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Coronavirus outbreak – Relaxed IBC timelines.

Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy

COVID-19 has retarded the momentum of wheels of the Indian economy, the corporates. The All India Association of Industries had estimated a loss of INR 2,00,000 crore (USD 26.35 bn) by March 31, 2020 due to pan India lockdown.

In order to prevent and absorb the effect of such huge losses and to respond to the dynamics of the business environment, which has been changing every second in the wake of the globally-spread WHO-declared pandemic, the central government seems to be responding in a structured manner by providing various sops, relaxation, extensions and amendments to the existing legal framework in the country.

Across the globe, it is observed that the corporates which were in the pink of financial conditions have witnessed a sharp decline due to COVID-19.

Supply chains are disrupted, valuation of the stocks on bourses have substantially decreased amidst global down selling, and the valuation of businesses have fallen steeply.

In such a scenario, it was viewed that insolvency resolution processes under the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) also needed added layers of cushion from different viewpoints.

Due to the standstill caused by the lockdown in the country, the performance of contracts and payments thereof is manifestly disrupted. This is a trigger event for creditors, both financial and operational, to initiate insolvency against such corporate debtors.

If insolvency proceedings are initiated at a mass scale, then it can have a devastating impact on the economy, because, during the corporate insolvency resolution process (CIRP), the management of the corporate debtor switches hands with the resolution professional and he/she only carries out such activities that are essential for running the businesses as a going concern.

Value addition to the businesses, which is a key driving force behind any economy, is stunted during the CIRP. Also, it has been largely observed that CIRP has become a tool, especially in the hands of the operational creditors, to recover the debt instead of resolving the insolvency of the corporate debtor.

In order to avoid such a situation where corporates are forced into insolvency proceedings, the Finance Minister Nirmala Sitharaman has announced that if the current situation continues beyond April 30, 2020, then it may consider suspending Sections 7, 9 and 10 of the IBC for a period of six months, thereby disabling the financial creditors, operational creditors and promoters from initiating insolvency proceedings against companies.

It will be very interesting to watch out for what happens next, especially if and when the lockdown is lifted, either fully or partially, on April 1, 2020, and these will be questions that will float around for the government to answer and action–How likely is it that there will be a suspension and what will be the criteria for such suspension? What about the large scale and long term impacts such suspension will create? Who all will be most benefitted? Will this end up benefitting only specific sects like the promoters, lenders, or contractors?

Currently, the government has taken certain steps to prevent the initiation of CIRP at a large scale and to avoid any frivolous filings. The Ministry of Corporate Affairs vide a notification dated March 24, 2020, has increased the threshold for initiating the insolvency resolution process from INR 1,00,000 (USD 1,300) to INR 1,00,00,000 (USD 130,000) under Section 4 of the IBC.

This amendment is likely to also help medium and small industries who have been hit the hardest by COVID-19. However, on the flip side, this amendment will adversely impact the ability of operational creditors to initiate CIRP, since the minimum default amount is now ten times higher than the previous minimum default limit. Once the economy sails through the slowdown caused by COVID-19, the government should ponder upon reducing the limit to a lower amount, so that IBC does not merely remain as a toothless tool at the hands of operational creditors.

Amidst the nationwide lockdown on account of COVID-19, the acting president of the National Company Law Tribunal (NCLT) notified that all benches of the NCLT shall hear only inevitable urgent cases with prior notification on email from applicants.

Insofar as matters not construed as urgent, e.g. pertaining to the extension of time, approval of resolution plan and liquidation under IBC, the Insolvency Bankruptcy Board of India (IBBI) has, vide notification dated March 29, 2020, amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 granting certain relaxations.

Pursuant to the amendment, Regulation 40C has been inserted, which is a special provision in relation to meeting of the timelines in pursuance of CIRP.

According to Regulation 40C, the period of lockdown shall not be counted for the purposes of calculation of timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.

Such an amendment was the need of the hour, as the common investor sentiment amidst the lockdown is to protect the liquidity, impacting and stalling the bids under the CIRP, causing delays in the bid process and posing challenges to the CIRP, the insolvent companies and their resolution professionals.

This relaxation also helps avert negative consequences and follow-on actions due to non-compliance which also leads to additional expenditure by the parties involved. However, this amendment is effective from March 29, 2020, thereby looming confusion around the period that shall be excluded for the purpose of calculation of timelines pursuant to CIRP. The intelligible differentia for exclusion of the period of lockdown from March 25, 2020 to March 28, 2020, for calculation of timelines is unclear. It is imperative for IBBI to issue a corrigendum, explicitly affirming that the aforementioned period of three days shall be excluded from the calculation of CIRP timelines.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment Act), (notified on March 13, 2020, by the Ministry of Law & Justice by way of an amendment with retrospective effect from December 28, 2019, due to a prior Ordinance), vide amending Section 5(15) of IBC, authorised the government to notify any debt as interim finance, which means such debts as may be notified by the government shall be considered as priority loans for repayment purposes.

In the wake of COVID-19, various banks have already extended emergency credit lines to ease the liquidity crisis of the borrowers. Once the lockdown is removed and businesses are resumed, if borrowers default in repayment of the emergency credit, the banks may face immense liquidity crisis. In order to keep the banks afloat post resumption of normal economic setup, the government should consider exercising its power under Section 5(15) of IBC and thereby, notifying these emergency credit lines as interim finance, so that any unnecessary defaults in repayment of emergency credit are prevented.

An insight into the 2020 amendment:

Prior to the aforementioned amendments in response to COVID-19, the IBC was revamped vide Amendment Act, to make the resolution process more effective and to promote ease of doing business. Key insights on the Amendment Act have been summarised below:

Section 32A: Liability for offences committed prior to CIRP

Section 32A has been introduced with the aim to protect the successful bidders, the corporate debtor and its assets from any action against offences committed by previous promoters or officers in charge of management or control of the affairs of a corporate debtor, prior to commencement of corporate insolvency resolution process (Management Offences).

This amendment grants immunity to the corporate debtor against the management offences and the corporate debtor shall stand discharged from the date of approval of the resolution plan. This benefit shall be available only if the management or control of the corporate debtor changes, which means that the defaulting management and promoters or the abettors of offence (as identified by the investigating authority) shall no more be in charge of managing or controlling the affairs of the corporate debtor. However, this immunity is not provided to the persons who committed default, hence, the officers of the corporate debtors, such as designated partner of an LLP, officer in default of a company, officer in charge of or responsible for the conduct of the business of the corporate debtor and officer associated with the corporate debtor in any manner, shall continue to be prosecuted and punished.

Subject to the change in management or control of the corporate debtor, the property of the corporate debtor covered under the resolution plan is also protected from any action, such as seizure, attachment, retention or confiscation, that otherwise may be taken against such property in relation to the offence committed prior to the commencement of CIRP. Such immunity shall also be provided to the persons who may acquire the property under the CIRP process or liquidation or liquidation process under IBC.

