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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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Competition Law Issues in the Fashion Industry

By: Cheshta Tater 

When one thinks of the fashion industry, the first words which come into one’s head are “designer wear” and “exclusivity”. A small consumer share but a considerable revenue and profit share of the fashion industry comprises luxury fashion.[1] Luxury fashion thrives on exclusivity and brand value and is always a status symbol, never a need. Given its exclusive and expensive nature, one cannot help but wonder how it rarely ever comes under the lens of the Competition Commission of India (“CCI”) or any other anti-trust regulatory body.

The objective of competition law is to create a healthy market environment by protecting and balancing the interests of businesses, consumers, and the economy. Lower but competitive prices allow consumers to make informed decisions about the substitutive products they wish to purchase while ensuring that no business abuses its dominant position. However, in the luxury sector of the fashion industry, the prices of products are always sky-rocketing. The much affordable products can not substitute them since the cost of a product, and its brand carries high social standing value, and are often one of a kind.

In the past few years, there have been several mergers and acquisitions in the luxury fashion sector worldwide, leading to a few dominant players. However, none of them has come under the beat for violating provisions of competition law. Through this article, the author would elaborate upon regulatory authorities’ findings regarding the monopolies present in the luxury sector. After that, the intersection of Intellectual Property Rights (“IPR”) and Competition Laws concerning the fashion industry. Lastly, the author would present their views on the necessity to check on the dominant players in the luxury and high fashion sectors.

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  1. Escaping the Watchdogs

The 1990s saw the boom of luxury fashion houses as well as fast fashion houses across the globe. With India’s globalisation in 1991, these brands became household names for the affluent and aspirational products for the middle class. One such brand was “Louis Vuitton”, the first label of the world’s largest luxury fashion group, LVMH.[2]

Since 1987, LVMH has acquired many luxury labels, both within and outside the fashion sector. Today, the group owns 75 luxury houses[3] in the industry of, inter alia, clothing, cosmetics, bags, watches, wines and spirits, and perfumes. In 2000, the joint acquisition of the fashion house Prada by LVMH and Fendi was approved.[4] The European Commission allowed for such a merger since these companies’ market share did not exceed the 25% limit.[5] Even though the 25% mark was crossed in the luxury handbags sector and leather accessories, the Commission chose to look at the luxury sector as a whole rather than dividing it into segments such as luxury clothing, luxury handbags, and luxury wines, and the likes.[6] The Commission believed that despite the merger, the parties would not be a dominant player in the market,[7] and the same was reasoned by stating:

  • Luxury items have low to no substitutability with other similar but non-luxurious products[8]; and
  • The purchase of a luxury good is linked to prestige rather than consumption of a specific item,[9] indicating that one luxury label’s product can not be substituted by a similar effect of another luxury label.

The goodwill, brand name, and the trademark value of a luxury fashion group is the most significant factor in deciding the cost of its goods and its worth as a status symbol. The intersection of IPR and Competition law is discussed in the following segment. This will help understand the exorbitant prices and the Commission’s reasons behind allowing the joint acquisition.

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  1. The intersection of IPR and Competition Law

IPR refers to a bundle of rights which give the owner the right to exclude others from accessing the product, subject to a limited period, i.e., it aims towards providing a sort of monopoly to the owner of the said invention by giving them the sole right to use or distribute it. On the other hand, Competition Law strives for the exact opposite and actively works towards a non-monopolistic market. Hence, a tussle arises between the two–which while talking of similar subjects, are complementary to one another in nature in certain areas and balancing them is essential for having a near-perfect market.

The denotation of ‘competition’ in the IPR and Competition Law are contextually different. The primary objectives of granting IPR encourage fierce competition among the intending innovators and simultaneously restrict the competition in many ways. At the end of the specified duration, the rights go to the public domain ending the completion. The objective of Competition Law is to prevent abusive practices in the market, promote and sustain competition in markets and ensure that the consumers get the right products at a reasonable price and better quality.[10]

While competition in IPR is reward-based, it aims to regulate and eliminate the unfair advantages wielded by monopoly holders in Competition Law. Competition Law also does not recognise the concept of right, while IPR on the other hand, by way of competition, allows for exploitation of rights, albeit in a restricted manner. However, in both, the basic concept of competition is the main driving force of respective legislation. While it may seem that the objectives of both are poles apart, somewhere down the line, their ultimate goals are the same, i.e., to achieve consumer welfare.

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When it comes to luxury fashion, a dire need is seen to strike a balance between the two laws. While IPR is essential to luxury brands as more than anything, it is the brand’s uniqueness, which makes it a luxurious one. For example, it is the red sole of Christian Louboutin’s, which attribute them their high value. The principles of IPR must remain intact to promote innovation and cater to the public who may value uniqueness as an important factor while purchasing. For the same, evils such as Counterfeiting must be avoided and actively punished not to bring down the value of said luxury brands and in the background, the importance of innovation.

However, it is also crucial that these exclusive rights do not turn into Monopolies which in turn do not just turn exploitative to other producers, but are also unfair to the consumer as because of this exclusivity, not only can be charged exorbitant prices for said ‘unique products’, but also result in lesser variety for the consumer to choose from. And hence, the balance between Competition Law and IPR needs to be struck perfectly to neither take away from the Innovators and Owners, but also not hamper the consumer.

