COVID-19 and its impact on Insolvency and Bankruptcy Proceedings

by Zen Webnet | Jun 3, 2020 | Blog

Daizy Chawla, Senior Partner, S&A Law Offices

On 11th March 2020, World Health Organization (WHO) declared Novel Coronavirus (COVID-19) a pandemic, the nations across the globe have amended their insolvency regulations especially countries in Europe to ease the burden of stressed companies. The governments all across the world were aware of the fact that disruption caused in demand and supply chain, due to lockdowns or slowdowns, have severe effects and it will continue to affect the financial capabilities of the companies for some time unless some relief is given. It might even lead many companies to go into insolvency.

Due to slow down, not only the corporate debtor, but even the prospective Resolution Applicants, who otherwise might be interested in the revival of the stressed companies will also not be in a position to move forward as their existing businesses have severely affected due to COVID-19.

The Government of India has announced some measures to relax the provisions of Insolvency and Bankruptcy Code (I&B Code), 2016, and regulations made thereunder. The first announcement in this regard was made on 24th March 2020, when the limit of default under Section 4 of I&B Code to initiate the proceedings under I&B Code 2016, was increased from current INR 1,00,000/- (Rupees One Lakh only) to INR 1,00,000,00/- (Rupees One Crore Only). This step was taken to safeguard the interest of medium and small-scale industries, this increase in the amount of default cannot be attributed entirely to COVID -19, because this increase was expected to be announced since long.

Nonetheless, the step which can be considered as taken in the light of COVID-19 and resultant slowdown in economic activities was the announcement made by Hon’ble FM on 17th May 2020 w.r.t suspending the fresh proceedings under I&B Code 2016 for one year (earlier it was announced to be for six months).Though the Ordinance and complete guidelines are still pending to be announced, it is not clear will the suspension  also apply to those applications which are pending admission before Ld’ Adjudicating Authority (NCLT). Further, even though the proceedings under I&B Code 2016 are kept under suspension for next 1 year, in order to help businesses with business continuity affected due to COVID-19 and lockdown but does that mean that only suspending the I&B will serve the purpose as other remedies available under law can be utilised by creditors like DRT, SARFESAI, and recovery suits, etc. One has to keep in mind that the objective of the I&B Code is the maximization of assets and not recovery but while under other laws it is. But still, the suspension has been announced with respect to I&B Code 2016 and not the other laws. Till the ordinance is passed, it is not clear whether the suspension will apply to cases where the default happened due to COVID-19 or is also going to include the cases of default that were present before COVID-19. 

While the suspension will be a relief for stressed corporate debtors but what about the creditors, both financial as well as operational, wherein the former have to do provisioning and might get some relief in that from RBI. It will be apt to mention here that that RBI has already extended the time period provided under Prudential Framework for Resolution of Stressed Assets but what about operational creditors who have to wait for 1 year or have to resort to other means available.

But will these steps be enough, and to understand the impact of COVID-19 on I&B Code 2016, we need to evaluate the proceedings pending at various stages.

Firstly, let us discuss the cases of the corporate debtors who are undergoing CIRP process (i.e. the application filed against them under I&B Code 2016 had been admitted by the Adjudicating Authority). ). For those corporate debtors who are undergoing the CIRP process, it will be difficult for the Resolution Professionals(RP), to get a good resolution plan. Even though the Hon’ble Supreme Court of India has clarified in Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors (Civil Appeal 4242 of 2019) that no provision in the Code or Regulations bid under Resolution Plan should match or should be more than liquidation value. As insolvency proceedings are not recovery proceeding but are for the purpose of maximization of assets of corporate debtors, however, often the Committee of Creditors (CoC) proceeds with those resolution plans which realize a maximum of their claims or where the bid under resolution plans are more than liquidation value. Further, nobody can challenge their wisdom as it has been held by courts from time to time. As the COVID-19 has disrupted the complete economic demand and supply chain, it won’t be easy to find a prospective resolution applicant with a good resolution plan as the business of every other company has been suffered.  

The RBI Governor in his recent press conference has suggested that the GDP of India for Financial Year 2020-21 will be negative.

The obvious impact of no resolution plan or not so good resolution plan is the liquidation of the corporate debtor. Not only this, for corporate debtors itself, during CIRP, but it will also be difficult to work as going concerned it will be tough for RP to arrange funds to keep the corporate debtor working. Even though there is a provision of interim finance under the code, but there will hardly be anybody other than the CoC who will provide the same.

Secondly, now let’s proceed to discuss the cases of those corporate debtors for whose revival resolution plan been received from prospective resolution applicant (has been accepted by the Committee of Creditors and approved by Adjudicating Authority or pending to be approved before Adjudicating Authority). For those resolution applicants, it will be difficult to meet the terms they otherwise agreed in a resolution plan, unless the resolution applicant is an Asset Reconstructing Company (ARC) or have already proceeded with making the complete payment of the resolution plan. Otherwise, for all other resolution applicant(s), their priority will be to stable their operations and business before they proceed with the revival of the corporate debtor. However, as they have already submitted the resolution plan, they cannot back out as it has consequences. Moreover, the amount paid can also be forfeited as in some cases the conditions are such that including the performance guarantee (which the code and regulations made thereunder provide to be forfeited if resolution applicant fails to perform). The only recourse available for them (in the absence of any guidelines issued by the Government of India or IBBI) is to re-negotiate the terms with CoC and seek ratification from Adjudicating Authority.

