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Impact Of Covid-19 on Insolvency and Bankruptcy Laws of India and the World at Large

By: Anjan Bhandari 

INTRODUCTION:

In the past few months, India has witnessed unprecedent changes being made in almost every sphere; whether it be something as simple as a lifestyle change or something as complex as amending various legislations to safeguard and protect the interests of both the parties. To give you a better perspective, the Central Government on 24th March declared a nationwide lockdown as a preventive step to limit the spread of the infectious coronavirus. In doing so, everyone was required to restrict themselves to their homes thereby bringing our economic structure to a standstill. Nobody knew for how long the lockdown would ensue when it began, but now we do have adequate data that informs us about the manner in which the lockdown was imposed and in how many phases –

  • PHASE 1 : 25th March – 14th April [Nationwide lockdown]
  • PHASE 2 : 15th April – 3rd May [Further extended]
  • PHASE 3 : 4th May – 17th May [Further extended]
  • PHASE 4 : 18th May – 31st May [Further extended]
  • PHASE 5 : 1st June – 30th June [Considerable relaxations from 8th June]

According to the above-mentioned data, it is clear that COVID-19 is the primary reason for all business uncertainties and the economic stabilities at large since the lockdown was continued for so long. All industrial activities came to a standstill because of which the Companies suffered huge losses which either resulted in salary reduction or laying off a major chunk of their employees in order to manage their sustainability. And not just the industrial sector, the outbreak of COVID-19 has caused massive difficulties for all sectors globally, such as the Micro Small Medium Enterprises (MSME’s), healthcare, tourism, automobile, etc. Courts all across the country has prohibited physical hearing to maintain social distancing except a few important cases and has instead resorted to virtual court proceedings. The only thing that can be said with absolute surety is that the brunt of this economic meltdown will be faced by all the financial institutions since its difficult to comment on the overall impact of the lockdown.

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IMPACT OF COVID-19 ON IBC LAWS IN INDIA:

The All India Association of Industries estimated a loss of 2lakh crore by 31st March due to the nationwide lockdown. The Central government has been trying to minimise such drastic blows by bringing in numerous reforms. The virus has indisputably disrupted the performance of contracts and payments consequently creating problems for the financial and operational creditors. It will have a devastating impact on economy if the creditors wish to initiate insolvency proceeding against the corporate debtors at a mass scale amidst this pandemic.

What’s important to notice is that the value of the stocks is declining at a startling rate since the demand has decreased at a global level. It wouldn’t be too far-fetched to suspect that at this point, the financial and operational creditors would move to the National Company Law Tribunal (NCLT) to avail remedies available to them under the Insolvency and Bankruptcy Code, 2016. After approaching the NCLT, initiation of the insolvency proceeding will have a negative impact because then the management of the company would shift from the hands of the corporate debtor to the insolvency resolution professional and as a result, the value adding mechanism by the corporate to the economy gets highly stunted.

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It is imperative to safeguard the interests of the MSME’s because if insolvency proceedings are initiated against them, it would further lead to rise in unemployment in the country. Pre-empting such an impact, our Finance Minister Nirmala Sitaraman had announced that if the current state of affairs continued beyond 30th April, the Central government may suspend a few relevant sections of the IBC for 6 months in order to protect companies from being forced into insolvency proceedings in such force majeure causes of default. Due to these reasons, the Government of India decided that they need to adopt a pragmatic approach in dealing with this problem and came up with the following amendments to the IBC, 2016 –

  • Application under Sections 7, 9 and 10 can only be filed when the default is of Rs. 1 crore or more.[1] Earlier U/S 4(1) of IBC, the minimum amount of default was Rs. 1 lakh which has now been officially increased by the Ministry of Corporate Affairs (MCA).
  • Section 7 : Initiation of insolvency proceedings by financial creditor

Section 9 : Initiation of insolvency proceedings by operational creditor

Section 10 : Initiation of insolvency proceedings by corporate applicant

According to the MCA Notification No. S.O. 1205(E) dated 24th March 2020 the Finance Minister as a relief to the affected industry announced that no petitions would be entertained unless the minimum amount of default is Rs. 1 crore or more.

