Indian Insolvency Law responds to the COVID-19 Pandemic- Part-II

Introduction

On June 5, 2020, the President of India promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 (“Ordinance”), in furtherance to the economic measures announced by the Ministry of Finance[1] to support Indian businesses impacted by the outbreak of the Covid-19 pandemic. The Ordinance has introduced the following amendments to the Insolvency and Bankruptcy Code, 2016 (“IBC”) (effective immediately):

  • Section 10A has been inserted in the IBC, restricting filing of any application for initiation of the corporate insolvency resolution process (“CIRP”) of a corporate debtor (being a company or a limited liability partnership) for any default[2] arising after March 25, 2020, for a period of six months or such further period, not exceeding one year from March 25, 2020, as may be notified in this behalf (such period being “Specified Period”).[3]

Further, a proviso has been inserted in section 10A to specify that no application shall ever be filed for initiation of CIRP of a corporate debtor for the said default occurring during the Specified Period i.e. CIRP can never be initiated on the basis of a default during the Specified Period, even if the default is continuing after having occurred during the Specified Period.

  • A non-obstante clause has been inserted in to section 66 (Fraudulent trading or wrongful trading) of the IBC to give protection to the directors of a corporate debtor. Accordingly, no application can be filed by a resolution professional under sub-section 66(2), in respect of such defaults against which initiation of CIRP is suspended under Section 10A of the IBC.[4]


Continue Reading Indian Insolvency Law responds to the COVID-19 Pandemic- Part-II

The Epidemic Ordinance, 2020 - An ‘opportune’ armour for the protectors

The world is grappling with an unknown virus that has escalated to a global pandemic in no time. At the very forefront of this battle against the unknown, are the medical healthcare professionals who have been working relentlessly to treat the rising number of patients across the globe, sometimes even without adequate protective gear[1]. Therefore, it is disheartening when one comes across news regarding them being subject to unprovoked violence from the public[2] in this time of crisis. The need to protect these frontline healthcare professionals was felt strongly by the Indian government in order to ensure seamless treatment of patients during the current pandemic. With these objectives in mind, the President of India on April 22, 2020, promulgated the Epidemic Diseases Amendment Ordinance 2020 (“Amendment Ordinance”), to amend the Epidemic Diseases Act, 1897 (“Epidemic Act”).
Continue Reading The Epidemic Ordinance, 2020: An ‘opportune’ armour for the protectors?

Covid-19 – Navigating choppy waters for Port Projects

The Covid-19 pandemic has resulted in an unprecedent crisis throughout the world and has caused widespread disruptions in normal operations across industries and life in general. In India, the National Disaster Management Authority determined that India was threatened by the spread of Covid-19 pandemic and took steps to prevent the spread of the pandemic in the country under the Disaster Management Act, 2005. On March 24, 2020, the Ministry of Home Affairs declared a 21-day lockdown under the Disaster Management Act, 2005 with effect from March 25, 2020. Such lockdown has been subsequently extended three times by the Ministry of Home Affairs and now remains in force till May 31, 2020.

The Ministry of Home Affairs has been issuing guidelines to determine the operation of essential and non-essential services during the period of lockdown and has attempted to restrict movement of persons throughout the country. The guidelines have caused States to close their borders and even movement within a State has been prohibited, unless it is in relation to an essential service. At the time of the first order of lockdown, the Ministry of Home Affairs excluded the ‘operation of seaports for cargo movement, relief and evacuation and their related operational organisations’ from the ambit of the lockdown. However, due to the disruptions in the supply chain, the inter-state and intra-state movement restrictions and the spread of Covid-19 pandemic, there has been an impact on operational as well as under construction port projects.
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To Pay Rent or Not To Pay Rent - The Delhi High Court rejects plea for suspension of rent during lockdown

The COVID-19 outbreak and the resultant nationwide lockdown have severely impacted performance of obligations, whether contractual or otherwise, across the country. Most entities/individuals are exploring the option of pleading frustration of contract[1] or invoking force majeure[2] clauses to suspend or obtain a relaxation on their contractual obligations. In this post, we examine the recent decision in Ramanand & Ors. v. Dr. Girish Soni & Anr.,[3] where the Delhi High Court rejected an application for waiver or suspension of rent on account of the lockdown.
Continue Reading To Pay Rent or Not To Pay Rent? The Delhi High Court rejects plea for suspension of rent during lockdown

Battling Covid -19 and Liquidity– The twin crisis of NBFC sector

While the health crisis has brought the country to its knees, the fatal blow seems to be coming our way from the economic effects of the Covid-19 pandemic. The exposure of the severely-stressed para banking industry to risky segments in these times has made it even more vulnerable to an economic slowdown.[1] With its asset quality deteriorating at an increasing rate, the liquidity in para banking industry has been squeezed off to its last drops.

