The commercial impact of the Covid-19 pandemic has been unprecedented. Barring a few like healthcare and fintech, most sectors have suffered huge losses. The effect of these losses will be known once the National Company Law Tribunals, which hear insolvency petitions, resume regular functioning. While the government has exempted “Covid” defaults from the ambit of the Insolvency and Bankruptcy Code, pre-Covid defaults that would otherwise have been paid within a reasonable period are likely to result in many cases of insolvency.
The government has, no doubt, reached out to provide economic support to MSMEs. Nonetheless, insolvency of even one major group will have a devastating ripple effect in the market owing to the numerous contracts each such group enters into. Each sector has faced its characteristic challenges. To cite a few examples:
1) Power sector: Most gas-based power companies have received demands from ONGC and GAIL for a contravention of the commitment to purchase a certain minimum quantity of gas every month. These companies have a legitimate defence: Many of them either partly or fully supply to private industries. Since these private consumers were either dysfunctional or functioning with minimum capacity, they have been unable to consume the power leaving the power companies with no demand for the gas.
2) Construction and infrastructure sector: Almost all construction and infrastructure projects have suffered delays resulting in time-inflicted losses including idling of labour (and payment of wages to labourers) and payment for hiring machinery. Restrictions on the number of workers on site, working hours and transport of men and machinery continue to hinder construction work even today.
3) Information Technology sector: Most IT companies have committed to lease large spaces at high cost. Owing to the lockdown and social distancing norms, these commitments have become difficult to honour leading to huge losses.
The current legal system is inadequate to deal with the present crisis for two reasons. For one thing, the delays in the system are likely to prove fatal to many companies. For instance, in the example pertaining to the power sector, the companies would have to make immediate payments to GAIL/ONGC due to the fear of their gas supply being severed, but they will not be in a position to immediately pass on these charges to private consumers without long-drawn-out litigation.
For another, the common law followed in India does not contemplate a system of distribution of loss; rather, it posits that the entire loss be borne by one or the other party as against an equitable distribution of loss. Perhaps, the latter would be fair and just, and would help more companies keep afloat in troubled times like the present. In this regard, a cue can be drawn from civil law systems (France and the UAE, for example) and the UNIDROIT principles that provide a unique regime for renegotiation of contracts to counter imbalances arising from “hardship” not attributable to the parties.
Comprehensive law, need of the hour: The departure from the traditional legal system would necessitate enacting a comprehensive umbrella legislation. Such legislation needs to identify sectors that have pressing concerns and a broad policy in relation to the kind of measures to be provided. It also needs to provide for a consultative process with the stakeholders that can enable subordinate legislation to be passed for each sector addressing its distribution of loss.
Most important, there is an increasing need for a fast-track mechanism to adjudicate disputes arising from the legislation. Ideally, the government should consider having a mediation procedure. The mediation should be conducted by mediators of impeccable integrity. Any dispute that cannot be resolved amicably must be placed before a specialised tribunal to resolve the issues on a fast-track mode with only one appeal, directly to the Supreme Court. Further, the government and government entities (who are one of the litigants in 70-75% of cases) must take a policy decision to be bound by the decision of the tribunal without recourse to the appellate remedy.
Singapore has enacted a law [COVID-19 (Temporary Measures) Act 2020] to address some of the concerns faced by some sectors including the construction and tourism sectors. The legislation also extensively deals with the rental relief in cases of non-residential properties. Interestingly, the legislation also keeps out the traditional court system and provides for an “assessor” to make certain judicial determinations under the Act.
Legislations, though far more skeletal, have also been enacted in New Zealand and Australia. India would have to come up with measures that are even more comprehensive than the Singaporean legislation to deal with the local needs. While questions may be asked about the need to depart from the traditional legal route, the overwhelming justification lies in the inherent unfairness of the “loss lies where it falls” rule that is amplified by the present scenario. Moreover, the effect of insolvencies of a few big companies will be felt far and wide. Not only will it cause mass unemployment but also disrupt the entire contract chain. Simply put, extraordinary times call for extraordinary measures and there is no denying we live in such times.
Anirudh Krishnan
Advocate, Madras High Court
(anirudh@aklawchambers.com)