Section 14: Government authorisations and essential supplies during moratorium

According to amendment in Section 14: (a) if the payments are duly made for the use or continuation of any license, permit, quota, concession, registration, clearances or a similar grant or right during the moratorium period then such license, permit, quota, concession, registration or clearances shall not be suspended or terminated on account of insolvency; (b) moratorium shall not be applicable such transactions, agreements or arrangements as may be notified by the central government in consultation with financial sector regulator or any other authority; and (c) IRP and the resolution professional, if consider supply of any goods or services to be essential for preserving the value of the corporate debtor and managing its operations as a going concern, then supply of such goods and services shall not be interrupted in any manner, subject to IRP or RP making payment towards such essential supply.

The objective of this amendment is to smoothen the CIRP and ensure that the resolution plan or management of the corporate debtor is not hampered for want of government authorisations or essential goods and services.

Section 5(15): Power of central government to notify interim finance

According to amendment in section 5(15), any debt notified by the central government can also be included in the definition of interim finance. In pursuance of this amendment, the central government vide notification dated March 18, 2020, has notified debts raised from the Special window for Affordable and Middle-Income Housing Investment Fund I to be included within the meaning of interim finance.

Interim finance is the debt which is treated as a priority loan for the purposes of repayment. The effect of this amendment is that the central government may notify any debt as interim finance, wherein such debt shall be repaid before all other debts of the corporate debtor.

Section 7: Increase in amount of minimum default for initiating CIRP

In addition to the criteria of the minimum amount of default being INR 1,00,00,000 (increased from INR 1,00,000, vide notification dated March 24, 2020), certain additional requirements are to be adhered to by the following financial creditors: (a) real estate allottees; and (b) security or deposit holders represented by a trustee or agent, prior to initiating CIRP against a corporate debtor. Applications by these financial creditors should be filed jointly by at least 100 such creditors or 10% of their number, whichever is lower.

The objective behind this amendment is to avoid frivolous litigations against corporate debtors. As of September 2019, of the 10,860 IBC cases pending with NCLT, 1,821 cases (17%) have been filed by homebuyers. However, this amendment may also impede the redressal of grievances of the genuine real estate allottees. The operation of part of the enactment pertaining to the real estate allottees has been stayed by the Supreme Court vide its order dated January 13, 2020.

Conclusion:

It will be a great wait and watch if the government eventually relents to industry demands for suspension of key provisions of the IBC for as long as six months. Irrespective, these amendments are likely to smoothen the insolvency resolution process and may prevent the corporates from sailing close to the wind during this period of recession that India Inc. is set to face amidst the lockdown.

India’s FDI changes & Prior Approval Process

Prior Approval process introduced

Recently, on 22 April 2020, the Government of India (GOI) amended India’s foreign exchange control norms to require that investments emanating from countries sharing a land border with India (including any beneficial ownership held in such countries) will require prior approval of the Government. The list of such countries includes China and covers investments made through any mechanism including fresh capital infusions as well as purchase of existing security. Prior to this amendment, investments from China did not require any prior approval process.

It must be noted that these amendments do not prohibit Chinese investments into India. Since these amendments, the GOI through it’s Foreign Investment Facilitation Portal (FIFP) has also modified the mechanism as well as the application form for seeking the prior approval of the GOI. While further clarity is still awaited, below is a very quick brief of this new mechanism introduced so far.

Changes in the Application Form to be filed online

A prior approval of the GOI for foreign investment into India has to be routed through the filing of an application form/ proposal online on the website of FIFP, where various details have to be provided and which facilitates a single window clearance system for this purpose. Once successfully uploaded, the application is forwarded to the relevant ministry of the GOI for its approval. This approval system has undergone some minor tweaks considering the amendments pursuant to the recent amendments:

Unlike the method existing prior to the above amendments, an applicant is now required to compulsorily select if the proposal falls within the purview of the recent amendments (Para 3.1.1(a) of the Press Note 3 of 2020).
The application is also required to select an appropriate “reason for proposal”. While this tab enlists all provisions of the FDI policy that require the prior approval of the GOI (for e.g. proposed foreign investment in a sector that requires approval, investor is a resident of Bangladesh or Pakistan, transfer of shares, expansion of existing facilities/ wholesale to retain, etc.), however, it does not provide any specific option for “investor is a resident of any other country that shares a land border with India” (this includes China). There could possibly be a change to this process in the coming days.
Under the tab concerning the details of the Investor, the applicant is required to provide details such as country of residence (in which China is one of the options in the dropdown – although this is a general list of all countries). Additionally, the applicant is required to provide details of “beneficial owner” and “beneficial owner country”.

Changes in the Security Clearance Form

Pursuant to the said amendments, the format of the security clearance form now requires a self-declaration regarding presence or operations in China (this is in addition to the existing list mentioning Pakistan and Bangladesh). The updated security clearance form does not consider self-declarations from other countries sharing land borders with India (namely, Afghanistan, Nepal, Bhutan, Myanmar).

Next Steps

We have been in engagement with the appropriate departments of the Government of India regarding developments in this area. We understand that certain clarification may be brought about by the GOI although dates for the same are unknown at this stage.

As a part of our Client Outreach Program, we shall keep you posted on further updates. In the meantime, please do not hesitate to reach out to us for any clarification and we will be happy to help.

Covid-19 and IBC Proceedings – 10 key considerations

What is the implication of the present lockdown) in the wake of Covid-19 outbreak on the timelines prescribed in respect of CIRP under the Code?

The IBBI has vide notification dated March 29, 2020 amended the CIRP Regulations by insertion of regulation 40C. Pursuant to regulation 40C, the lock down period shall be excluded for the purpose of computation of the time frame for completion of the various activities forming a part of the CIRP. Regulation 40A provides a comprehensive list of the activities required to be undertaken to complete the CIRP along with timelines.

What is the implication of the lockdown on the time limit prescribed for completion of CIRP under Section 12 of the Code?

Section 12 of the Code provides that CIRP is to be completed within 180 days with an outer limit of 330 days (inclusive of litigation). The NCLAT vide its order dated March 30, 2020, extended the time limit for CIRP by excluding the period of lockdown ordered by the CG and the State Governments, including the period as may be extended either in the whole or part of the country, from the CIRP period, for matters where the CIRP has been initiated and is pending before any bench of the NCLT or is pending in appeal before the NCLAT. Thus, the period of lockdown shall not form a part of the period of 180 days contemplated for completion of CIRP. Please note that the extension is applicable only in cases where the CIRP has already been initiated and the timelines provided under the Code in all other cases remains sacrosanct. Further, the NCLAT has also ordered that all interim orders and stay orders passed by NCLAT under the Code shall continue until the next date of hearing.

What is the implication of the lockdown on limitation prescribed for filing of an application under the Code?