The failure on the part of such resolution applicant to fulfil the terms of resolution plan can also result in the liquidation of the corporate debtor unless there is any other resolution applicant (who has submitted its Resolution Plan but not got selected) and such resolution applicant is still ready to act upon the resolution plan.

Moving further, there are the cases where the applications for initiating CIRP is pending before Adjudicating Authority, as mentioned above, it’s not clear whether the suspension will also apply to the applications which are pending to be admitted before the Adjudicating Authorities. However, if they are not then unless the ordinance makes it clear that the suspension w.r.t fresh insolvency filings will only be those cases where the default is due to Covid-19, those should also be suspended.

Here, it would also be important to consider the cases of operational creditors, who have already proceeded with completing the first leg of application, i.e. serving of demand notice under Section 8 of the Code much before the announcement made by Hon’ble FM or COVID-19 and they have neither received any payment or response w.r.t existence of a dispute. Again, it is not clear whether the suspension will also apply to such situations or they will be treated at par with applications already filed for admission or they will be not allowed to file the application under Section 9 even though they have completed the penultimate stage by serving the demand notice. 

In November 2019, w.e.f 1st December 2019, the Central Government brought into effect the proceedings w.r.t Insolvency, applicable to Personal Guarantors of a Corporate Debtor and now clarity is required whether the suspension will also be to proceedings to be filed against Personal Guarantors of the corporate debtor, ideally, it should if the suspension is allowed against Corporate Debtor.

In summary, we can conclude that much more is required in terms of I&B Code 2016 to overcome the impact of COVID-19 in its working. Like, the government should allow a further time period (mandatory) to resolution applicants to complete their commitments provided under the resolution plan. For example, the time period of lockdown has been permitted to be excluded from that of calculating 180/270 days, it should accordingly allow such exclusion of period, in implementing the resolution plan. It will not be out of place to mention that even RBI has allowed the moratorium w.r.t loans for a period of 6 months now and same can be considered for resolution plans also. 

Further, instead of completely suspending the fresh insolvency proceedings, it is expected that in the ordinance, some exceptions be carved out w.r.t filings. To suggest few, is permission to file the Applications where the demand notice has already been issued under Section 8 prior to COVID period/lockdown including those where the default amount is less than INR 1 Crore, or against those Corporate Debtors which are in default since long and have nothing to do with Covid or lockdown. Having said so, if the suspension been proposed by the government is apart to give an opportunity to Corporate Debtors to revive back, is the fear that there will not be any resolution applicants or fewer resolution applicants due to economic slowdown. Then it would also be worth noting that in such case mere suspending the fresh proceedings will not be enough as one can expect many more cases ready to be filed immediately the suspension period ends as a period of 1 year moratorium will not be enough to gain normality so unless the good economic package and support of Financial institutions are available for businesses to stand back everything done or announced will not be of much help.

Arbitration during and post Covid-19: A perspective

by Zen Webnet | May 29, 2020 | Blog

Manoj K Singh, Founding Partner, S&A Law Offices

In a short period of a few months, the coronavirus pandemic has spread through the globe, completely disrupting life as we know it. It is a disaster very few people had foreseen, and even fewer had prepared for. The freedom of movement and gathering has been greatly curtailed, and the same has had a very real effect on the functioning of the legal system and the arbitration mechanism in our country. Faced with complete lockdowns and social distancing, the legal system has rapidly adapted to the new reality, with the Supreme Court and High Courts leading the way, by having urgent hearings over video conferencing. 

The situation has hit the system of in-person arbitration hearings hard, and the initial reaction has been to adjourn the matters, at times without even giving any next date. However, as the development of a vaccine is still at least 12-18 months away, the questions that this article seeks to address are – How long must arbitral hearings remain adjourned? And, is there a way out?

The short answer is, we must recognise that way forward for arbitration is through the use of video-conferencing and virtual hearings. It is true that this will be a complete change from our long-standing and established practice of in-person hearings. Certain lawyers and arbitrators might even have a psychological barrier, and hesitate in adopting this approach; however, it must be recognised, that given the circumstances, this would be our best, most practical solution. The times have changed, and if we don’t change with it, the entire arbitration framework will come to a standstill. Under the legal framework of the Arbitration and Conciliation Act, 1996 which has been adopted from the UNCITRAL Model Law on International Commercial Arbitration, parties have complete freedom and flexibility in choosing the procedure of the hearings. As there is no bar on virtual hearings, parties can agree on having virtual hearings and a procedural order may be passed by the tribunal, recording the agreement of the parties. If the parties fail to agree, the Arbitral Tribunal can exercise its power under Section 19(3) of the Act, mandating that the hearings would happen over video conferencing.