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  • The Supreme Court on 23.03.2020 opined that the lockdown period should be excludedfor the purpose of counting the timeline. Even the NCLAT ordered the same on 30.03.2020. The order states that “the period of lockdown imposed by the central government in the wake of Covid-19 outbreak shall not be counted for the purposes of the timeline for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”[2]
  • The government may even consider scrapping Section 7, 9 and 10 of the IBC, 2016 so that no insolvency proceedings be initiated by the promoter, operational or financial creditor if the situation continues beyond 30th April, 2020 and if it does, it would be scrapped for a period of 6 months.

The first amendment that came in on 24th March which increased the minimum default vale from Rs. 1 lakh to Rs. 1 crore not only reduced the workload on the insolvency resolution professionals but also turned out to be beneficial for the MSME’s and corporate debtor. However, the fruit to such benefits is only enjoyed by one as opposed to safeguarding equal interest of the parties. Increasing the default value to such a higher threshold causes immense dissatisfaction to the operational and financial creditors. The operational creditor in particular would face hindrances as they won’t be able to utilise this remedy to regain the operational and corporate debt from the corporate debtor. Moreover, their operational debt isn’t generally this high to be able to initiate insolvency proceedings which further puts them on the backfoot. Under Section 9 of the IBC, 2016 the operational creditor cannot even jointly file for an application unlike as mentioned under Section 7 of the Insolvency Code, 2016. Kumar Saurabh Singh, Partner at Khaitan & Co. said that the Central Government shall also cover matters of liquidation in other courts and tribunals besides the IBC process. He said that “A similar approach would also be required to be followed by other courts/tribunals in the country to not allow enforcement and sale of assets of companies which are suffering from the impact of the pandemic situation so that the benefit of suspension of insolvency law is effectively given to the borrowers.”

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After diving deep into the details of the impact of COVID-19 on the IBC laws in India, the question still remains whether the applicants who filed for the insolvency resolution before the pandemic should be affected or not. In my view if it does, then the applicants would rather prefer indulging themselves in outside settlements rather than utilising the provisions under the Insolvency and Bankruptcy Code thereby defying the very purpose of the said statute.

IMPACT OF COVID-19 ON IBC LAWS ACROSS THE WORLD:

  • UNITED STATES – On 19th February, the Small Business Reorganisation Act became effective which seeks to provide an economical and quicker option for reorganisation of businesses with total debts falling within the quantum of $2,725,625. On 28th March, Donald Trump gave a nod to the Coronavirus Aid, Relief, Economic Security (CARES) Act. Apparently, it is the largest emergency aid package ever provided in US history. It includes revised retirement account rules, student loan changes, and the unemployment coverage. There has also been an increment in the debt limit under the CARES Act to $7.5 million for a year in order to allow small business debtors to realign their affairs for a new start.

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  • SINGAPORE – The Ministry of Law in Singapore had announced that they would introduce a bill in the Parliament aimed at finding a way for an organised moratorium so that the obligations that ensue are either suspended or deferred. A distinctive feature of the Bill is that the parties would not be allowed to be represented by lawyers in case of a dispute. Instead, an assessor would be appointed by the Ministry of Law who will decide on an equitable and just outcome without any legal fees. 
  • AUSTRALIA – On 23rd March, the Commonwealth government introduced the Coronavirus Economic Response Package Omnibus Bill 2020[3] which was passed by both Houses of Parliament and received the Royal Assent on 24th Certain temporary amendments were made to the Corporation Act, 2001 which are as follows:
  • Amendment relating to individual in financial distress
  • Amendment relating to businesses in financial distress
  • Temporary relief for directors from the duty to prevent insolvent trading

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  • UNITED KINGDOM – Alok Sharma, Business Secretary announced a package of insolvency measures to be adopted in the future. The UK government has shown keen interest in bringing forward such legislation, but the timing still remains uncertain. It is evident that the government is building up on potential reforms announced in August 2018. The new structuring tools include –
  • To bring in measures safeguarding the suppliers and creditors, thereby ensuring timely payments until a more viable solution is reached.
  • Coming up with a new restructuring plan, and binding creditors to that plan.
  • To introduce a moratorium for companies allowing them a breather from creditors enforcing their debts for a while until they seek a restructure or rescue.
  • To protect their supplies thereby enabling them to continue with their trading activities during the moratorium period.

