Background:
As the clouds of Cz-19 pandemic refuse to blow over, India Inc. is already facing its worst year since the 2008 global recession in terms of growth, business, job layoffs and funds. Lack of economic activity due to mandatory lockdowns and a subsequent lack of funds has surely impacted every industry's capacity to invest and the effects might just be here to persist for quite some time. Facing such a crisis, a lot of investors/market players are reconsidering and revaluating their recent investments, especially into stressed assets, which require efforts to revive even in a healthy economy. This article seeks to analyse the current legal framework, which might help investors in such circumstances as a pandemic to review and revise their current investments into stressed assets and whether the current laws provide an adequate remedy for them.
Current Issues:
One of the most pertinent issues in the current scenario is to ensure that the investment size and the resolution plan is financially viable and feasible from the investor's perspective. Stressed assets can be difficult to revive even in a healthy economy and pose an even bigger risk if the economy is in downturn. Another factor to be considered is the lack of availability of funds with the investor and/or the ability of the investor to raise the funds from market for acquiring the stressed assets due to loss of business and the economic recession.
It is pertinent to note that there is no special law in India protecting the interests of the investors during a persisting calamity except Section 56 of the Indian Contract Act 1872. However, the application of Section 56 is also limited in these cases, which will be discussed in the latter part of this article. Hence, the current situation requires a review and modification of the construction of contracts in light of the COVID-19 pandemic and purposive interpretation of existing laws. There is a special need to examine the legal framework available to current merger and acquisition transactions and also resolution bids under the Insolvency and Bankruptcy Code 2016.
Measures to be taken by investors in relation to existing bids
This section seeks to examine the possible course of action available to investors for revising and scrapping existing bids in ongoing transactions and not be forced to put themselves in economically unfeasible positions due to a change in circumstances which could not have been foreseen.
- M&A Transactions:
In most of the M&A transactions, certain peculiar issues may arise on account of the lockdown such as supply and business disruptions, delay in receiving payments from vendors, delay in achieving project completion date (in under construction projects) and the consequences thereof, payment defaults under the loan agreements resulting in uncertainty on the prospects of revenue generation for the target company. In view of the aforesaid, the following measures may be taken by the Investors:
- Force Majeure / Material Adverse Change (MAC): Clauses in the existing pre-acquisition agreement / memorandum of understanding can help investors. Force Majeure Clause/Material Adverse Change (Effect) clause / change in valuation clause (depending upon the drafting of the relevant clause) available in the memorandum of understanding or share subscription agreement (pre-acquisition stage) can be invoked in light of Covid-19, if the transaction has not been consummated, to seek revaluation of the target company and revise the acquisition value.
- Law of Frustration and Commercial Inconvenience: Even in the absence of any abovementioned clauses in the underlying agreement, the law of frustration may be made applicable, as available under Section 56 of the Indian Contract Act 1872. The concept of "frustration" under Indian law would excuse a party from performance of its obligations.
However, from judicial precedent, it is understood that mere difficulty or increased costs or hardship may not be sufficient to establish frustration in itself, and since the law of frustration as a concept has traditionally been narrowly construed, the applicability of this provision will depend on the nature of the contractual obligations relative to the restrictions, the duration of any "lock-down" restrictions, the possibility of alternative means of performance and a number of other factors.
- Resolution Plans under IBC:
Since the entire process of resolution of corporate insolvency is governed by the provisions of Insolvency and Bankruptcy Code 2016 and also because a resolution plan is not an agreement by its very nature, Section 56 of the Indian Contract Act may not have applicability to resolution plans under the IBC.
However, conceptually a resolution plan is akin to a scheme of merger/amalgamation, which needs to be first approved by the committee of creditors and then by the Adjudicating Authority and during this process, there can be 3 major stages, which are discussed below:
- Pre-Approval by the committee of creditors : There is no provision under the IBC, which restricts a Resolution Applicant ("RA") to modify the contents of the resolution plan submitted by it before the plan is approved/rejected by the committee of creditors ("COC"). Accordingly, in light of the impact of COVID-19, the RA may choose to modify/revise its financial proposal and other terms of the resolution plan inter alia including a clause relating to Material Adverse Change/change in valuation clause on account of pandemic, in order to ensure the viability and feasibility of the resolution plan.