  • Bring them under the lens.

As discussed earlier, luxury brands are known for their exclusive goods and sometimes, even their exclusive customers. A luxury handbag label, Birkin, is so exclusive that bags aren’t available in retail stores and only a very few loyal customers are even offered to purchase a Birkin handbag.[11] This exclusivity of the brand and its reflection lies in the originality and sophistication of the product’s creation, the qualitative level of the materials used, and the products’ marketing.

Considering such exclusivity of the brand and its goods, presupposing luxury products’ interchangeability does not set a good precedent. For instance, no other label’s handbag is at par with a Birkin bag when it comes to exclusivity and status. As established earlier, luxury products are not purchased for their utility but their reputation. Even a product of the same fashion house cannot replace the more exclusive product at such a point. Taking the example of Birkin, a Birkin bag cannot be substituted by a bag of Hermès, which is the parent company of Birkin. Their cost indicates the same. While the cheapest Hermès bag sells for $540, the cheapest Birkin doesn’t trade for anything less than $12000.[12]

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Suppose the interchangeability of luxury products cannot be presumed. In that case, the entire luxury market cannot be created as a single competitive space, i.e., a more transparent and distinct division of products is necessary to correctly evaluate competitiveness and dominance in the luxury market. Wines and bags cannot be created in the same market. Once distinct relevant market needs are defined, it will be apparent that LVMH is a dominant player in two sectors: luxury handbags and luxury leather accessories.[13] The pertinent question in competition law now arises: Is this dominant position being abused?

In LVMH’s case, it is crucial to understand that the group owns 75 brands, many of which are “must-have” goods for retailers, i.e., an essential product that retailers have to stock and display to meet their customer’s requirements.[14] This leads to lower bargaining power in the hands of the retailer so that they have to stock more from the house, apart from the most-have. In turn, this leads to the absence or reduced presence of other dwellings in such a boutique because the retailer only has so much capital to invest.

Companies are free to enter the market in a competitive market to compete with existing players, without immediately devoured by more powerful rivals. It is becoming difficult for existing players to compete with LVMH; one can only imagine how new players will be slaughtered in the market. LVMH’s turnover of 53.7 billion euros in 2019 marked its dominance as the strongest player in the luxury market. Gucci, the second-largest luxury fashion house, has still not reached the 10 billion euro turnover landmark.[15]

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The numbers speak for themselves, indicating that the abuse of a dominant market position is not always active but is passive. If too much emphasis is placed on active abuse, there may be a risk that the market’s actual situation and concerns are overlooked.

[1] McKinsey and Company, The State of Fashion 2020 (2020) <https://www.mckinsey.com/~/media/mckinsey/industries/retail/our%20insights/the%20state%20of%20fashion%202020%20navigating%20uncertainty/the-state-of-fashion-2020-final.ashx> 90-91

[2] Deloitte, Global Powers of Luxury Goods 2019: Bridging the Gap between the Old and the New (2019) <https://www2.deloitte.com/content/dam/Deloitte/ar/Documents/Consumer_and_Industrial_Products/Global-Powers-of-Luxury-Goods-abril-2019.pdf> 15, 42

[3] LVMH, Houses, <https://www.lvmh.com/houses/#:~:text=LVMH%20is%20home%20to%2075,exquisite%20caliber%20of%20its%20products.&text=Our%20group%20of%20wines%20and,no%20other%20in%20the%20world> last accessed 22 December 2020

[4] Commission approves joint acquisition of Fendi by LVMH and PRADA (European Commission, 26 May 2000) <https://ec.europa.eu/commission/presscorner/detail/en/IP_00_535> last accessed 22 December 2000

[5] Commission of the European Communities, LVMH / PRADA / Fendi (2000) COMP/M.1780 [16]

[6] ibid

[7] ibid [22]

[8] ibid [11]

[9] ibid [10]

[10] Shubhodip Chakraborty, Interplay Between Competition Law And IPR In Its Regulation Of Market (Lawctopus, 15 November 2015) <https://www.lawctopus.com/academike/interplay-competition-law-ipr-regulation-market/#:~:text=Intellectual%20Property%20Rights%20(IPR)%20consists,adverse%20effect%20on%20the%20market> last accessed on 23 December 2020

[11] Sarah Lindig, This Iconic Bag is Still the Most Exclusive in the World (Harper’s Bazaar, 14 June 2015) <https://www.harpersbazaar.com/fashion/trends/a11201/hermes-birkin-bag-most-exclusive-in-the-world/> last accessed 22 December 2020

[12] Hermès <https://www.hermes.com> last accessed 23 December 2020

[13] LVMH / PRADA / Fendi (n 6)

[14] Commission of the European Communities, Coca-Cola/Amalgamated Beverages GB (1997) IV/M.794 [136-138]

[15] George Arnet, Gucci on Track to Hit €10 Billion in 2020 (Vogue Business, 26 April 2019) <https://www.voguebusiness.com/companies/gucci-sales-reach-euro-10-billion> last accessed 24 December 2020

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