There might be a situation that despite the tribunal’s order, the objecting party still refuses to cooperate. In such a situation, the matter can proceed ex-parte. It is pertinent to note that Section 25(c) of the Arbitration Act, 1996 clearly states that if a party fails to appear in a hearing or does not produce documentary evidence, the tribunal may proceed to make the award based on the evidence before it. The law pertaining to deliberately not attending arbitral proceedings is no longer Res Integra. Recently in the judgment of Quippo Construction Equipment Limited vs. Janardan Nirman Pvt. Limited (29.04.2020 – SC): MANU/SC/0421/2020, the Hon’ble Supreme Court had held – “…. Considering the facts that the Respondent failed to participate in the proceedings before the Arbitrator and did not raise any submission that the Arbitrator did not have jurisdiction or that he was exceeding the scope of his authority, the Respondent must be deemed to have waived all such objections.”

It is also pertinent to note that in 2018, the Hon’ble Supreme Court of India in the judgment of Radha Chemicals vs. Union of India (UOI) (10.10.2018 – SC): MANU/SC/1630/2018 had ruled that a Court while deciding an application under Section 34 the matter cannot be remanded back to the Arbitrator. Accordingly, it becomes evident that if an ex-parte award is given, against a party deliberately to appear for a hearing, then the non-cooperating party may lose its remedy for good. Therefore, such a stand must be taken by a party at its own peril. To avoid situations like this; however, an approach may be adopted, wherein the arbitration clauses in the commercial contracts would mention that the parties agree to have virtual arbitration proceedings.

It must be appreciated that while the risk of Covid-19 is still present, the application of technology in a dispute resolution scenario, would be that of minimising the necessity for close contact. While online conferences through video conferring software, were common, this pandemic has forced the introduction of these technologies in the legal sphere, accelerating a techno-legal reform. Historically, virtual hearings were avoided because there was a lack of technologies in the market and a lack of access and necessary expertise to use such technologies. Even at present, not every lawyer will be adept, or even be comfortable with, the idea of carrying out advocacy online. However, as Covid-19 has now added the aspect of human vulnerability to the practice of law, steps must be taken to ensure all practitioners are technology compliant and are able to participate in virtual hearings. To facilitate this practice, induction and training sessions must be organised by Bar Councils regularly. Major institutional arbitration centres like ICA, DIAC, MCIA should offer educational courses to participants. Perhaps, a change may be brought about in law school curriculum, and herein online advocacy and trial may be included as subjects. Only through education, can we bring about the implementation of virtual court and arbitration hearings, which will further strengthen our legal system.

All across the world, various international arbitration centres of repute have recognised that Covid-19 is here to stay. The International Chamber of Commerce’s International Court of Arbitration has come up with the Guidance Note on possible measures aimed at mitigating the effects of the Covid-19 pandemic, the same offer an early set suggested of clauses, protocols and procedural orders and a checklist to assist parties in dealing with online arbitration. SIAC is collaborating with Maxwell Chambers’ Virtual ADR to hold virtual hearings and HKIAC (Hong Kong International Arbitration Centre) has reported a significant increase in demand for its e-hearing services. In India too, the Indian Council of Arbitration has issued a notice with respect to the COVID-19 situation, wherein it has stated the intention to make use of information technology and video conferencing tools to conducting arbitration proceedings. With respect to Ad-Hoc arbitrations, the Arbitral Tribunals must play a proactive role in either setting our procedures for virtual hearing or adopting the procedures notified by the reputed arbitral institutions. The entire process of virtual arbitration can be refined through trial and error until virtual hearings become the norm instead of the exception. Concerns regarding security and privacy can be addressed through strict protocols, as well as the implementation of new technologies like blockchain. It must be accepted that in the short and medium-term, this is the most practical approach forward.

Even in the long term, in a world without COVID-19, the advantages of virtual arbitration over in-person arbitration would make it an attractive option. The first significant advantage would be that virtual arbitrations would save time and make coordination easier. At present, hearings often have to be scheduled months apart, based on available dates of the arbitrators, lawyers and clients. The process is subject to the availability of a venue. In the case of international/outstation hearings, a lot of time is also wasted in travelling and setting up for the hearing. These would become non-issues in the case of virtual hearings.

Similarly, the cost of hearings would also go down as the only necessary infrastructure would be a virtual device. Parties would be spared the cost of expensive accommodation and venue bookings. A third major advantage would be in terms of benefits to the environment. The elimination of paper filing would preserve lakhs of pages and as there would be no need to travel nationally or internationally, it would significantly reduce carbon footprint.

To conclude – we must realise that we are in a state of new normal. Under the circumstances, online arbitration hearings offer us the most practical solution, and there has to be a complete shift from offline to online arbitration. The technology for having arbitral hearings online already exists; however, we must remove our mental barriers and openly embrace the same. The shift from in-person to online arbitration has already been achieved by many institutions, such as the SIAC and the HKIAC, and there is no reason why in India, we cannot follow the same pattern. Once the initial experimentation and implementation phase is over, with time, the entire system will become more mature, efficient and widely accepted. Once that happens, whole arbitration matters can take place. As the system picks up popularity, there is no reason why online arbitration cannot become the preferred method of dispute resolution.