Gautam Khurana
The last few months have seen a momentous change in the way we live, in the way we act and in the way the legal world has reacted to the Pandemic of COVID 19. India too has seen a paradigm shift due to the catastrophic repercussions faced amidst these challenges.
The Government of India immediately swung into action to act two fold, one, to curb the pandemic and flatten the curve and secondly to assure the corporate sector, its citizens and the World that it is in complete control of the crisis. Various guidelines/notifications/orders and advisories have been issued from time to time to cover the effect of pandemic on the social and financial fabric of the Country. It is indeed commendable that the Government has been able to take stock of every area, sector and strata of the country, considering that India is the second largest populated Country in the world.
The following are the various measures undertaken by the Government, executive and judiciary of the country which has affected the legal sector:
Relaxations for Corporates
To begin with, the Government of India has attempted to provide as much support to the corporate sector as is possible, starting with the extension of time for filing of returns which is 31st of March in India. That deadline has been extended to 30th of June, 2020 considering the chaotic condition of the economy in general. The Ministry of Corporate Affairs introduced a scheme called the Companies Fresh Start Scheme, 2020 or the ("CFSS") vide general circular no. 12/2020, dated March 30, 2020. CFSS shall remain in force till September 30, 2020.
In terms of the said scheme, delay in filing the aforementioned documents with the registrar of companies, would be condoned and no additional fees would be charged. The ministry has provisioned that only regular fees would be charged for filing of documents if there is a delay. There will not be any prosecution or proceedings for imposing penalty on account of any delay associated with certain filings. It is however clarified that any other proceeding will not be covered by such a scheme. No previous proceeding, appeals, defaults etc. shall get immunity under this scheme. The inactive companies have also been covered under this scheme, so that they remain on the List of Registered Companies. The returns under Labour laws also stand extended due to the above mentioned provisions being imposed.
A similar relief has been granted to the Limited Liability Partnership Companies as well under an LLP Scheme. The submission of forms, returns etc. under the Mines Act has also been extended.
The government has also relaxed and extended the time period for ESI contribution by the Employer under the Employees State Insurance Act.
The legal fraternity has been closely working with the corporate sector to implement the various guidelines and advisories being issued by the Government.
Payment of salary during the lockdown as a Disaster Management Measure
The Ministry of Home Affairs, Government of India, in exercise of powers contained in Section 10(2)(l) of the Disaster Management Act, by way of Order No. 40—3/2020-DM-1(A) made the earlier Advisory of 20 March 2020 regarding payment of wages by private establishments/government mandatory by directing that any violation will be punishable under the DM Act. The Order reads as under:
“Whereas, to deal with the situation and for the effective implementation of the lockdown measures, and to mitigate the economic hardship of the migrant workers, in exercise of the powers, conferred under Section 10(2)(l) of the DMA, the undersigned, in the capacity as Chairperson, National Executive Committee here directs the State/Union Territory Government and State/Union Territory Authorities … to take following additional measures:
(i) …
(ii) …
(iii) All the employers, be it in the industry or in the shops and commercial establishments, shall make payment of wages of their workers, at their work places, on the due date, without any deduction, for the period their establishments are under closure during the lockdown; ...”
This law is under challenge before the Supreme Court of India. It is being pleaded that The Government of India cannot invoke Section 10(2)(l) or any other provision of the Disaster Management Act 2005 to impose financial obligations upon the private sector such as payment of wages. It is further contended that the Central Government should take onus of providing for those in need, rather than forcing the employer to make payments when the organizations are not functioning normally or are completely shut down. This forceful act may lead the employers to bankruptcy. The Disaster Management Act, 2005 was promulgated with the objective of providing a framework for the effective management of disasters. It is also contended that the Government under this Act should utilise the funds from the Disaster Management Fund and as per the judgement in B.J. Diwan vs. State of Gujarat AIR 2002 Guj 99 that when there is a natural calamity the State as guardian of the people (Parens Patria) is obliged to provide help, assistance and support to the victims of such natural calamities to help them to save their lives. This concept is also popular in the West and is known as Furlough, where the Government steps in the shoes of the employer and takes care.