The Supreme Court (SC) vide its order dated March 23, 2020, extended the period of limitation until further orders for filing of petitions/applications/suits/appeals/all other proceedings, irrespective of the limitation prescribed under the general law or special laws, whether condonable or not, with effect from March 15, 2020. SC exercised its power under article 142 read with article 141 of the Constitution and declared that the order is a binding within the meaning of article 141 on all courts/tribunals and authorities. Hence, the limitation period stands extended with effect from March 15, 2020. The Registrar, NCLT, Delhi has also issued a notice dated March 24, 2020 clarifying that the order of the SC will be binding on all the NCLTs.

What is the implication of the lockdown on the implementation of a resolution plan which has already been approved by the adjudicating authority (AA)? Has any extension been granted in so far as timelines for implementation of an approved plan is concerned?

The Code mandates the resolution plan to provide for an implementation schedule which inter alia covers timelines for various payment obligations. Regulation 40C extends the timeline for any activity that could not be completed due to the lockdown, in relation to a CIRP subject to the overall time provided under the Code. However, regulation 40C does not extend the timeline for any actions to be taken upon the completion of the CIRP. Once a plan is approved, the CIRP comes to an end. The actions contemplated above would arise only once the CIRP is completed and, therefore, the benefit of regulation 40C shall not be available in so far as timelines for implementation of an approved plan is concerned. The resolution applicant would therefore be required to adhere to the timelines contemplated in the plan for the various actions contemplated therein. The successful resolution applicant may be required to approach the NCLT for granting relief against strict adherence to the timelines contemplated in the plan.

Since there is no extension granted to the timeline contemplated for implementation of an approved plan, can the resolution applicant invoke Force Majeure? Further can a resolution applicant back out of a plan which has been approved or is pending approval by the CoC or is pending approval of the AA, in view of Covid-19?

Under the Indian laws, Force Majeure cannot be implied in a contract. Therefore, whether or not this relief will be available, will depend on whether the plan approved by the AA contains a specific provision on Force Majeure and also on the scope of the Force Majeure clause. A resolution applicant may be able to invoke rights of suspension or termination under Force Majeure (subject to the force majeure clause allowing such suspension/termination), if the clause specifies disease, epidemics, pandemics, quarantines or government intervention/declaration as force majeure events. In addition, presence of terminology such as ‘extraordinary circumstances beyond control of the applicant’ or similar phrasing in the plan may also be tested to trigger the clause for outbreak of Covid-19. In several landmark judgements, including in Satyabrata Ghose v. Mugneeram Bangur and Co. and Energy Watchdog v. CERC, SC has applied the following test to determine validity of Force Majeure events:

Whether the event qualifies as force majeure under the contract?
Whether the risk of non-performance was foreseeable and able to be mitigated?
Whether performance is truly impossible?

In the absence of a specific provision in the plan, the availability of the relief of Force Majeure would depend on the ability of the resolution applicant to satisfy the test laid down under Section 56 of the Indian Contract Act, 1872 i.e. if the resolution applicant is able to factually demonstrate before a court that the purpose and underlying principles of the plan have been eroded/frustrated and the performance under the plan has become impossible. The essential element for a claim of frustration is impossibility of performance of its obligations and the party claiming frustration carries the burden of proof. In this context, it is important to remember that performance of the contract (in this context may be read as plan) becoming onerous or change in circumstances do not lead to frustration of the obligations in terms of the plan (Alopi Parshad and Sons Ltd. v. Union of India) – it will have to be proved on facts that the frustrating event has made implementation of the plan impossible. Similarly, the ability of the resolution applicant to back out from a plan already placed for approval before the CoC/approved by the CoC or pending approval of the AA would depend on the above-mentioned factors. Further, the possibility of invocation of the bid bond guarantee in the absence of a Force Majeure provision in the plan cannot be ruled out.

Resolution plans are usually unconditional and irrevocable and generally do not contain a Force Majeure clause. In our view, therefore, it would be important to seek an extension of time for implementation of the plan from the NCLT and/or the CoC, as the case may be. In view of the nature of the pandemic, the courts should be lenient in matters relating to extension of time or suspension of performance during the lock down period. However, backing out of an approved plan in the absence of a specific provision of force majeure which clearly absolves the resolution applicant from performance, may be difficult to achieve.

Would the CoC be entitled to invoke the performance bank guarantee in view of non-implementation of the plan during the lockdown period?

This will depend on whether there is a Force Majeure clause in the plan which clearly covers the pandemic. In the absence of such provision, the CoC would, unless restrained by an order of a court of law, be legally entitled to invoke the performance bank guarantee. It is therefore important to enter into negotiations with the CoC for extension of time and/or seek directions from the AA for extension of timelines. Further, it may be advisable to apply to the AA for an order restraining invocation of the performance bank guarantee. The NCLT Principal Bench, New Delhi, Camp at Chennai is hearing urgent matters and an application of this nature should qualify as an urgent matter. In this context it may be stated that courts are usually reluctant to interfere in matters relating to invocation of the performance bank guarantee unless it can be demonstrated that such invocation is fraudulent or would result in irretrievable harm or injustice. In view of the ongoing pandemic, the courts are likely to take a view that invocation of the performance bank guarantee would cause irretrievable harm or injustice. In a situation where the performance bank guarantee has already been invoked, the applicant may approach the AA seeking relief against such invocation. The tribunal should be lenient in granting relief against such invocation in view of the pandemic.

What is the implication of COVID-19 on the threshold requirement for initiating CIRP or liquidation of corporate persons?

In order to prevent triggering of CIRP against the MSME sector, the ministry of corporate affairs has issued a notification dated March 24, 2020 whereby the threshold of default under Section 4 of the Code has been increased to INR 1 crore from the existing threshold of INR 1 lakh.

What are the extensions in timelines that have been provided under the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations)?

The IBBI has pursuant to an amendment dated March 28, 2020 to the IP Regulations provided the following reliefs under the IP Regulations: (a) For the financial year 2019-2020, the resolution professional and/or insolvency professional entity (IPE) is allowed pay his/its annual fee for maintaining his/its registration with the IBBI on or before June 20, 2020 instead of April 30, 2020; and (b) If an individual joins or ceases to be a director or partner of an IPE during the period between March 28, 2020 to December 31, 2020, then IPE can intimate IBBI within 30 days instead of 7 days.

Are urgent matters being heard by the AA? Has any procedure been prescribed for hearing urgent matters?

The NCLT, Delhi on March 22, 2020 issued a notice to the effect that in case of unavoidable urgent matters, on application by the aggrieved party, through email to the registry NCLT Chennai, after service of notice to the other side, the Hon’ble Acting President sitting singly at Chennai will examine and pass necessary orders on Wednesday and Friday. Parties/counsels will not be provided an opportunity to make oral submissions. Application shall be verified by the respective counsel through affidavit by mentioning their bar enrolment number and the above process should not be abused. The application/communication shall be sent to the email id of Registrar, NCLT Chennai from the email id of respective counsel. Hearings are being conducted through video conference and issues being decided forthwith. On April 7, 2020, the NCLT Delhi has issued a further notice directing parties to file joint memo of written submissions to avoid delays, avoid filing reply and rejoinder and memo and to arrive at decisions quickly. However, in the event the situation demands grant of ad-interim relief by NCLT even before filing of the memo, non-filing of the memo will not become a hindrance to NCLT in granting such relief.

