Authors: Shweta Sahu, Alipak Banerjee, Vyapak Desai
Firm: Nishith Desai Associates (website)
Overview of legal measures as of 5 June 2020, as response to the coronavirus. Please note: Due to the extraordinary situation, the legislation is in continuous evolution and may change very fast.
Following the liberalization of India's economy in 1991, India experienced unprecedented growth and has become an integral part of the global economy.
India has made a substantial leap upward, raising its ease of doing business ranking from 130 in Doing Business 2016 to 63 in World’s Bank’s report on Doing Business 2020. A primer on starting and carrying on operations in India, and the legal regime governing the conduct of business in India, has been captured in our series on “Doing Business in India”.
The World Bank in determining the ease of doing business ranking of a country takes into account the enforceability of contracts. Keeping up with the pace of the ever-growing dispute resolution landscape in India, several legislative developments have seen light. These include, the amendments to the Arbitration and Conciliation Act 1996 in 2015 and 2019, Specific Relief (Amendment) Act, 2018 and the Commercial Courts Act, 2015, Insolvency and Bankruptcy Code 2016, to name a few. An overview of the dispute resolution mechanism in India, is available here.
In light of the ongoing COVID-19 pandemic, India has taken active steps towards battling the global pandemic and its consequences.
Marching alongside the Legislature are the powerful Indian Judiciary and Executive, which have stood together as pillars for uplifting and striking a balance between containment of the spread of the COVID-19 and the health and economic welfare of the country and its citizens.
1. PREVENTIVE MEASURES FOR CONTAINMENT OF THE SPREAD OF COVID-19
1.1 Legal basis
Limitations were placed on the movement of men and material as per the guidelines issued by the Ministry of Home Affairs under the Disaster Management Act 2005 under the directions of the National Disaster Management Authority, and the respective governments of States and Union Territories from time to time. Accordingly, the Ministry of Home Affairs has issued several notifications in this regard.
1.2 Lockdowns: Restrictions on movement of people and travel
Vide these notifications and guidelines, India sought to regulate and monitor travel and movement of citizens and goods and services – with the primary objective of controlling the spread of novel coronavirus. Meanwhile, to establish a balance with the upkeep of economy and essential goods and services required for survival – the lockdown was eased in a phased manner, and restrictions were accordingly modified.
Vide the new guidelines issued by the Ministry of Home Affairs dated 30 May 2020, the Government allowed for reopening of activities in a phased manner, which is scheduled to remain in force till 30 June 2020. The guidelines along with details of “National Directives for COVID-19 Management” and “Offences and Penalties for Violation of Lockdown Measures” are available here.
As per the latest guidelines, the following activities will be allowed with effect from 8 June 2020:
(i) Religious places/ places of worship for public.
(ii) Hotels, restaurants and other hospitality services.
(iii) Shopping malls.
Extensive guidelines have been issued by several public departments laying down preventive measures to be taken to contain the spread of Novel Coronavirus (COVID-19). For instance, standard operating procedures (“SOPs”) published by the Ministry of Health & Family Welfare, on 4 June 2020, for the following:
The Ministry of Home Affairs subsequently issued Guidelines for Phased Re-opening, vide an order dated 29 June 2020, which is available here.
1.3 Travel and Visa Restrictions
The Ministry of Health and Family Welfare had issued Guidelines for domestic travel (air/train/inter-state bus travel), available here.
The Ministry of Home Affairs has also issued travel and visa restrictions for international travel, including Standard Operating Protocol for:
(i) Movement of Indian Nationals stranded outside the country
(ii) Movement of persons stranded in India who are desirous to travel abroad
1.4 Facilitating health welfare
Special Instructions were issued by the Department of Expenditure, Ministry of Finance to facilitate the procurement and transportation of medical and other essential supplies relating to relief operations for COVID-19 global pandemic. Such facilitates were required to be extended by issuance of guidelines or providing necessary relaxations for the following Ministries/Departments:
(i) Department of Pharmaceuticals
(ii) Ministry of Health and Family Welfare
(iii) Ministry of Textiles
(iv) Department of Consumer Affairs
(v) Ministry of Civil Aviation
2. SUPPORTING BUSINESSES AND EASING OUT ECONOMIC DIFFICULTIES
2.1 Expanding force majeure in commercial contracts to include the COVID-19 pandemic
In light of the ongoing pandemic and the disruptive consequences on the supply chains, the Department of Expenditure, Ministry of Finance clarified on 19 February 2020 that - disruption of supply chains due to spread of COVID-19 will be considered as a case of natural calamity and force majeure clauses may be invoked, wherever considered appropriate, following the due procedure as below:
A Force Majeure (FM) means extraordinary events or circumstance beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/ seasonal rain and any other events specifically excluded in the clause). An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party's non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto. There may be a FM situation affecting the purchase organisation only. In such a situation, the purchase organisation is to communicate with the supplier along similar lines as above for further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.
