COVID 19 and lay-off fears:An Insight

In view of the outbreak of COVID 19 pandemic, both the federal Government of India and the State Governments have issued notifications/ advisory with regard to workmen/ employees. Both state and federal governments have advised all owners of factories, industries and private establishments not to terminate their employees/ workers from their jobs and not to deduct their wages/ salary. While the communique is in the nature of advice and do not carry the force of law, however, given the present socio-political situation due to the COVID 19 pandemic, it remains to be seen how the labour courts will interpret these advisories in case any employer decides to go ahead with lay-off plans ignoring the government advisories.

The fear of lay-offs will not be allayed immediately after the lock-down is withdrawn since the impact of the pandemic on the economy is going to be long term with no hope of the economy looking up any time soon.

The principal law applicable to lay-off of workmen in India is the Industrial Disputes Act, 1947 (“ID Act”). In terms of the ID Act, the employer/ management of an industrial establishment may lay-off workmen on account of shortage of coal, power or raw materials or the accumulation of stocks or the break-down of machinery or natural calamity or for any other connected reason. The actual manner and modality of any lay-off will depend on the total number of workmen employed.

Compensation: An employer may lay-off a workman whose name is borne on the muster rolls of an industrial establishment [Section 25C of Chapter VA of the ID Act]. Workmen who have completed not less than one year of service under the employer, shall be paid by the employer for all days during which he is so laid-off (except for weekly holidays) compensation equal to fifty per cent (50%), of the total of the basic wages and dearness allowance. The period of compensation may also be limited to first forty-five days in the event a workman is laid-off for more than forty-five days in any twelve-month period. 

In case of lay-off on account of natural calamity, the employer need not seek prior permission from the concerned state authorities unlike lay-offs for any other reason (Section 25 M of the ID Act).    

Limitation of Applicability of ID Act: The provisions of the Act apply to workmen employed in an industrial establishment (who are engaged in manual, unskilled, skilled, technical, operational, clerical or supervisory work).

Employees who are not covered under the ID Act and who are in managerial roles will need to be dealt with by the employer on the basis of their respective contract of service (applicable law- Indian Contracts Act, 1872).

Impact of ‘Force Majeure’: A force majeure situation would render the performance of the Agreement/ contract impossible only during the limited time in which the event is in operation, thereby providing a window for resuming normal contractual obligations after the event ceases to operate. A force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and the protection afforded thereunder will depend on the language of the clause . As such, for the employer to lawfully ‘lay-off’ an employee under a ‘force majeure’ situation, the contract/ agreement of service must provide for and identify such force majeure event and also provide for the rights and remedy available to each party under such eventuality.

                                   Insolvency and Bankruptcy Code, 2016 - Operational Creditor- an overview

     The Insolvency and Bankruptcy Code, 2016 (“Code”) has been enacted inter alia to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons[1], partnership firms and individuals in a time bound manner for maximization of value of assets of such persons. The scheme of the Code is such that the insolvency resolution and liquidation of corporate persons (Part II- Chapters I to VII) and that of individuals and partnership firms (Part III) are dealt with separately.  For the purpose of the matter at hand, this note shall restrict itself to the insolvency resolution and liquidation of corporate persons. While the entire burden of preparation of insolvency resolution plan is placed on the shoulder of the insolvency resolution professional, the National Company Law Tribunal (“NCLT”) acts as the adjudicating authority under the Code. The National Company Law Appellate Tribunal (“NCLAT”) is the appellate authority placed above the NCLT in hierarchy.  The Insolvency and Bankruptcy Board of India (IBBI) governs the procedural aspects of insolvency and bankruptcy proceedings in India (it frames and amends the regulations from time to time in exercise of the powers bestowed upon it under the Code) including regulating the registration and appointment of insolvency resolution professionals.

Ø  Applicability Threshold: The provisions pertaining to insolvency resolution and liquidation for corporate person (which includes companies) shall apply to corporate debtors[2] where the minimum amount of the default is one lakh rupees (INR 1,00,000).