Have any guidelines been issued on what constitutes urgent matters?

The NCLT has not issued any guidelines on what constitutes urgent matters. However, it has in its notice dated March 22, 2020 stated that in so far as matters under the Code is concerned, extension of time, approval of resolution plan and liquidation will not be construed as urgent matters. These matters will be taken up as soon as regular benches start functioning, until such time such applications shall not be filed.

Why the power sector deserves exemption to IBC

Author by Hemant Sahai

It is an established fact that a robust power sector provides one of the fundamental underpinnings for modern socio-economic development. While a series of legislative reforms by the government – beginning with the plan in 1990s to galvanise private sector investment in this sector and resulting in the Electricity Act, 2003 as a comprehensive legislation governing this sector – have sought to modernise different aspects of this sector, one of the peculiarities of the current architecture is that the private investor or producer inevitably deals with a state-owned monopoly for distribution.

It is indeed true that some segments of the sector have been opened up to private investment, and with reasonable success so far, however, the state and its instrumentalities have assiduously resisted the opening up of the most inefficient segment of this sector, i.e. the distribution and retail sale of electricity, to private investment and competition.

Therefore, unlike other infrastructure sectors such as highways, airports, metro railways etc., where the revenue collection risk is dispersed amongst a multitude of users, in the power generation sector, the entire offtake and revenue risk is concentrated on single buyers that are state-owned monopolies.

The only thing worse than a private monopoly is a state-owned monopoly since it brings not only its might as a monopolist but also its might as an instrument of the State, with its own peculiar and subjective assessments of what constitutes ‘public interest’.

These assessments are inconsistently applied and, consequently, the economic and financial principles that apply to the distribution sector, which is essentially a business, get sullied and distorted by political, ideological and non-commercial considerations.

The starkest example of this is the current impasse in Andhra Pradesh where the new government tried to reduce the solar and wind tariffs of already executed and operative power-purchase agreements ostensibly in “public interest”. Fortunately, the attempt was ultimately quashed by the Andhra Pradesh High Court by holding such unilateral action effectively to be “arbitrary”. The said case is presently being appealed on certain limited issues of jurisdiction.

Systemic inefficiencies that are directly traceable to government control of distribution companies or discoms continue to distort the commercial dynamics of this sector.

It is noteworthy that as of Jan 2020, discoms owe Rs 88,782 crore to the generators, and the situation gets further aggravated when we consider that it is the state governments that have the lion’s share of the outstanding amount due to discoms, which stands at a staggering Rs 82,073 crore as of January 2020. Such inefficiencies have been instrumental in the marked rise of stressed assets in the power generation sector. There are currently close to 60,000 MW of thermal power generating assets (constituting nearly a fifth of the aggregate installed generation capacity in India) that are undergoing insolvency proceedings under the Insolvency and Bankruptcy Code.

Is IBC a solution or…

Any consideration of stressed assets invites discourse on the applicability of Insolvency and Bankruptcy Code, 2016, to ostensibly alleviate and resolve the distress faced by private sector producers. Numerous companies in the power sector have been declared to be insolvent by the respective National Company Law Tribunals and are undergoing corporate insolvency resolution process.

IBC, however, is prescriptive in nature and mandates a certain course of action without making any distinction between sectors or indeed the causes leading to the financial situation. If corporate insolvency resolution process under Chapter II of Part II of the IBC is initiated against a company or the company initiates voluntary liquidation proceedings under the IBC, the most desirable outcome is that the debts of the creditors are satisfied and there is a change in the management of the company so that after resolution, the company does not go back into the hands of the promoters or directors who have led to its downfall in the first place.

IBC lays down an expeditious process wherein upon admission of the application for initiation of insolvency proceedings by the concerned National Company Law Tribunal, the existing management is ousted and the interim resolution professional steps in within 14 days of said admission.

Given the sectoral inefficiencies that can directly be attributed to the state, and are responsible for the sectoral stress in private power production, there is an urgent need for creating a special dispensation for power sector within the IBC framework.

Firstly, the non-payment of dues by discoms is a major contributory factor to the sectoral stress. In various instances, discoms are citing the pendency of appeals, or non-receipt from other third parties, as reasons for such non-payment. However, such appeals take years to get finally decided. In the meantime, generation companies suffer undue financial distress.

Secondly, power sector is also plagued by several issues that are essentially beyond the investors’ control. One such issue is the non-availability of fuel despite the assurance of supply of 100 percent coal to power projects vide the New Coal Distribution Policy dated October 18, 2007 which was later reduced and thereafter, vide a remedial measure i.e. the Shakti Scheme which came in 2017, brought down to 75 percent of the coal requirement. Though the Supreme Court in the matter of Energy Watchdog vs CERC recognized the reduction of assurance of 100 percent coal as a change-in-law event, however, the approval from the respective regulatory commissions for pass through of this cost is a time-consuming process and, in the interregnum, the generators have been made to bear the additional cost, which is a major reason for the financial stress. Compensation for time value of money by way of interest is usually too little and too late and in any case is frustrated once again by the monopolistic buyers through diverse stratagem.

Thirdly, unlike most other sectors, the power sector is highly regulated – from the applicable tariff and claims for compensations, including increase in taxes and duties that can be recovered as part of the tariff, to allocation of inputs required for generation solely by the government of India, and restriction on purchase of generated power only by distribution or trading licensees – all aspects are regulated by the regulatory commissions.

In light of this, it would seem that applying a purely commercial framework for resolving stress in the power sector seems inequitable at the very least and, in fact, presents a compelling argument as to why there should be reconsideration on the blanket applicability of the IBC on the power sector.

These aspects, along with various other power sector specific issues such as discrimination between private and public sector generation companies, lack of power purchase agreements etc. were raised before the Supreme Court in the matter of Dharani Sugars and Chemicals Limited vs Union of India & Ors. wherein the court, while passing the judgment on April 02, 2019, failed to discuss and deal with the said issues crippling the power sector.

These issues and arguments have, till date, been overlooked by the Parliament and by the courts. The Supreme Court, in the challenge to the RBI circular of February 2018, did recognise these factors, but eventually did not rule on this inequitable power sector architecture. It is high time to rethink our approach to avoid adverse consequences accruing to the power sector as a whole and to India’s economy at large.

The Alternative?

The provisions of the IBC should be relaxed in terms of their applicability to the power sector by way of introducing additional pre-requisites for initiating insolvency proceedings, higher default limits, introduction of the ground of ‘pre-existing’ disputes in case of entities pertaining to the power sector etc.

Another approach can be to make a distinction regarding the extent that the IBC should apply to assets or segments that are financed by private sector i.e. generation and transmission, unlike in the case of distribution companies which are mostly government owned.