The subsequent restrictions imposed by the government on the movement of vehicles, goods and services, severely impaired the fulfilment of contractual obligations for supply of goods, works and consultancy services (including other services), and affected the volume of vehicular traffic.
Vide an office memorandum dated 13 May 2020, it was further clarified that the force majeure clause would apply to all construction/works contracts, goods and services contracts and public-private partnership contracts with government agencies and in such event, date for completion of contractual obligations which had to be completed on or after 20 February 2020 shall stand extended for a period not less than three months and not more than six months without imposition of any cost or penalty on the contractor/concessionaire.
It was further clarified that:
(i) invocation of the force majeure clause would be held valid only in a situation where the parties to the contract were not in default of the contractual obligations as on 19 February 2020.
(ii) invocation of the force majeure clause does not absolve all non-performances of a party to the contract, but only in respect of such non-performance as is attributable to a lockdown situation or restrictions imposed under any Act or executive order of the Government/s on account of COVID-19 global pandemic.
(iii) subject to above stated, all contractual obligations would revive on completion of the period of extension by 3-6 months.
A detailed analysis of the impact of COVID-19 on contracts is available here.
2.2 Measures by the Reserve Bank of India (“RBI”) to ease Financial Stress
Certain relaxations were provided in the regulatory framework, such as COVID -19 Regulatory Package issued by RBI on 27 March 2020 followed by Statement on Developmental and Regulatory Policies dated 22 May 2020 (“RBI Statement – May 2020”). These regulatory measures were announced by the RBI to mitigate the burden of debt servicing caused by disruptions on account of COVID-19 and to ensure the continuity of viable businesses. As per this package, India’s central bank sought to introduce the following:
(i) On 27 March 2020, the RBI permitted all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India financial institutions, and non-banking financial companies (including housing finance companies and micro-finance institutions) (referred to hereafter as “lending institutions”) to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on 1 March 2020 till 31 May 2020. In view of the extension of the lockdown and continuing disruptions on account of COVID-19, such moratorium on term loan instalments was extended by another three months, i.e., from 1 June 2020 to 31 August 2020. Accordingly, the repayment schedule and all subsequent due dates, were shifted across the board by another three months.
(ii) In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to allow a deferment of another three months, from 1 June 2020 to 31 August 2020, in addition to the three months allowed earlier, on payment of interest in respect of all such facilities outstanding as on 1 March 2020.
2.3 Measures by the Reserve Bank of India to Improve the Functioning of Markets
The afore-mentioned measures vide the RBI Statement – May 2020, also intended to ease constraints on market participants and channel liquidity to various sectors of the economy that are impacted by COVID-19 related dislocations. Accordingly, certain relaxations were extended in respect of the following:
(i) Refinancing Facility for Small Industries Development Bank of India
The Small Industries Development Bank of India (SIDBI) plays an important role in meeting the long-term funding requirements of small industries. In view of the tightening of financial conditions in the wake of the COVID-19 pandemic, and difficulties in raising resources from the market, the RBI had announced a special refinance facility of ₹15,000 crore to SIDBI for on-lending/refinancing. Advances under this facility were provided at the RBI’s policy repo rate at the time of availment for a period of 90 days. In order to provide greater flexibility to SIDBI in its operations, it has been decided to roll over the facility at the end of the 90th day for another period of 90 days.