The impact of the liquidity crisis across various classes of non-banking financial companies (“NBFCs”) may be analysed vis-à-vis the exposure it has towards the borrower segments whose economic activities have been severely impacted.  With the economic and consumption activities a bust in sectors such as real estate and micro-finance, the NBFCs with loan exposures in the said sectors will be hit the worst in the wave of this global pandemic. The increasing loan losses and inaccessibility to new capital is likely to exacerbate the liquidity stress.
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How special are “special equities”- Analysis of invocation of bank guarantee during COVID-19

A pandemic, of the nature which affects the world today, has not visited us during the lifetime of any of us and, hopefully, would not visit us hereinafter either. The devastation, human, economic, social and political, that has resulted as a consequence thereof, is unprecedented. The measures, to which the executive administration has had to resort, to somehow contain the fury of the pandemic, are equally unprecedented. The situation of nationwide lockdown, in which we find ourselves today, has never, earlier, been imposed on the country. The imposition of the lockdown was by way of a sudden and emergent measure, of which no advance knowledge could be credited to the petitioner – or, indeed, to anyone else.” – C. Hari Shankar, J., April 20, 2020.

The above quote aptly sums up the current situation globally and domestically. The COVID-19 outbreak has created a void in terms of performance of commercial contracts and has in many cases left the parties on edge. Through this article, we aim to provide an insight into the orders passed by the judiciary during COVID-19, dealing with an otherwise settled issue i.e. the invocation of bank guarantee.
Continue Reading How special are “special equities”- Analysis of invocation of bank guarantee during COVID-19

DOUBLE TROUBLE IN 2020 - TACKLING COVID-19 WHILE PROTECTING THE RIGHT TO PRIVACY

Background

Dire times call for ingenious, and often, radical measures. The COVID-19 pandemic, which has led to actions being taken under the Epidemic Diseases Act, 1897, and the Disaster Management Act, 2005, in India, is one such unprecedented and grim event. While governments and health workers all over the world are grappling to curb the spread of the virus, it has been realised that surveillance of affected persons is of paramount importance in order to assess and implement preventive and control measures.

Data tracking and analysis has emerged as an unlikely hero. This analysis has enabled governments to implement measures to stop the pandemic at its source and to prevent deaths, social disruption, unnatural burden on the healthcare system and economic loss. As government authorities are required to control the pandemic not only in their own country, but also understand how the same is evolving in other countries, governments all over the world have taken the stance that free flow of information that is updated in real time will allow for the formation of a steady global picture and help in curbing the spread of the pandemic.
Continue Reading Double Trouble in 2020 – Tackling COVID-19 while Protecting the Right to Privacy

