legal challenges. The author through this article has tried to highlight some of the legal challenges that would come up post-COVID-19 which may leave a lasting effect.

Insolvency Proceedings And Recovery Of Corporate Debts

The COVID-19 has caused a lot of disruptions in the commercial world. The complete lockdownhas brought almost everything to stand still by taking away the pity jobs of the working class and making their finances considerably low.

The construction industry has slowed down, production world is witnessing a toughest time and lot many other degradations in trade and commerce industry which are yet to come may make the situation little harsh. In this chaos to provide relief to MSMEs and other small scale businesses the Finance Minister on 24th March 2020[ii] made a very significant move by raising the threshold for filing Insolvency proceedings to Rs.1 Crorefrom Rs.1 Lakhs.

In furtherance of the same, it was also announced by the Ministry that the Force Majeure clause could be invoked when appropriate as the present situation might be declared as natural calamity. The efforts of the Government to keep the MSMEs boosting and giving a hand of support to the MSMEs and small businesses by aptly exercising their powers under the provision to section 4 of the Code[iii]is commendable and will surely provide great relief as it is till now Section 4 of the Code [iv] has always beena benefactor to corporate creditors than the Corporate debtors.

The Corporate creditors prefer filing frivolous litigation for dissolution of the Operational Debtor to attempt to recover the debts speedily in those matters where the debts are not of high value. Though the action of the government seems to be much-deliberated act yet it has given a way out for many challenges way ahead.

For eg. The most prominent question is the status of the proceedings which are pending before the National Company Law Tribunal and which are not admitted till date.

Should the Operational Debtors be given a timeline to revise their Applications or the said categories of applications will be rejected as a whole? In such cases, it will be a gross injustice if the applications will be rejected only because they were filed just before the present announcement. There also might be such a scenario where the Operational Creditor might have served notice under section 8 immediately before the lockdown but would not have been able to file the proceedings due to closure of NCLT benches.

What should be the fate of such application? Technically speaking in such matters the amendment in force for real-estate creditor's[v]i.e a timespan should be set up for the Applicants to comply with the new threshold to revise their claim. However, this ambiguity must be cleared by the Government by express official notification to avoid further chaos and perplexities.

The greatest concern lies ahead of 30th April 2020 wherein the government is intending to suspend section 7,9 and 10 at least for a period of 6months  to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default[vi]if this intention of the government comes into force then the same should specify that it will not have any impact on such debts which though are due even after COVID-19 but do not have any nexus to the present situation.

The difficulty for Personal Guarantor

Another question that arises is the fate of personal guarantors under Code[vii]. Presently the threshold for filing proceedings against the Personal Guarantors of Corporate Debtors is Rs.1000/- if the threshold for initiating proceedings against the Corporate Debtors is increased to Rs. 1Crore, there is a possibility that hereafter the proceedings would be initiated against the Personal Guarantors since the recent notification is silent about this matter and the threshold for guarantors remains untouched as of now.

In furtherance, the Government has expressed its intention of suspending Section 7, 9 and 10 of the Code for six months and that the suspension may extend further if needful. In such scenario, since raising claims against the corporate debtor will become difficult, it may so happen that the burden of the debts of the corporate debtors might get shifted to personal guarantors in cases where debt amount is less than Rs. 1 Crore.

This will give rise to the number of litigations against the personal guarantors as the fact cannot be overlooked that many of the Operational Creditors are also MSMEs which includes suppliers and small businesses which will be in need to recover their debts.

A clause of Force Majeure

The Clause of force majeure is a clause of protection for the contracting parties in case of any failure to perform their contractual obligations due to the events which are beyond the control of human and are beyond foreseeability of either of the parties to the contract such as Act of God or natural disaster, war or war-like situation, labour unrest or strike, epidemics etc. The provision related to force majeure is provided under section 32 and section 56 of the Indian Contract Act.[viii]

Section 32 deals with contingent contracts i.e those contracts which are dependent upon happening or non-happening of events. If the event is non-happening then the contract becomes void, whereas, section 56[ix] embodies the doctrine of frustration.In the clause of force majeure there is an exemption for the contractual parties for the performance of their obligation only in the case of impractical and impossible events such as mentioned above and stands as an exception to the breach of contract.

However, considering the present situation and overall disruption there is a huge possibility of the performance in contracts would be delayed. However, there are also possibilities that the parties may take undue advantage of the situation more specifically the suppliers and may delay the performance or avoid the performance of their contractual obligations under the umbrella of force majeure clause and use it as an excuse to extricate themselves from the unfavourable deal.

Further, a situation will be created wherein due to the delay in contractual performance by the suppliers; the companies too would delay performing their contractual obligation thereby forming a chain of delay and non-performance with the availed defence of frustration of contract. Though the force majeure is an exception to the non-performance of the contract in exceptional circumstances yet the applicability of such a clause should be dependent upon the factual analysis.

The law regarding force majeure is laid down by the Hon'ble Supreme Court in the case of Satyabrata Ghose v/s MugneeramBungur &Co[x] that:
Impossibility u/s 56 doesn't mean literal impossibility to perform (like strikes, commercial hardships, etc.) but refers to those cases where a supervening event beyond the contemplation and control of the parties (like the change of circumstances) destroys the very foundation upon which the contract rests, thereby rendering the contract 'impracticable' to perform, and substantially useless given object and purpose which the parties intended to achieve through the contract.