Ø  Who can initiate corporate insolvency resolution process against a corporate debtor who commits a default?

i)      A financial creditor[3], or

ii)    An operational creditor, or

iii)   The corporate debtor

Ø  Meaning of ‘default’: Non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be (Sec. 3 (12) of the Code)

Ø  Meaning of ‘debt’: A liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt (Sec. 3 (11))

Ø   A ‘Operational debt’ means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority (Sec. 5 (21)). An ‘Operational Creditor’ is a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred (Sec 5 (20)).

Ø  Clarification on ‘Operational Creditor’:

i)          The 'Operational Creditor' and 'Operational Debt' having defined in Section 5(20) and Section 5(21) of the Code, except those who come within the meaning of Operational Creditor no other creditor, whether secured or unsecured creditor are entitled to file an application under Section 9 though they are entitled to file claim before the Interim Resolution Professional, once Insolvency Resolution Process starts against a 'Corporate Debtor', either under Section 7 or Section 9 or Section 10 of the 'I & B Code'.

Pawan Dubey and Ors. Vs. J.B.K. Developers Pvt. Ltd. (IV (2017) BC 56)

ii)        A perusal of Section 9 of the Code would show that in order to maintain an application as an ‘Operational Creditor’ the petitioner has to satisfy the requirements of section 5 (20) and (21) of the Code. … It is evident from the perusal of the aforesaid definition of ‘Operational Debt’ that is a claim in respect of provision of goods or services including dues ….However, the framer of the Code has not included in the expression ‘Operational Debt’ as any debt other than the ‘Financial Debt’. It is thus confined to aforesaid four categories like goods, services, employment and government dues.

Col. Vinod Awasthy Vs. AMR Infrastructure Ltd. ((C.P. No. (IB)-10(PB)/2017. February 20, 2017))

Ø  Corporate Insolvency Resolution Process- By Operational Creditor

Step 1: Notice: An Operational Creditor, on the occurrence of a default, shall deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor (Sec. 8(1)).  Notice to be issued in format of Form 3 in terms of Insolvency & Bankruptcy (Adjudicating Authority) Rules, 2016. 

Step 2: Reply by the corporate debtor:  The corporate debtor may within a period of ten (10) days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—(a) existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute; (b) the repayment of unpaid operational debt with proof thereof (Sec 8 (2)).

  

Sec 5 (6) of the Code defines ‘Dispute’ as ‘includes a suit or arbitration relating to – (a) existence of amount of debt, (b) quality of goods or services; (c) breach of a representation or warranty’. The Supreme Court of India in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited (AIR2017SC4532), has recently held that while determining “existence of a dispute”, all that the NCLT is to see is whether there is “a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.” While opining that “a spurious defence which is mere bluster” should be rejected, the Supreme Court added a word of caution – while determining whether dispute exists or not, the NCLT is not required to satisfy itself that the defence is likely to succeed or to examine the merits of the dispute. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the application of an operational creditor must be rejected by the NCLT. The existence of any pending suit or arbitration is not the sole criteria.

 

  Step 3: Application to NCLT (Sec. 9): After the expiry of the aforesaid period of ten (10) days from the date of delivery of the notice or invoice demanding payment, if the Operational Creditor does not receive payment from the corporate debtor or notice of the dispute, the Operational Creditor shall file an application before the Adjudicating Authority (i.e., National Company Law Tribunal (NCLT)) for initiating a corporate insolvency resolution process. The application is to be filed in format of Form 5 in terms of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The Operational Creditor may also propose the name of the insolvency professional to the NCLT who shall act as the interim insolvency professional to administer the corporate debtor and to conduct the resolution process[4].

Step 4:  Order by the NCLT: Within 14 (fourteen) days of receipt of the application under Step 3, the NCLT may either:

a)      Admit the application if it is complete, there is no repayment of the unpaid operational debt; the demand notice has been delivered to the corporate debtor; no notice of pending dispute is sent by the corporate debtor; or there are no disciplinary proceedings against any resolution professional proposed; OR

b)       Reject the application in the event of existence of adverse situations as stated above. In case of rejection, 7 days’ time shall be provided to the applicant to rectify the defect.