Invoking Material Adverse Change based on Covid-19: Easier said than done A Material Adverse Change (MAC), also known as Material Adverse Event (MAE), clause enables a party to withdraw from a contract in circumstances where there is a material change after its signing. Such clauses are usually found in acquisition and financing agreements. In acquisition agreements, the MAC clause gives the buyer the option of withdrawing from the transaction whereas in financing agreements, it gives the lender the option of not disbursing the amount agreed to be advanced. MAC clauses are essentially definitions that reflect the allocation of risks between contracting parties. The risks allocated to the seller or borrower (as appropriate) are covered by the MAC clause whereas all other risks are allocated to the buyer or lender, respectively. Generally, systemic and industry-wide risks are allocated to the buyer/ lender while risks that are specific to the business/ borrower are allocated to the seller/ borrower. The MAC clause is used in conjunction with other provisions of an agreement. For instance, in acquisition agreements, the absence of any MAC could be a condition precedent for closing or a representation/ warranty by the seller. Additionally, the occurrence of a MAC could also be a ground for termination by the buyer. Similarly, in financing agreements, the absence of any MAC could be a condition precedent to drawdown/ disbursement under a facility or a representation/ warranty by the borrower. At the same time, the occurrence of a MAC could also be an event of default entitling the lender to accelerate/ recall the loan. Change in Attributes of the Target/ Borrower In order to trigger a MAC, a change must relate to one or more of the specific attributes of the target/ borrower mentioned in the MAC clause. These attributes include financial condition, business, assets, etc. Having fewer attributes in the MAC clause can considerably narrow down its scope. For instance, the Federal Court of Australia has held that a change in cash flow projections did not constitute a change in the ‘business, assets or financial condition’ of the borrower. Inclusion of a longer list of attributes such as condition (financial or otherwise), business, assets, operations, etc. may reduce the risk of changes being found not to be covered under the MAC clause. The specific attributes that should be included will vary depending upon the circumstances in which the agreement is being signed as well as the business model of the target/ borrower. Further, the change needs to be determined by reference to the circumstances that existed at the time the agreement was signed. The Court of Chancery at Delaware (United States) has held that even where a MAC clause is broadly written, it is best read as a backstop protecting the acquirer from the occurrence of ‘unknown’ events, thereby suggesting that MAC cannot be invoked if a change is caused by an event which was known at the time the agreement was signed. However, the Queen’s Bench Division (England) has held that mere knowledge of the acquirer of the causes of probable future losses prior to the agreement would not prevent the acquirer from invoking a MAC if such losses actually occur because it is concerned with changes and not with the causes of such changes. Ordinarily, a party cannot invoke the MAC clause on the basis of circumstances of which it was aware at the time the agreement was signed since it will be assumed that the parties contracted despite the same. However, it will be possible to invoke the clause where conditions worsen in a way that makes them materially different in nature. Anticipated changes/ effects A MAC can usually be invoked only in respect of circumstances that exist on the date of invocation. However, specific wording may enable a MAC to be invoked in respect of anticipated changes as well. For instance, where (i) the seller represented that there was no threatened litigation other than those that “… would not have or reasonably be expected to have …” a MAE; and (ii) ‘prospects’ was one of the attributes mentioned in the MAE clause, the court relied on the same to observe that the said clause emphasises the need for a forward-looking analysis which would include changes reasonably expected to occur in future. Nevertheless, even if a MAC clause included such wording, the likelihood of the anticipated change/ effect must be clearly demonstrable when invoked. The Supreme Court of New South Wales (Australia) has indicated that the anticipated change/ effect should be so likely that any objection as to MAC not having already occurred should be “… tantamount to a submission that a person who falls out of an aircraft has not suffered a [MAC] until the person hits the ground…”. Determining Materiality Every adverse change does not amount to a MAC; only ‘material’ changes do. If the MAC clause prescribes a formula or method for what is material, then the issue of materiality will depend on the said formula/ method. If no formula/ method is prescribed, then it will be left to the court to determine whether the particular change(s) in question are material based on judicially formulated principles. Courts in Delaware (United States) have evolved the following principles for determining materiality in MAC clauses in the specific context of acquisition agreements: • Contractual language has to be read in the larger context of the transaction to determine what is material; • Even where a MAC condition is broadly worded, the same is best read as a backstop protecting the buyer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally significant manner; • A short-term hiccup in earnings should not suffice, rather the MAC should be material when viewed from a long-term perspective of a reasonable acquirer; • The most important consideration is whether there has been an adverse change in the target’s business that is consequential to the target’s long term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months; and • The issue of whether a change/ effect constitutes a MAC has both qualitative aspects and quantitative aspects. In the context of financing agreements, courts have held that only a change which significantly affects the borrower’s ability to perform its obligations and, in particular, its ability to repay the loan will be considered material. Proving the Existence of a MAC Unless there is clear language to the contrary, the burden of proving the occurrence of a MAC/ MAE is on the party seeking to excuse its performance, irrespective of how the MAC/ MAE is drafted (i.e. whether as a representation/ warranty or as a condition precedent). In acquisition agreements, the burden is a heavy one for the buyer to discharge. Mere speculation is not enough and both factual as well as expert testimony is required to be adduced in order to discharge this burden. However, admissions made by the seller/ borrower during the course of the trial may sometimes be sufficient by themselves for the court to rule in favour of the invoking party. Subjective MAC Clauses in Financing Agreements Sometimes, MAC clauses in financing agreements provide that the issue of whether a MAC. has occurred will be determined in the opinion or reasonable opinion of the lender. In such cases, the question which the court has to examine is not whether a MAC has in fact occurred but whether the lender has properly formed the required opinion. Where the MAC clause requires the formation of a reasonable opinion, the likely approach is for the court to apply principles akin to those laid down in the context of judicial review of administrative action and only satisfy itself that the lender has not acted arbitrarily, capriciously, whimsically or dishonestly without substituting the lender’s opinion with the court’s own judgment regarding whether a MAC has occurred. Where the clause merely requires the formation of an opinion, the court will only ascertain if the opinion formed by the lender was an honest one. The Supreme Court of New South Wales (Australia) explained this to mean that the opinion of the lender will be upheld unless it is so perverse/ irrational that no reasonable person in the position of the lender could have formed that opinion. However, even in such cases, it cannot be ruled out that the courts may imply a term to the effect that any opinion formed by the lender regarding occurrence of a MAC must necessarily be a reasonable one. MAC and Covid-19 in the Indian context The above examination of the judicial approach across various jurisdictions indicates that the courts are conservative when viewing MAC clauses and do not readily permit parties to use MAC for terminating an agreement. While Indian courts have not yet had the opportunity to rule on a MAC clause, there are indications they will be equally (if not more) circumspect when dealing with it. First, the Supreme Court has, in the context of the Takeover Code, interpreted the grounds on which an open offer may be withdrawn in a very narrow manner that is akin to impossibility. Secondly, Indian courts are likely to approach MAC clauses as being a contractual avatar of the doctrine of frustration and apply the high thresholds under Section 56 of the Indian Contract Act, 1872 while determining the justification for invoking such a clause. Given that the Covid-19 situation is widely perceived as a temporary one, parties invoking MAC based on the pandemic will have to demonstrate that its effects on the specific target/ borrower in their case are so grave that they will continue well after the crisis has been resolved. This may be difficult at present because the duration of Covid-19 itself is still unknown and ascertaining its full economic impact is, therefore, even more difficult. However, there could be cases where the severity of the impact would be sufficient to demonstrate a MAC. Parties invoking MAC even in such cases should anticipate being dragged into litigation and prepare for the same by collecting sufficient material to defend their invocation. In cases where the impact has not yet occurred but is unmistakably imminent, parties invoking MAC should consider the timing of invocation carefully and be aware of heightened litigation risks. Where agreements have been signed after the Covid-19 outbreak, parties invoking MAC should be prepared to demonstrate that the extent of its adverse impact on the target/ borrower has been so significant that it could not have been foreseen/ contemplated by the parties at the time of signing the agreement. Concluding Observations MAC clauses came about, at least in part, as an alternative to invoking force majeure and frustration. The purpose was to include an option with a somewhat lower threshold to make it easier for a party to walk away from a transaction. However, given the judicially evolved principles for interpreting a MAC clause, parties will find that invoking it comes with its own set of challenges. Even if a MAC clause is tailor-made for the specific transaction in question (as is best practice), the evidentiary burden on the invoking party coupled with the cost of collating sufficient material to discharge the same could be daunting. In the context of acquisition agreements, invoking a MAC is likely to remain an option on paper and do little more than provide leverage to re-negotiate the terms of the agreement since most sellers would prefer to avoid a protracted litigation. However, in the context of financing agreements, if the lender invokes an event of default based on MAC, it could effectively trigger the slide of the borrower into insolvency, leaving him with no option but to drag the lender into litigation as a survival strategy.