 Thus, on comparing the impact of COVID-19 on IBC laws in India with the rest of the world, we can deduce that almost similar precautionary steps were adopted by other countries. Some of them increased their minimum default limit required to file for insolvency proceedings, some have thought of implementing a moratorium period, while the others decided to put a bar on initiation of insolvency proceedings after a set particular date.

[1] https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf

[2] http://www.mca.gov.in/Ministry/pdf/Notification_30032020.pdf

[3] https://pinpoint.cch.com.au/document/legauUio3230299sl1133168580/regulation-5-4-01aa-temporary-increase-to-the-statutory-minimum-and-statutory-period

 

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Defamation in Cyberspace

By Aishwarya Ganesan

In the era of the Cyber World, the Internet provides Individuals an equal opportunity to access data/ information; and with the high usage of technology, misuse of the cyberspace amplified. As the uses and applications of the technology develop, understanding of the technology grows.

With the growth in the extensive usage of social media, cyberspace has provided Individuals around the globe a wide platform to express their views. But should this electronic media be an arena to disrepute anyone?

ELEMENTS OF DEFAMATION

  • Plaintiff to prove publication of the defamatory statement, and that it refers to the Plaintiff
  • Prove that the Statement is defamatory
  • The said statement must be false and untrue and must be made with malicious intent

 

However if the statement is true and is made in Good faith and in Public interest, it fails from being a defamatory statement.

The Indian Penal Code solely talks of defamation.

Section 499 IPC: Whoever, by words either spoken or intended to be read, or by signs or by visible representations, makes or publishes any imputation concerning any person intending to harm, or knowing or having reason to believe that such imputation will harm, the reputation of such person, is said, except in the cases hereinafter expected, to defame that person. Explanation 2.— It may amount to defamation to make an imputation concerning a company or an association or collection of persons as such.

Section 500 lays down the punishment in such cases:

Whoever defames another shall be punished with simple imprisonment for a term, which may extend to two years, or with fine, or with both.

Can a company be held responsible for its employees’ actions? The test that determines this is whether the actions were suited to the benefits of the company, the employee would be held vicariously liable if he were promoting his own interests. India is not yet a signatory to the Council of Europe’s Convention on Cyber Crime, formulated by the EU, globally; around 43 nations have signed this treaty addressing the issues of cross-border terrorism.

Asia’s first cyber Defamation case was filed in India, in the case of SMC Numatics Ltd. v. Jogesh Kwatra. Defamatory e-mails were said to be sent by the defendant to the top management of SMC Numatics, who has, since been retrained from communicating with the Plaintiff. This order of the Delhi High Court holds extensive significance since it was the first time an Indian Court recognised the issue of Cyber defamation, and took action against it.

Section 66A of the IT Act, 2000: If any person sends by means of a computer resource or a communication any content which is grossly offensive or has a menacing character or which is not true but is sent to create nuisance, annoyance, criminal intimidation, hatred or ill will etc shall be imprisoned for an imprisonment term which may be up to two years combined with a fine. This section has been struck down; however a few other sections have been amended and added to curb issues relating to Cyber Defamation.

Section 68(A) has been proposed for providing modes and methods for encryption for secure use of the electronic medium. This principle has been proposed for safer usage of the electronic medium. Section 69, has been amended to take care of the concerns of the Ministry of Home Affairs regarding the safety, sovereignty and integrity of India and further preventing stimulation to the commission of any cognizable offence. This provision relates to the authority/power to issue instructions for interception or monitoring or decryption of any information through any computer resource, which stands rightfully amended.