Further, the IBC should not apply to commissioned and operating transmission and generation assets where there is a sole procurer that has defaulted on payments for an extended period such as three month, (considering that most of the regulations for tariff determination usually account for two-three months of working capital costs.

In this context, it also relevant to note that, in addition to IBC, there are other pieces of legislation that are perhaps more suited to this sector such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which enables lenders to enforce the security interest put forward by the borrowers in order to recover their loan amounts, without necessarily derailing the management and essentially bringing the entire company to the ground. This also provides a chance to the company to revive itself basis the remaining assets and continue its business operations as a going concern, which, in context of the power sector, would be in the best interest of the economy of the consumers.

In light of the above, Parliament needs to seriously consider the specific existential realities of the power sector and address these challenges faced by private sector investors in the generation and (to a lesser extent) the transmission business objectively. In this case, what’s gravy for the goose is not necessarily gravy for the gander.

Source: BloombergQuint

Coronavirus outbreak: Relaxed IBC timelines may be a face-saver for Indian corporates

Authored by Dipti Lavya Swain

Across the globe, it is observed that the corporates which were in the pink of financial conditions have witnessed a sharp decline due to COVID-19.

Supply chains are disrupted, valuation of the stocks on bourses have substantially decreased amidst global down selling, and the valuation of businesses have fallen steeply.

In such a scenario, it was viewed that insolvency resolution processes under the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) also needed added layers of cushion from different viewpoints.

Pursuant to the amendment, Regulation 40C has been inserted, which is a special provision in relation to meeting of the timelines in pursuance of CIRP.

An insight into the 2020 amendment:

Section 32A: Liability for offences committed prior to CIRP

Section 14: Government authorisations and essential supplies during moratorium

Section 5(15): Power of central government to notify interim finance

Section 7: Increase in amount of minimum default for initiating CIRP

Conclusion:

Source: Business Today

Navigating the problems of inland waterways

Akshay Malhotra, Partner along with Ishita Gupta, Associate, HSA Advocates

India has one of the largest networks of water channels in the form of rivers, creeks, canals and backwaters, and it provides an effective and economical means of transport. Being environment friendly and inherently cost efficient because of lower construction, operation and maintenance costs, waterborne traffic is an attractive transportation option. The cost of moving one tonne of cargo through inland waterways is approximately one-third of that of railways and half of that of roads. India has more than 14,000km of navigable waterways capable of taking motorized craft.

In 1980, a National Transport Policy Committee determined that the sector was underutilized and inadequately funded. The committee recommended guidelines for declaring watercourses as national waterways. These required navigation by mechanically propelled vessels, the passage through, and service of the interests of more than one state, connections between hinterlands and major ports, and the connection of places not served by other modes of transport. The Inland Waterways Authority of India (IWAI) was established by the Inland Waterways Authority of India Act, 1985 (act), for regulating and developing inland waterways for shipping and navigation. The IWAI may establish infrastructure and facilities, levy fees and enter into contracts to discharge its functions. The Allahabad-Haldia stretch of the Ganga-Bhagirathi-Hooghly river was declared the first national waterway in 1986. The government added five national waterways between 1986 and 2015 and the National Waterways Act, 2016, declared another 106 national waterways.

In recognition of the role that the private sector can play, the Inland Water Transport Policy, 2001, prepared by the Ministry of Shipping supported and encouraged private participation. Apart from streamlining the regulatory framework, the government has provided viability gap funding, and has enabled the IWAI to enter into joint ventures adopting the build, operate and transfer model offering up to 40% equity for terminals and inland waterways. The sector can also receive 100% foreign direct investment through the automatic route.

Despite these benefits and incentives, the sector faces significant headwinds. The viability of projects in the sector is dependent on other modes of transport and the need for inland waterways terminals to be located near industrial hubs for efficient rail and road last-mile connectivity. Project financing of capital-intensive vessels is a challenge as there is no prescribed draft, and thus no standard for the minimum depth of watercourses required for the navigation of vessels. Additionally, the present regulatory framework limits the ability of private sector operators of inland waterway terminals to levy tariffs based on market conditions.

To overcome these drawbacks the government, over the past five years, allocated budget to this sector and increased financial contributions to the IWAI. The budget stressed the need to enhance port development through the Sagarmala Scheme and to develop inland waterways for cargo movement to ease congestion on road and rail networks, reduce the cost of transportation and cut oil import bills. In the last budget, the Jal Vikas Marg project on National Waterway-1, the fairway between Varanasi and Haldia, was said to be nearing completion.

The government also proposed the regulation of multi-modal transport and a national logistics policy, which will benefit inland waterways through a transport mix, thus encouraging consolidated cargo movements.

The World Bank recently signed a loan agreement of US$88 million to help modernize Assam’s passenger ferry sector. This will help Assam to improve the passenger ferry infrastructure and strengthen the capacity of the bodies running inland water transport. The World Bank, through the International Finance Corporation, has successfully helped the IWAI enter into an arrangement for the operation and management of terminals at Kolkata and Patna, which were placed in the charge of an operator from Bangladesh. The state government of Goa plans to revive inland waterway passenger services connecting rural areas to cities in the coastal state, which will be fully funded by the IWAI.

Clearly, the benefits of developing robust inland waterways outweigh the drawbacks. To encourage greater private sector participation, the government should consider the introduction of robust public-private partnership programmes. While noteworthy steps have been taken towards the development of this sector, there is much more that can be done to ensure that inland waterways emerge as a viable transportation platform.

Source: India Business Law Journal

Coronavirus outbreak – IBC suspension.

Suspension of the IBC for a period of 6 months shall further disable the creditors from initiating insolvency resolution proceedings against the corporate debtors, thereby further blocking the mechanism to resolve the debt and recover the credit

In order to prevent community transmission of COVID-19, the government has extended the pan India lockdown. India’s Lockdown 2.0 commenced on April 15, 2020 and shall continue until May 3, 2020. The total count takes it to 40 days since the first phase of the lockdown.

The lockdown has brought India Inc to a standstill, although considering the need to bring the economy back into motion, certain activities in the essential goods and services sector have been allowed, subject to conditions, with effect from April 20, 2020.

The Insolvency Bankruptcy IBC, 2016 (IBC) was enacted in order to provide a solution to creditors, resolve the insolvency of corporate debtors and very importantly, provide a time-bound mechanism to the creditors for debt resolution. Amid COVID-19 outbreak, the government has taken several necessary yet difficult measures such as lockdown, which may render resolution of debts by corporate debtors, strenuous.

Will the IBC be suspended?

As a protectionist move for corporate debtors under the IBC, on March 24, 2020, the Union Finance Minister Nirmala Sitharaman, for the first time, had announced the intention of suspending Sections 7, 9 and 10 of the IBC, in case the difficulties faced by the corporates continue beyond April 30, 2020, amidst the lockdown.