- Post Approval by the COC1: However, once the resolution plan is approved by the committee of creditors, the options available to the RA will depend upon the drafting of the resolution plan and in the event the resolution plan provides for clauses entitling the RA to revise or modify the resolution plan in the event of occurrence of a Force Majeure event/Material Adverse Change (Effect) /change in valuation event or similar events (depending upon the drafting of the relevant clause), the RA may choose to invoke such clause and revise the resolution plan value/terminate the resolution plan or extend the implementation period, as the case may be.
- Post Approval by the National Company Law Tribunal: While there is no certainty about modification of a resolution bid post approval by the National Company Law Tribunal ("NCLT"), however, depending upon the wordings of the resolution plan (and before the actual acquisition of the Corporate Debtor), an appeal may be filed before the NCLAT seeking stay on the operation of the order of the NCLT approving the resolution plan and a right to modify the terms of the resolution plan. However, as stated, there is no certainty as to the reliefs that may be granted by the NCLAT or the Supreme Court.
In all the scenarios as discussed above, the recent order of National Company Law Appellate Tribunal ("NCLAT") allowing additional time for completion of the corporate insolvency resolution process ("CIRP") will be helpful, thereby allowing more time to complete the insolvency resolution process. According to the NCLAT's suo moto order dated 30 March 2020, the period of lockdown ordered by the central government and state governments, including the period as may be extended either in whole or part of the country where the registered office of the corporate debtor is located, shall be excluded for the purpose of counting the period for resolution process under section 12 of the IBC in all cases where the CIRP has been initiated and is pending before any bench of NCLT or in appeal at NCLAT.
Further, recently, the Chandigarh Bench of the NCLT , in re FM Hammerle Textiles Limited, at the request of the successful resolution applicant (New Ram Traders), agreed to extend the implementation period and excluded the period of lockdown while calculating the period of implementation, on account of the aforementioned order of NCLAT, the suo moto order dated 23 March 2020 passed by the Supreme Court of India and Regulation 40C of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, as amended.
Measures to be taken by investors in relation to future bids
Taking a lesson from the uncertain conditions posed by the COVID-19 pandemic, investors in future can attempt to protect their position by an unambiguous drafting of Force Majeure clauses.
Force Majeure/MAC: Clear and unambiguous drafting of Force Majeure Clause, Material Adverse Change (Effect) clause and change in valuation clause (which can be included within MAC) in the memorandum of understanding / share subscription agreement / resolution plan, can allow an investor to take care of situations like COVID-19 pandemic, disruption of business and loss of revenue and shore up the corresponding right of the investor / RA to either revise the value of the transaction or withdraw the bid/avoid the transaction.
Depending upon the negotiation power, the RA (in proceedings under IBC) may endeavour to make these clauses applicable even post NCLT approval.
Conclusion:
As Corporate India faces a grave crisis due to the ongoing COVID-19 pandemic, which has effectively changed the entire landscape and circumstances that existed before its arrival in a sudden and unforeseeable manner, there is need to enact specialised laws and regulations to govern a seamless transfer to a post COVID-19 era. The government needs to take into account the abrupt and adverse change in circumstances governing any existing transaction and the economic unfeasibility of following through with most of them.
However, currently, as examined in the sections above, the only thing protecting investors is the probable drafting of clauses in their agreements/resolution plans and in other circumstances, the interpretation and the mindset of the judiciary. The government should expediently address the concern of the investors and the need to create legal exemptions for them. An adequate legal framework in this regard would reassure industry stakeholders and reduce the possibility of dispute. This would certainly aid the revival of Indian companies during and post the COVID-19 pandemic lockdown.
Footnote
1. Ramkrishna Forgings Limited, the selected resolution applicant in the CIRP of ACIL Limited, has requested the lenders of ACIL Limited, to revise its resolution plan in light of the demand disruptions caused by the Covid-19 and the lockdown.
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