Section 67 of the Act is amended to diminish the term of imprisonment for publishing or transmitting obscene material in electronic form to three years from five years and there is an increase in the fine thereof from Indian Rupees 100,000 (approximately USD 2000) to Indian Rupees 500,000 (approximately USD 10,000). A series of new sections have been inserted as Sections 67 A to 67C. While Sections 67 A and B insert penal provisions with respect of offenses of publishing or broadcasting of material containing sexually explicit act and child pornography in electronic form, section 67C deals with the obligation of an intermediary to preserve and retain such information as may be specified for such duration and in such manner and format as the central government may prescribe.

Today appreciation of the need for legislation and what is required in terms of its structure and content has changed

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Origin and Development of Contract Law

By Prashansa Shah

About 144 years old is our Indian Contract Act, and since then, it has been very much active and developing. The contracts and contract making today, reaches new dimensions with numerous variations and innovations, but still holding on to the prime purpose of safeguarding the parties’ interests and expectations.

As we analyse the origin and development of laws of contract, one of its core purposes has always been to facilitate and ensure smooth functioning of business and exchange.

The emergence and development of contract law derives most of its history from the industrial revolution. Since ancient times, it was the growth of trade and commerce that enhanced the need to have contracts.

After the inception of civilization, eventually people realised, that performing activities that involved exchange and transactions with each other, was is a very vital and unalienable part of their livelihood. As commerce flourished through this idea, the need to safeguard the same from false practices and non fulfilment of promises also arose.

However, the scenario was such that there was lack of a formal and systematic mechanism to rule over the transactions and abide the parties to perform and fulfil their duties and promises. Absence of any such rule, created disharmony, quarrels and disputes, leading to increase in losses, frauds, non-uniformity and thus non reliability and unrest in the society.

In order to avoid the unnecessary chaos and such unpredictability, laws were formulated. The frequency of people approaching the courts for breach of contracts increased, as everyone wanted to secure their commercial interests and expectations. Consequently, a huge collection of caselaws developed with the courts and the inception of specific laws eventually took place.

CONTRACT LAW AS A SOCIAL UPGRADATION

Widespread encouragement was given to the recognition of contractual obligations and towards the evolution of ‘rights of parties’, by virtue of contracts rather than by status. Evidently, the development of laws of contract was seen as an ideal development of the whole society where it was absorbed. This is because binding promises and contracts gave rise to contractual obligations governed by laws and conferred rights and remedies to the parties. All this eradicated some of the ill-terms of the society which perpetuated inequality in the name of status and superiority. A sense of equality was developed with the freedom of contracts, and at the same time, certain restrictions upheld by the law also prevented misuse of such powers and freedom.

“The movement of all progressive societies has hitherto been from status to contract.”[1] Is indeed very well observed, as we see the positive changes in the society with the emergence of contract law.

 

INDIAN CONTRACT LAW

The Indian Contract Act, 1872, governs the contractual affairs within the jurisdiction of India. India being a country with colonial history, the English Law of Contracts has been a major source of derivation and inference for the formation of Indian contract laws. However, owing to the difference of situations and circumstances, the Indian contract law suits itself, to the Indian scenario and at various places differs from the English rule.

[1] Quoted by Sir Henry Maine. He holds some of the splendid and widely noted works on study of societies and their development.

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Emergency Laws and Civil Liberties

By George Nalappat

The provision of emergency laws in various constitutions around the world has always been up for a debate. The power that is vested in the governments and the executives to enforce and implement emergency powers can be traced back to the early Greek civilization. Even though such is the case, it is so astonishing that so little thinking and writing has been done on the politics of the emergency situations other than for the early scholarly efforts of Carl .J. Friederich, Clinton L Rossiter and Frederick .M. Watkins and the writings of German jurist Carl Schmit.[1] However, it has been found out through various researches that such widespread implementation of the emergency laws have been violating the human rights of people all around the globe and even pose a threat for implementing the Human rights covenants that are proposed by the UNO.

The encroachment of emergency law provisions on civil liberties and the gradual change of emergency powers to emergency regimes have been two of the grounds in which the very existence of emergency powers has been questioned by various philosophers around the world. The reliance of the executive on emergency powers to respond to perceived threats from other foreign sovereigns have always presented a challenge for the maintenance of a constitutional governance ever since the beginning of a Republic.[2] However it has also been concluded by various legal philosophers that since the provision of emergency power is present in almost every contemporary constitution, thought and time needs to be given on how to accommodate emergencies within our social life and thereby how to constitutionalize emergency powers.