Now that the lockdown has been extended, the government is mulling on promulgation of an ordinance for suspension of the said sections of the IBC. The suspension shall not allow financial and operational creditors as well as corporate debtors themselves from initiating insolvency proceedings.

This is primarily aimed at protecting the medium and small enterprises, which are hit the hardest due to the COVID-19 pandemic, because of disruption of supply chains and disabilities caused by lockdown in carrying out the businesses and generating revenue.

However, a blanket ban on initiation of insolvency proceedings may have been uncalled for as it is likely to have adverse repercussions for certain sections e.g. the creditors. But, the situation may well be unavoidable since the initiation of insolvency proceedings during these times are likely to severely clog the courts and therefore, the government may well press the suspension button, albeit for a temporary period.

We have already seen various measures under the IBC being taken since the last few months including the threshold of minimum default under the IBC being increased ten times from Rs. 1 lakh to Rs. 1 crore thereby swiping off a large number of operational creditors from filing applications for recovery and leaving them toothless under the IBC.

The Force Majeure difficulty

Force majeure is basically a clause which provides an ability to contracting parties to not perform their obligations without being held responsible for it, due to the happening of extraordinary events that were not in their control. Importantly, force majeure is generally not seen in loan agreements. However, business contracts that contain such clauses are likely to see parties invoking it, thereby rendering the performance of contract for the time period, impossible, which means that a corporate debtor, owing to zero or substantially lowered revenues during the lockdown is likely to default on its pay-outs to financial creditors as well as operational creditors. Worse, force majeure clauses in certain contracts may well be drafted in a manner which may not allow an interpretation to be taken such that a pandemic of this nature does not get covered.

If the IBC is suspended, without a doubt, creditors, especially the operational creditors shall be hit hard. Operational creditors, unlike financial creditors are engaged in the supply chain of the corporate debtor and if they are not paid due to invocation of force majeure, this shall further impact their ability to repay their creditors, thereby showcasing a devastating ripple effect on the economy.

RBI’s COVID-19 Regulatory Package

The Reserve Bank of India has allowed financial creditors, i.e., all banks and financial institutions (including NBFCs) to grant a moratorium of 3 months on payment of all term loan installments (including agricultural, retail and crop loans) and interest on working capital loans (such as overdraft facilities), which are due between March 1, 2020, and May 31, 2020.

This not being mandatory in nature, poised a difficult question for borrowers and lenders alike, until India’s largest public sector bank, State Bank of India, opened this line of moratorium and others followed suit. Such moratorium has already made it easy for the debtors to repay their loans and interest after the end of the moratorium.

However, this moratorium shall restrict the liquidity of the creditors and pose difficulty in extending credit to potential borrowers. Even if the credit is extended to potential borrowers considering the hiatus in business activities created by the novel coronavirus pandemic, such borrowers shall be in limited or no capacity to repay at this juncture, which shall only further dry up the liquidity of the creditors. If creditors run out of liquidity, since the Indian banking sector is already exposed to several NPAs, businesses shall be hampered, as a substantial majority run on credit.

How will a suspension be brought about?

The central government may exercise its powers under Section 242 and other provisions of the IBC to issue a notification suspending Sections 7, 9 and 10 of the IBC, in order to prevent the companies at large from being forced into insolvency proceedings. Section 242 empowers the central government to make such provisions not inconsistent with the provisions of the IBC in order to remove any difficulty.

Will a temporary suspension be useful?

In light of the aforementioned measures already taken by the government to ensure the corporate debtors to sail through this period of financial stress, suspension of IBC maybe a little too much of an overprotection of the corporate debtors.

Certainly, this suspension will put the creditors in dire financial crisis, as despite the end of the second phase of the lockdown, they will have to remain remediless for at least a period of 6 months, only after which they may seek redressal under the IBC, which shall further take a period of 330 days to recover the loan from the corporate debtors.

This is a long period to throw a lot of creditors, especially the operational creditors out of business. Also, during this extended time, the quality of the asset is most likely going to further decrease.It is imperative to question whether the period of 6 months would be enough for the corporate debtors in regaining the same financial position, as was before the first phase of the lockdown so that repayment towards the loans can be made?

Especially since no economy in the world knows the end date for the current pandemic. Despite that, optimistic economists predict the economic recovery to take at least a span of 9-12 months.

During the IBC’s temporary suspension, corporate debtors may not be reinstated into the pink of their financial conditions, so as to repay their loans. The feeble repayment capacity of the borrowers is evident from various circulars released by RBI upon requests of various stakeholders amid COVID-19.

For instance, the RBI released a circular upon requests of exporters, seeking relaxation in the timeline for realisation and repatriation of funds to India from 9 months to 15 months.

Hence, unless the proceeds are realised, payment of borrowings made by the exporters is only a dream for creditors not coming true anytime soon, even after the period of 6 months for suspension of the IBC is over. This implies that the period of six months may not be enough for the borrowers to regain their repayment capacity, hence the suspension of the IBC may not render envisaged outcomes.

How necessary is suspension of IBC?

However, the suspension of IBC appears to be the last resort before the government to prevent the initiation of mass insolvency proceedings against the companies that may have defaulted during the COVID-19 pandemic impacted period.

Mass insolvency proceedings may cause retardation of economic growth, as vital activities to keep the businesses going are carried out during the insolvency proceedings. Additionally, the already overburdened National Company Law Tribunals (NCLT) shall become further burdened.

Strangely, this time, the debate on whether or not a suspension will be imposed may lie on different pedestals which may not have been why the IBC was brought about in the first place. Unfortunately for the government, India Inc’s engines are corporates themselves and the burden of keeping this engine running may push the government to once again require the banks and financial institutions to shoulder this responsibility. In turn, the government may infuse funding into these banks for sustenance.

Coronavirus – The fallacy of forcing forje majeure

Authored by Rajdeep Choudhury

“Gasmaggedon” Sweeps Over Global Gas Market

Manufacturers entangled in logistical nightmare as virus-hit China limps back to work

Coronavirus casts a shadow on solar projects

The above headlines are a stark reminder that the humanitarian challenges brought about by the outbreak of severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that is causing the coronavirus disease (COVID-19) are closely followed by logistical challenges and economic impact.

On 11 March 2020, the World Health Organisation (WHO) classified the outbreak as a “pandemic”, which is considered more severe than an “epidemic” because of its geographical spread. There is scarcely an area of economic activity that is untouched by the outbreak.

The crisis has shone a spotlight on over-dependence of supply chains on China. Once the worst is behind us, decoupling from China that had already commenced against the backdrop of rising labour costs and trade tensions may accelerate.

India

In India, certain industries have been especially affected by the outbreak.

In the pharmaceutical industry, China’s dominance of the active pharmaceutical ingredient (API) is now being re-examined. It is estimated that Indian pharmaceutical companies rely on China for approximately 70% of their API requirement and it is feared that manufacturing facilities of pharmaceutical companies in India, which is the world’s largest manufacturer of generic drugs, will be affected. India has announced restrictions on the export of twenty-six ingredients and the medicines made from them. There is evidence that prices of certain drugs in India have started to increase.