(ii) Investments by Foreign Portfolio Investors (FPIs) under the Voluntary Retention Route (VRR)
The regulatory framework for FPI investment in debt has evolved over the years in line with the policy objective of encouraging such flows within the prevailing macro-prudential framework. The VRR introduced in March 2019 facilitates long term and stable FPI investment in debt and offers operational flexibility in terms of instrument choices and exemptions from certain regulatory requirements. Since its introduction, the VRR scheme has evinced strong investor participation, with investments exceeding 90 per cent of the limits allotted under the scheme. In view of difficulties expressed by FPIs and their custodians on account of COVID-19 related disruptions in adhering to the condition that at least 75 per cent of allotted limits be invested within three months, it has been decided that an additional three months will be allowed to FPIs to fulfil this requirement. Detailed guidelines are being issued separately.
3. CHANGES TO THE INSOLVENCY REGIME
The Insolvency and Bankruptcy Code 2016 (“IBC”) provides for a consolidated framework of laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons. Creditors, as defined therein, could initiate insolvency proceedings against persons on a default or non-payment of debts, which had become due and payable. The minimum amount of the default was one lakh rupees. However, the Ministry of Corporate Affairs issued a notification dated 28 March 2020 under Section 4 of the IBC increasing the threshold of default from one lakh rupees to one crore rupees.
Further, the National Company Law Tribunal issued a notification on 12 May 2020 directing financial creditors to file default record from Information Utility along with the new petitions filed for initiating insolvency proceedings under the IBC.
In addition to the above, an ordinance has been passed to suspend initiation of insolvency proceedings against companies under the IBC for a period of six months, which could be extended to one year – in case of defaults arising on or after 25 March 2020.
4. PACKAGES ANNOUNCED – for employment, support to businesses, state governments as well sectors such as education and health
4.1 Packages announced in aid of the under-privileged
The Ministry of Finance released a special financial package of INR 1.70 lakh crore under Pradhan Mantri Garib Kalyan Yojana for the poor to help them fight the battle against corona virus. The said package was announced on 26 March 2020, and aimed to amid address issues of health, food, business, etc.
4.2 Recent measures announced by the Ministry of Finance
The recent package announced by the Ministry of Finance includes:
(i) INR 40,000 crore increase in allocation for Mahatma Gandhi National Rural Employment Guarantee Scheme to provide employment boost.
(ii) Decriminalisation of violations under Companies Act 2013, involving minor technical and procedural defaults such as shortcomings in CSR reporting, inadequacies in Board report, filing defaults, delay in holding of annual general meetings.
(iii) Key reforms towards Ease of Doing Business for corporates such as:
Direct listing of securities by Indian public companies in permissible foreign jurisdictions.
Private companies which list non-convertible debentures on stock exchanges not to be regarded as listed companies.
Power to create additional/ specialized benches for National Company Law Appellate Tribunal
Lower penalties for all defaults for Small Companies, One-person Companies, Producer Companies and Start-Ups.
5. LEGAL PROCEEDINGS
5.1 Court hearings using video-conferencing
With the onset of COVID-19, the Supreme Court of India and several High Courts in India started taking up urgent matters using video-conferencing. This was done to ensure that access to justice. The apex court had also suo motu issued guidelines for functioning of courts through video conferencing during the COVID-19 pandemic.
However, the courts restricted themselves to matters of extreme urgency. A detailed analysis of such matters of ‘extreme urgency’, which were being heard by courts during the ongoing lockdown is available here.
Nonetheless, courts gradually began to hear ‘urgent matters’ instead of only the matters of ‘extreme urgency’, which was further extended to include matrimonial matters, court hearings related to arbitration such as those pertaining to interim reliefs and challenge of arbitral awards. For instance, the office order issued by the High Court of Delhi is available here.
Notably, other statutory tribunals including the National Company Law Tribunal, National Consumer Disputes Redressal Commission, would be resuming with regular hearings.
5.2 Limitation Period
On due consideration the effect of the COVID-19 and resultant difficulties being faced by the lawyers and litigants, and to ensure that lawyers/litigants do not have to come physically to file such proceedings in respective courts/tribunals across the country, the apex court extended the periods of limitation prescribed under law.
An analysis of the said extension is available here.
Such extension has been further extended by the apex court till - the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown.
5.3 Interim measures
Several High Courts, including the High Courts of Bombay and Delhi, have extended interim orders, previously passed by courts. Further, liberty is granted to parties to approach the court in the event any hardship of an extreme nature caused to a party due to such extension. Such extension is applicable to all courts/tribunals/authorities subordinate, over which the High Court has superintendence.