The persistence of emergency powers and the breakdown of civil liberties have been the cause for the collapse of democracy in various countries and hence it is the need of the hour to spend some thought into the said topic.

Through an in depth study on prevalent emergency laws throughout the world- AFSPA for example, it can easily be found out that Emergency laws/ martial laws pose for constitutional democracies – problems of a magnitude and variety to defy easy solution, and evokes response which vary according to a nation’s pattern of political experience and institutions. It is also understood that the time has gone in which one could challenge the very existence of the provision for emergency laws in various constitutions and hence the focus now should be on how to accommodate the existing emergency powers into our civil society

To accommodate the provisions of emergency regimes in our society, the first realization that we need to have is that there is a fundamental difference between the rights enjoyed by a society, as a whole during a period of emergency and a period of normalcy. If this realization has been well thought out by the existing political system, instances will be less, where there is an outcry for the slightest violation of human rights. However, this does not mean that human beings will be entirely denied of their inherent civil and political rights, but it means that there has to be a certain degree of relaxation on the rights guaranteed to every human being. So the conflicts regarding emergency regimes and human rights will be entirely determined on where a restraint needs to be imposed on the powers that are enjoyed by an executive in a period of emergency. This simply means that a clear cut balance needs to be struck on the emergency powers enjoyed by an executive during the period of emergency and its encroachment on human rights. This balance has to be maintained or else it would lead to the collapse of the constitutional machinery existing in a state.

There are different mechanisms that allow a state to make this balance. One such mechanism is to develop a constitutional machinery within the state itself that ensure minimum protection for its citizens during the period of emergency. The second method is by devising procedural safeguards against the violation of human rights taking place within the state. This is where the role of the judicial system existing in a state comes into play. After intra-state mechanism has been successfully developed, the next task is to make sure that the international community comes together to act against the violators of human rights. To achieve this mechanism, there has to be an overall change in the existing international rules. Constitution of a separate International Body to monitor the effects of emergency regimes that exist in different nations. It should be ensured that countries that deviate from the set International standards are imposed with sanctions, one kind or the other to make sure that such instances never repeat and some of the basic human rights are given priority over the needs of the executive or the needs of a state as it is claimed.

Whatever be the mechanism that has been brought into force, it does come with its own limitations. Almost all measures require the consent of the executive, who takes care of all the affairs of the state. Bringing into force, such mechanisms without the prior permission of the executive will require a complete overhaul of the existing political landscape of a country, and when this is viewed in a broader picture of international regime, the chances for such occurrences are very remote. Overall, it can be concluded that the issue of emergency powers has no easy solutions. It will take years of detailed discussion and not a political revolution to bring in solutions, though it won’t be concrete, but solutions that ensure that the individual rights in an international sphere does not conflict with the needs of emergency regimes that are imposed on the state by an executive.

[1] Carl J. Friedrich, Constitutional Government and Democracy: Theory and Practice in Europe and America, rev. ed. (New York: Blaisdell, 1950), chapter 26; Clinton L. Rossiter, Constitutional Dictatorship: Crisis Government in the Modern Democracies (Princeton, N.J.: Princeton University Press, 1948); and Frederick M. Watkins, The Failure of Constitutional Emergency Powers under the German Re-public (Cambridge, Mass.: Harvard University Press, 1939).

[2] Executive use of emergency powers to respond to foreign crisis threatens to undermine both constitutional separation of powers and individual liberties. As it was warned by James Madison almost 200 years ago, “perhaps it is a universal truth that the loss of liberty at home is to be charged to provisions against danger, real or pretended, from abroad.” A. SCHLESINGER, THE IMPERIAL PRESIDENCY ix (1973) (quoting Letter from Madison to Jefferson, May 13, 1798); see also THE FEDERALIST No. 8, at 45 (A. Hamilton) (J. Cooke ed. 1961) (“Safety from external dangers is the most powerful director of national conduct. Even the most ardent love of liberty will, after time, give way to its dictates.”).