Already reeling from demand shock, the automotive industry in India is preparing for transition to higher emission standards from 1 April 2020. Over-dependence on suppliers in China for automobile parts and components is presenting the industry with another headache. Most of the major manufacturers are apprehensive that production cuts will be inevitable as activity in the supply chain in China and South Korea have been curtailed and securing supply from alternative sources is not practical.

One of the worst affected in India may be renewable energy projects. China is a leader in the global solar supply chain and dominates the production of ingots, wafers, cells and modules. Nine of the top ten cell makers in the world are Chinese. It is estimated that Indian solar power producers meet approximately 80% of their requirements for solar cells and modules from China. To take advantage of the generally falling prices of PV technology and the relatively short construction period for solar PV projects, power producers pursue aggressive scheduling of supply and services contracts with their contractors – that is risky because unexpected delays in procurement and construction can lead to critical delays in the commissioning of projects and expose the producers to liability under power purchase agreements (PPAs).

Solar power producers in India, already struggling with wafer-thin margins on the back of record-low tariff and a volatile depreciating Indian Rupee, are being battered by a perfect storm: regulatory risk, the ballooning of regulatory assets and payment risk. There are even murmurs of discontent about producers experiencing higher-than-expected degradation in their solar plants owing to significant variability in the quality of solar cells.

The author is fielding enquiries from solar power producers in India concerned about notifications they have received from their suppliers in China about delays in manufacturing, inspection, certifications from accredited labs and transportation. The imposition of quarantine, production bans and city-wide lockdowns may have a significant impact on ongoing projects and impair contractors’ abilities to participate in new projects.

Prolonged disruption due to SARS-CoV-2 can impact projects due for commissioning later in 2020. CRISIL, the rating agency, has stated that in the period from July onwards, scheduled commissioning dates on nearly 3 gigawatts of solar projects are at risk of being missed – if that materialises, producers may have their bank guarantees encashed. If the producers’ delay is significant (beyond 6 months), the consequences become more severe: contracted capacity of projects may get reduced or an event of termination may be said to have occurred with secondary obligations to pay additional damages ensuing.

At the time of this article, it is not clear whether there exists in law valid grounds for affected parties to receive relief from liability for delayed or failed performance of contracts in the aftermath of the outbreak of SARS-CoV-2.

What is Force Majeure?

The doctrine of force majeure is a creature of contractual innovation. Its precise scope is agreed between the parties in the terms of the underlying contract. Force majeure is not a term of art and the contract will have to define with care the parameters of the relief that will be afforded to the parties.

Force majeure provisions import the principle that upon the occurrence of an event or circumstance that is not reasonably within the control of and would not have been avoided or overcome by a party, which prevents or delays that party from performing some or all of its contractual obligations, that party will be relieved from liability which might otherwise arise as a result of that party’s failure to perform those affected obligations. Force majeure provisions do not suspend the requirement for performance and typically require the affected party to continue to perform its obligations to the extent not prevented by the event of force majeure. In some contracts, after a period of prolonged event of force majeure, parties may be permitted to terminate the contract with moneys being payable depending on the nature of the force majeure event.

Express force majeure provisions began to make appearances in English law governed contracts in recognition of the perceived unfairness of the decision in Jacobs v. Credit Lyonnaise (1884), where although the defendants would have escaped liability for failure to perform owing to the doctrine of force majeure in French law, then in force in the country where part-performance of the contract was undertaken, it was held that because English law applied and because there was no equivalent common law principle (including frustration) that could provide relief, the defendant shippers were held liable.

The practical utility of force majeure contrasts with the rigid common law doctrine of frustration although they are similar in the sense that they both deal with occurrences beyond the control of parties to an agreement. Under the doctrine of frustration, where subsequent to the execution of a contract, the emergence of supervening circumstances beyond the control of the parties renders further performance of the contract impossible or radically different from what had been contemplated in the contract, the contract will be terminated and the parties will be discharged from the requirement of further performance (as a matter of law). The doctrine evolved as a means of mitigating the perceived harshness of the law’s requirement for strict compliance with a promisor’s promises. Under Indian law, the doctrine of frustration is well-developed by judicial precedents interpreting Section 56 of the Indian Contract Act, 1872.

Securing Force Majeure Relief

The following are the key considerations for affording a party force majeure relief:

(a) Burden of proof: the affected party carries the burden of proving the validity of its claim for force majeure relief. It has to adduce evidence that an event of force majeure occurred, which was beyond its reasonable control and which prevented or delayed its performance of the affected obligations;

(b) Scope and interpretation: as noted above, because there is no accepted definition of force majeure, force majeure provisions typically identify a series of events or circumstances that can legitimately be claimed by a party as an event of force majeure. This is critical because the event or circumstance must fall within the definition of force majeure if the affected party is to have any prospect of securing relief. This will turn on the specific wording of the provision subject to the rules of contractual interpretation. In disputes arising out of sophisticated and complex contracts, tribunals will carry out a textual natural and ordinary interpretation of the force majeure provision in order to ascertain its objective meaning.

A force majeure provision may set out an exhaustive list of events or circumstances that constitute events of force majeure. Commonly listed items are occurrences such as adverse weather conditions, explosions, fire, acts of God and other natural catastrophes. It is not clear whether in the selection of the above descriptions of events or circumstances, the outbreak of SARS-CoV-2, which is a biological entity that can cause an infectious disease, would fall within the contemplated use of the provision.

The concept of force majeure is wide enough to accommodate man-made interventions such as wars, blockades, strikes and legislative and executive interference and can even be extended on account of changes in law, economic hardship and accidental damage to specified facility.

Alternatively, a force majeure provision may set out an inclusive list that recites several events or circumstances for the purposes of illustration only, with a catch-all provision that force majeure relief will also be extended on account of any other event unless that other event is specifically named in a list of excluded items. In any event, the interpretive rule of ejusdem generis – that when a list of specific items belonging to the same class is followed by general words, the general words are to be treated as confined to other items of the same class – will be used to determine contractual intention.

Force majeure provision may exclude outright certain events such as changes in either party’s market factors, a party’s inability to finance its obligations under the agreement or the unavailability of funds to pay amounts when due, breakdown or failure of plant or equipment caused by normal wear and tear or by a failure to properly maintain such plant or equipment from constituting events of force majeure.