The Apex Court in the judgement of Energy Watchdog vs CEKC[xi] passed by the bench comprising of Justice PC Ghose and Justice R F Nariman has summarized the jurisprudence on the subject by laying down following aspects which courts need to be kept, which are as follows:

  1. If the contract has an express or implied force majeure clause, it will apply over the principle under section 56.
  2. Application of frustration must always be within a narrow limit
  3. A rise in cost or expense will not frustrate a contract
  4. The doctrine of frustration will not apply so long as the fundamental basis of the contract remains the same.
  5. Force majeure clause will apply when an alternative mode of performance is not available.

This is all when the contract will contain Force Majeure Clause; now let us consider the situation otherwise. What if the contract will not contain the clause of force majeure? Will the contracting parties be saved from the haphazard? The answer is not quite positive as the parties may be inclined to invoke other clauses such as limitation exclusion clauses, adverse change clause, adjustment clause etc. which may still invite more pending litigations as a chain of non-performance may be formed.

The Insurance Sector

The COVID-19 will leave a huge impact on the Insurance Industry as it will impact the financial outlook of the industry; the insurers are likely in for a tussle regarding the claims arising out of the novel pandemic.The Insurance Information Institute, in its first-quarter Global macro outlook, reported that COVID-19's impact on global growth and the insurance industry is likely deeper and wider than the current consensus and could last well into the third quarter and beyond.[xii]

The report further has stated that global GDP growth in 2020 could slow down by as much as 1 per cent, from 3.3 per cent to 2.3 per cent, making a 2021 recovery unlikely. [xiii]

The Insurance Regulatory and Development Authority of India have advised all the insurance Companies to extend the health insurance protection against the disease of COVID-19. However, this may not be acceptable to all the insurers as a health emergency is not a part of the product feature. Quite a few companies are on the brink of taking benefit of loss for-profit clause in their insurance contract which indemnifies a policyholder against the losses suffered due to shutdown of units due to unforeseen circumstances such as fire or accidents, but even this seems practically unactionable.

Corporations usually take only two types of Insurances i.e material damage policy and business interruption policy. A policyholder is indemnified in case of material damage policy if there is loss due to fire, flood or machine breakdown, whereas, business interruption policy can come into force if the loss of profit is occurred due to clauses mentioned under the material policy. Thus for either of the reason, the COVID-19 or pandemics cannot be covered under the policy and thus loss for profit clause cannot be invoked readily. Therefore, the insurers seem to be reluctant in allowing the claim as the loss for profit is not a part of the above mentioned.

Once again specification from government becomes necessary as the extent of insurance available in each case will depend on the specific terms of each policy. Whether cancellation of any business event will include cancellation due to situations like COVID-19 or whether situations like COVID are inclusive needs much deliberation by the insurers and insurance authorities as the exclusion of old products is a subject of interpretation.

Commercial And Real Estate Sector

The Real Estate Sector too would not be able to escape from facing a tough time ahead. The huge losses suffered by the promoter due to halts in the construction activities will give rise to disputes regarding the delay in completion of the projects. The promoters may try to avail the undue advantage which would again give rise to the litigation. The question may arise regarding the cancellation of contracts and delayed construction.

Litigation
A stupendous rise in the pending litigation is an add on to the legal challenges. Due to lock down the, there will be a considerable rise in the litigation process which may push for a virtual hearing of the cases. Even though courts have always considered the proceedings through video conferencing yet the technological system in our country is not developed to the extent that the proceedings will be taken online regularly. Nevertheless, on March 23, the Supreme Court made history by announcing its decision to begin conducting virtual hearing through video conferencing. The lockdown of courts and slow down of the justice system will no doubt would create a narrow space in all areas of law.

Conclusion
The lockdown in the prevailing circumstances was inevitable. Even though it is true that only life is precious yet what lies ahead is something a difficult path for everyone. In this clarifications from the Authorities will play a major role as we may be about to enter the phase of financial emergency. Rest we can hope for the best always!

End-Notes:

  1. https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf
  2. Supra
  3. This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:
    Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.
  4. Supra
  5. Insolvency and Bankruptcy Code (Amendment) Bill, 2020
  6. Finance Minister announces several relief measures relating to Statutory and Regulatory compliance matters across Sectors in view of COVID-19 outbreak
    http://pib.gov.in/PressReleseDetail.aspx?PRID=1607942
  7. Section 94 to 187 of the Code read with section 60(1) and (2)
  8. Section 32 in The Indian Contract Act, 1872
    32. Enforcement of contracts contingent on an event happening.—Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened.  If the event becomes impossible, such contracts become void. Illustrations
    (a) A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced by law unless and until C dies in A's lifetime. (a) A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced by law unless and until C dies in A's lifetime.
    (b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse. (b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse.
    (c) A contract to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void. (c) A contract to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.
  9. in The Indian Contract Act, 1872
    56. Agreement to do impossible act.—An agreement to do an act impossible in itself is void. —An agreement to do an act impossible in itself is void.  Contract to do act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.1 —A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.2  Compensation for loss through non-performance of an act known to be impossible or unlawful.—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. —Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
  10. 1954 SCR 310
  11. (2017) 14 SCC 80
  12. Insurance Information Institute, Global macro and insurance outlook, March 4, 2020. View in article
  13. Ibid

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