A Material Adverse Change (MAC), also known as Material Adverse Event (MAE), clause enables a party to withdraw from a contract in circumstances where there is a material change after its signing. Such clauses are usually found in acquisition and financing agreements. In acquisition agreements, the MAC clause gives the buyer the option of withdrawing from the transaction whereas in financing agreements, it gives the lender the option of not disbursing the amount agreed to be advanced.

MAC clauses are essentially definitions that reflect the allocation of risks between contracting parties. The risks allocated to the seller or borrower (as appropriate) are covered by the MAC clause whereas all other risks are allocated to the buyer or lender, respectively. Generally, systemic and industry-wide risks are allocated to the buyer/ lender while risks that are specific to the business/ borrower are allocated to the seller/ borrower. The MAC clause is used in conjunction with other provisions of an agreement. For instance, in acquisition agreements, the absence of any MAC could be a condition precedent for closing or a representation/ warranty by the seller. Additionally, the occurrence of a MAC could also be a ground for termination by the buyer. Similarly, in financing agreements, the absence of any MAC could be a condition precedent to drawdown/ disbursement under a facility or a representation/ warranty by the borrower. At the same time, the occurrence of a MAC could also be an event of default entitling the lender to accelerate/ recall the loan.
Continue Reading Invoking Material Adverse Change based on Covid-19: Easier said than done

Patent Licensing in times of Covid-19 Pandemic

The entire world has been grappling with the COVID-19 pandemic for some time now, and efforts are on to find a treatment protocol and vaccine. Several drugs and treatment therapies are being tried and tested to find a cure for this pandemic. In the middle of this fervent R&D activity, some questions come to mind — what about IP protection? How would companies commercialise a cure — if and when it is finally found? How would the cure be available to the public en-masse at affordable prices? Enter patent law and the aspect of Licencing.
Continue Reading To Protect or Not to Protect that is the Question : Patent Licensing in times of Covid-19 Pandemic

SUPREME COURT’S CONTINUOUS BATTLE WITH COVID-19

I. Introduction

The last few months have been extremely unpredictable and extraordinary for the world as it continuously battles against the novel Corona virus (“Covid-19”) in all its spheres. In India, the economy has suffered a severe blow and the legal fraternity and judicial system seems to be no different due to a lack of digital infrastructure.

Recently, by an order dated May 6, 2020 (“May 06 Order”)[1], the Hon’ble Supreme Court extended all periods of limitation prescribed under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) w.e.f. March 15, 2020 until further orders. This order has a tremendous implication for strict timelines prescribed under these statutes. In this article, we will analyse whether the May 06 Order was necessary in light of the order dated March 23, 2020 (“March 23 Order”) passed by the Hon’ble Supreme Court in the same proceedings[2] and thereafter, explore the implication of the same.
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