Occasionally, events that are carved out of force majeure can be brought back within its fold if those events were themselves the consequence of an event of force majeure. For example, in some PPAs in the solar power sector in India, the unavailability or late delivery of equipment, although not an event of force majeure by itself, may constitute an event of force majeure if it was the consequence of an event of force majeure;

(c) Causation: another key threshold consideration is causation. Depending on the precise wording of the force majeure provision, it is for the affected party to demonstrate that an event of force majeure (and not some other factor) delayed performance of the contract (i.e. a lower standard) or caused the failure in performance of the contract (i.e. a higher standard) notwithstanding the commercially reasonable efforts of the affected party to overcome or mitigate the effect of the event of force majeure; and

(d) Notification: the affected party is required to notify its counterparty of the occurrence of an alleged event of force majeure within a specified timeframe and failure to do so can be fatal to its eligibility to force majeure relief. The notice requirement is ongoing and the affected party must continue to update the notices periodically during the subsistence of the event of force majeure specifying the actions being taken to remedy the event.

Limitations on Securing Relief

The extent of force majeure relief will be affected by the following considerations:

(a) Duty to mitigate: in the unlikely event that an express duty to mitigate is absent, a duty to do so may be implied albeit on commercially reasonable terms, which can be ousted only by clear and unequivocal language. Provisions may specify the extent to which a party declaring force majeure must mitigate not only the event of force majeure but also its effect.

In a long-term LNG sales and purchase agreement the author has advised on, the seller was required to apportion any remaining available production capacity at its LNG liquefaction facility amongst each of its foundation customers on the basis of the proportionate share of each foundation customer’s adjusted annual quantities to the sum of the adjusted annual quantities of all the foundation customers. This meant that non-foundation customers would not have been entitled to any LNG if production at the facility was sufficient to meet the entitlement of foundation customers only.

In some PPAs used in the solar power industry in India, there are express provisions that require power producers to make reasonable efforts to mitigate the effect of an event of force majeure. Might it be reasonable to expect a solar power producer to attempt to source modules and other equipment from alternative vendors? Did the producer make effort to obtain quotations from alternative vendors and freight forwarders and be able to demonstrate that it did so? Did the terms of those quotations meet the standard of commercial reasonableness given that prices from alternative vendors in Taiwan and Malaysia are estimated to be about 15 to 20% higher than the prices that are typically quoted from vendors in China? In light of the global footprint of SARS-CoV-2, was there available capacity with any other manufacturer in any event? Were there pre-existing or concurrent delays attributable to the power producer that were aggravated by the delay caused by the event of force majeure? Given that businesses endured the outbreak of another virus in 2002 (SARS-CoV), was the outbreak of SARS-CoV-2, in fact, not unforeseeable? These are all key issues that a tribunal will have to address if a power producer’s counterparty contests its claim for force majeure relief.

(b) Certifications: force majeure certificates issued by governmental agencies may aid an affected party’s efforts in securing force majeure relief, but they may not prove determinative.

In another long-term LNG sales and purchase agreement, it was an express term that an “epidemic” would constitute an event of force majeure. The WHO’s categorisation of the outbreak as a “pandemic” may be of significant persuasive value in cases where the force majeure provision contains appropriate language.

In response to industry concerns, on 19 February 2020, the Department of Expenditure, Ministry of Finance, Government of India issued a cryptic Office Memorandum stating that the outbreak that has caused disruptions in the supply chain should be considered as a “natural calamity” and force majeure provisions may be invoked “wherever considered appropriate”. This memorandum may persuade pliant counterparties, but it is debatable whether such certificates have force of law. Ultimately, the question of whether relief will be afforded can be settled only by construing the terms of the contract and assessing each case on its merits. Even if force majeure relief is granted, producers may need financial support to deal with working capital costs and interest payments due to delays in commissioning.

Way Forward

There have been reports of businesses rejecting force majeure notices received from affected parties. PetroChina and CNOOC are reported to have declared force majeure on their LNG import commitments in China although Shell and Total have rejected CNOOC’s claims. PetroChina is apparently struggling to gather sufficient workers to operate four of its LNG regasification terminals in China. Sinopec and CNPC are reported to be mulling over invoking force majeure provisions in their respective contracts.

The author is aware of businesses in India who have overstated their eligibility for force majeure relief. As a negotiated term of contract, the language of the provision and the facts and circumstances of the affected party will determine the prospects of a successful claim.

Alternatively, parties may wish to circumvent the effect of a restrictive force majeure provision by claiming relief under the doctrine of frustration. Owing to the more limited application of this doctrine, however, this may well be more difficult to establish. It may be that counterparties, mindful of nurturing long-term relationships, will choose to be pragmatic and accommodate claims for relief to a limited extent.

Parties wishing to assert a claim for force majeure relief need to prepare well. That involves compiling a dossier on the event or circumstance constituting an event of force majeure, retaining all relevant documents and complying with notice provisions. Those intending to resist claims for relief should scrutinise whether notice provisions have been complied with and put affected parties on notice about establishing the chain of causation.

Filing a false complaint under Section 14 of the POSH Act

Authored by Chinmay J Mirji and Charitha V

Women play an integral part in developing a balanced and inclusive workplace. With the objective of preventing and protecting women at the workplace and to ensure effective redressal of complaints, the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act (POSH Act) was enacted in 2013. Because of this Act, every company is mandated to have a well-documented mechanism to address complaints and offer guidelines to initiate action against any sexual misconduct, thereby creating an environment where every woman feels safe. However, in recent times it has been observed that the very Act enacted for the safety of women has been used by women employees as a weapon to achieve their personal vengeance against their male colleagues and employers.

The protection envisaged under the POSH Act is being misused and abused by women, however the statute has a remedy for the same as the POSH Act includes a specific provision for punishing the complainant for filing of the false or malicious complaint. Section 14 of the POSH Act provides for penalizing the complainant if the complaint is found to be false with malicious intent. Section 14 of the POSH Act read with Rule 10 of the POSH Rules deals with the punishment for filing false or malicious complaints by the complainant or any other person who is involved in the conspiracy of filing a false or malicious complaint or producing false or misleading documents or evidence. Section 14 of the POSH Act clarifies that the mere incapability to substantiate a complaint or failure to provide adequate proof does not invite action.

The same has been observed by the Hon’ble High Courts in India as stated below:

Anita Suresh Vs Union of India & Others, P (C) 5114/2015: The Hon’ble High Court of Delhi has dismissed a writ petition filed by the complainant and has passed an order directing the petitioner/complainant to pay a fine of INR 50,000 for filing a false complaint and misusing the provisions of the POSH Act.
Union of India Vs. Reema Srinivasan Iyengar, WP Nos. 10689, 24290 and 4339 of 2019: The Hon’ble High Court of Madras observed that ‘Though the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 is intended to have equal standing for women in the workplace and to have a cordial workplace in which their dignity and self-respect are protected, it cannot be allowed to be misused by women to harass someone with exaggerated or non-existent allegations.’

The law is clear about the difference between an accusation that is not proved and a complaint that is false or maliciously filed. A complaint filed by the complainant with the knowledge that such a complaint is false or filed with malicious intent should not go unpunished. It is pertinent to note that it is a criminal offense on the part of the management/employer if they fail to take appropriate action against the allegedly aggrieved woman or false witness who takes recourse under the POSH Act as a way out to cover up their transgressions.

Article Type: Article