However, the Supreme Court vide its order refused to stay the effect of the Order of the Central Government and called upon the Central Government to file its reply and in the interregnum the Employers are bound to comply with the said order Dated 29.03.2020. The Legal development in this grey zone will lay the foundation of the employer employee relationship for future. In India the workmen and the managerial category was always separate in terms of legal rights, i.e. Workmen being covered under the Industrial disputes act and the Managerial category under contractual law. This particular order does not differentiate between the two, so it will be interesting to see the interpretation of the courts and the law being laid
Contractual obligations under the current situation
The fact remains, that now is the time when the contracts will have to pass the scrutiny of the Courts in India and around the world to let the parties get an advantage of the provisions of the contract for defaults being made during this period. For a scenario like this, the clause of the contracts of which the parties may try to take umbrage would be the Force Majeure clause, which means unforeseeable circumstances that prevent someone from fulfilling a contract, which is also called an Act of God.
In some cases already pending before the Courts, the Indian Courts are only subjectively analysing the case in question. The situation is a case of a pandemic and a lockdown which is completely unique to the business community as well as the legal fraternity.
However one thing to be noted is that even the force majeure clause rarely relieves the parties of its financial obligations. So the party failing to complete its obligation for supply may get relief, but the party which is obliged to make payment for the part of the contract fulfilled by the other side may not have the same advantage.
The Indian Contract Act also protects non-performance of obligations under such unforeseeable circumstances as a frustration of contract. Section 56 reads as under:
“Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
An office memorandum of the Ministry of Corporate Affairs, Government of India, provides that a party may invoke the Force Majeure clause. The memorandum makes it clear that invocation of an FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. A notice of force majeure must be given as soon as it occurs, and it cannot be claimed later. Further, if the performance, in whole or in part or if any obligation under the contract, is prevented or delayed by force majeure for over 90 days, either party may terminate the contract without any financial repercussion on either side.
Applicability of moratorium to Banking Sector and recovery of dues through Insolvency proceedings
The Banks in India have been directed to have a moratorium period of about 3 months for now. All kinds of retail loans in India can enjoy deferment of payment of EMIs for the next 3 months, however, the same is subject to agreement between an individual/corporate and the banks. To bring some relief to the struggling MSME sector amidst the Coronavirus pandemic, the Finance minister increased the default threshold from Rs. 1 lakh to Rs 1 crore. This was an attempt to prevent triggering of insolvency proceedings against MSMEs. While this would help to reduce the number of frivolous cases under the Insolvency and Bankruptcy Code, it would also raise the bar to exclude the majority of MSMEs which could use IBC as a threat to seek payment of their dues. According to reports, Section 7, 9 and 10 of the Insolvency and Bankruptcy code which provides for the defaulting Company to be declared insolvent and wind up the Company, would be suspended for six months and the suspension time can be extended up to one year and is initiated by Financial creditors, i.e. Banks and Financial Institutions for recovery of the defaulted loan amounts . An enabling provision with respect to extending the time would be part of the ordinance, they added. Suspension of these provisions could be extended up to one year based on the economic situation going forward.
We may add that the IBC was a major legal development in India after it came into force, however the same being suspended might be a big jolt to the financial sector in terms of recovery of bad loans. As it is the defaults are likely to increase the declaration of companies as a Non Performing Asset by the Banks.
Online courts and future of justice:
The COVID 19 pandemic has brought to light a need for an increased use of technology in our system and provision of more technology Infrastructure to even the lower Courts. The Supreme Court of India after evaluating the situation held that:
“This Court has taken Suo Motu cognizance of the situation arising out of the challenge faced by the country on account of Covid-19 Virus and resultant difficulties that may be faced by litigants across the country in filing their petitions/ applications/ suits/ appeals/all other proceedings within the period of limitation prescribed under the general law of limitation or under Special Laws (both Central and/or State). To obviate such difficulties and to ensure that lawyers/litigants do not have to come physically to file such proceedings in the respective Courts/Tribunals across the country including this Court, it is hereby ordered that a period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by this Court in present proceedings.
We are exercising this power under Article 142 read with Article 141 of the Constitution of India and declare that this order is a binding order within the meaning of Article 141 on all Courts/Tribunals and authorities. This order may be brought to the notice of all High Courts for being communicated to all subordinate Courts/Tribunals within their respective Jurisdiction.”
Conclusion
The legal Scenario in India is clearing the smoke and trying to get clarity on various issues which have cropped up suddenly due to the Covid-19 situation. Indian corporates have been carrying on business with almost every country in the world. However, locally and internationally the business have taken a hit and suffered a huge loss and therefore, the Indian Government is making all efforts to bring normalcy to a rather cloudy scenario.
XLNC ARCHIVE | 05 May 2020