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What Indian businesses should be mindful of during COVID-19: A legal standpoint

With almost 7.5 million people now impacted by the coronavirus, businesses across the globe have had to struggle to stay afloat. We have summarised the key legal issues that may arise due to COVID-19 for an Indian business, and what should be your next steps.

Globally, several businesses have already adopted the bankruptcy route (Neiman Marcus, JC Penny, J Crew, Hertz, Avianca, LATAM Airlines, ALDO, to name a few). Many non-essential small businesses have already folded; for surviving businesses, cost-cutting measures and massive layoffs and furloughs of the existing workforce continue to be reported. Retail giant Shoppers Stop laid off 1100 employees; earthmoving and construction equipment maker JCB India laid off 400 employees. Ola, Uber India, Zomato, Swiggy, Oyo, Cure.fit, Paytm, BookMyShow and many more private players have been hit hard.

Did you say ‘free’ legal advice?

The struggle to survive is key, and more so if you’re a small business owner. Here is some free legal advice for Indian businesses, from a boss lawyer, Charu Chitwan, on a couple of things you should be mindful of during COVID-19.

  • Adapting business models: Businesses will need to be flexible and adapt to a “new normal”. For offline retailers this would mean building a presence on e-commerce platforms; for restaurants, this could mean substituting traditional outlets with pickup stores
  • Review existing contracts for,
  • A. Force majeure: A clause in contracts that limits the liability or obligations of the parties when an extraordinary event or circumstance occurs, beyond the control of the parties, such as acts of God, war, earthquakes. Review your existing contracts, check what actions you can take under your force majeure clause. Where the contract does not contain a force majeure, the doctrine of “frustration” could be used to excuse performance of obligations basis an unforeseeable event, that makes the performance of the contract impossible or defeats the foundation of the contract. Example: Two people entered into a contract for leasing out a music hall for concerts and stuff. The music hall burned down, the contract is impossible to perform. How frustrating.
  • B. MAC clauses: In business use, Material adverse change (MAC) is typically a change in circumstance that causes a substantial decline in the value of a business. Review your MAC clauses, the wording, timing and usage. Keep in mind, COVID-19 does not automatically qualify as a MAC, and where it does, businesses should be mindful of ensuing obligations. India has no precedent until now interpreting COVID-19 as a MAC.
  •  Reach out to lenders for loan payments which are due: The RBI has permitted commercial banks, NBFCs, cooperative banks and AIFIs to grant a moratorium of up to 6 months on debt servicing for all term loan instalments due between 1 March 2020 – 31 August 2020. Payment of interest on cash credit/overdraft facilities has also been deferred for this period. 
  • Protection for defaults that have occurredEffective 5 June 2020, any default in debt repayment on and from 25 March 2020 till a maximum of one year cannot be a ground for an operational or financial creditor to initiate insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC). Defaults on account of Covid-19 prior to 25 March do not have this protection. Note that where parties have sought to resist invocation of guarantees arguing COVID-19, courts have examined the same strictly.
  • Closing down businesses: While the right of businesses to initiate insolvency voluntarily under Section 10 of the IBC on grounds of a default post 25 March 2020 (till a maximum of 1 year) has been taken away, alternate mechanisms such as voluntary liquidation of companies under IBC and winding up of small businesses under the Companies Act remain available. Post the IBC suspension period, only a default of minimum INR 10,000,000 will allow a company to initiate insolvency.
  • Negotiating fixed business costs like rental dues: There is no one-size-fits-all approach that may be followed; the occurrence of the pandemic does not automatically mean a green signal on waiver or non-payment of rental dues. On 21 May 2020, the Delhi High Court clarified that tenants of commercial premises were liable to pay rent for the lockdown period and suspension or waiver of rent for that period is permissible only if the terms of the contract allow. In cases where the contract is silent on suspension or waiver, the courts will examine each case on its facts and circumstances. 
  • Reviewing insurance policies: This exercise will assist in understanding if business losses on account of COVID-19 and resultant lockdowns are covered. While typically the answer to this is in the negative, businesses should consider getting such required cover moving forward.
  • Employee negotiations: Employers can now negotiate and enter into settlements with their employees/workers for wages payable during the lockdown as per the interim reliefs ordered by the Supreme Court on 12 June 2020, and full wages are not mandatorily payable to the employees for such period. 
  • Future obligations: Contracts to be entered in future, should contain provisions protecting against COVID-19 impacts.

The points mentioned above are by no means an exhaustive list but hey, something is better than nothing. There have been concessions on other aspects as well, such as taxation, import and exports and foreign investments, and staying updated with these reforms is critical for Indian businesses.

Don’t forget to share this article. You can also message Charu here. Do you know we also dialogue via podcasts? Hear what is next for Uber India during COVID-19 here!

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