Step 5: Declaration of moratorium, public announcement and appointment of interim resolution professional (Sec. 14, 16): The NCLT shall by an order declare a moratorium till the completion of the resolution process -

(a) on the institution or continuation of suits, execution of judgments, decree or order, alienation/ transfer of assets of the corporate debtor, recovery of any property, recovery or enforcement of any security interest   

(b) cause a public announcement of initiation of corporate insolvency process and call for submission of claims

(c)  appoint an interim resolution professional [in case the applicant/ Operational Creditor makes no recommendation of the insolvency professional or he is found to be under disciplinary proceedings, NCLT may appoint an insolvency professional as may be recommended by the Insolvency and Bankruptcy Board of India]

Step 6: Public announcement: Public announcement shall be made by the insolvency resolution professional (“IRP”) within 3 (three) days from the date of his/her appointment, in Form A under the Insolvency & Bankruptcy (Insolvency Resolution) Regulations, 2016. The public announcement inter alia shall contain the details of the insolvency professional, last date of filing claims, penalty for making false claims (Sec 15).   

Step 7: Claims by Operational Creditors: A person claiming to be Operational Creditor shall submit proof of claim to the IRP in Form B in terms of the Insolvency & Bankruptcy (Insolvency Resolution) Regulation 2016. The existence of debt may be proved on the basis of –

i)         a contract for the supply of goods and services with corporate debtor;

ii)   an invoice demanding payment for the goods and services supplied to the corporate debtor;

iii)   an order of a court or tribunal that has adjudicated upon the non-payment of a debt, if any; or

iv)    financial accounts.

Step 8: Verification of Claim: The IRP or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven (7) days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it which shall also be submitted to NCLT (Regulation 13 and 14 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016).

Step 8: Role of interim resolution professional (IRP)- committee of creditors (sec 17, 18, 20, 21): From the date of appointment of the IRP, the management of the affairs of the corporate debtor, powers of the board shall vest in the IRP. The IRP shall, inter alia, constitute a committee of creditors (COC) within 30 days of his appointment  after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor. Financial creditors shall comprise the committee of creditors and in case there are no financial creditors then CoC shall comprise of 18 largest operational creditors of the corporate debtor and one nominee each  of workmen and employees of the corporate debtor.     

Step 9: Appointment of resolution professional (Sec 22): The COC, within 7 (seven) days of constitution, hold a meeting to appoint the IRP as the resolution professional (RP) or any other replacement (to be forwarded by NCLT to the Board for confirmation within 10 (ten) days of receipt of the name from the NCLT).

Step 10: Information Memorandum (Sec. 29 and Regulation 36 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016):  The RP shall prepare an IM containing such information as assets and liabilities of the corporate debtor, latest annual financial statements, list of creditors, details of guarantees, list of material litigation, liquidation value, liquidation value due to operational creditors. The purpose of the IM is to provide adequate information to all potential resolution applicants to submit/ apply with their resolution plans.

Step 11: The resolution applicant[5] may submit a resolution plan to the RP on the basis of the IM, which shall be examined by the RP with regard to provision for payment of process cost, payment of debts of operational creditors, management of corporate debtors after the approval, implementation and supervision of the plan. The COC must also approve the plan by 75% vote.

In terms of the IBC, any insolvency resolution plan received by the insolvency resolution professional (to be approved by the committee of creditors by 75% vote) must satisfy/ confirm the following (section 30 of the IBC):

(a)  provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor;

(b)  provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor;

(c)  provides for the management of the affairs of the Corporate debtor after approval of the resolution plan;

(d)   the implementation and supervision of the resolution plan;

(e)   does not contravene any of the provisions of the law for the time being in force;

(f)    conforms to such other requirements as may be specified by the Board.

Step 12: Approval of NCLT: Upon submission of the duly approved resolution plan by the RP, the NCLT may accept (if it provides for payment of process cost, repayment of debts, management of the debtor company, implementation and supervision of the resolution plan etc.) or reject the plan.

Step 13: Liquidation: In event of lack of any valid/ acceptable resolution plan within the stipulated time period or rejection of such plans, the NCLT shall pass an order requiring the corporate debtor to be liquidated and require a public notice to be issued in this regard.  

In course of the process of liquidation, the liquidator[6] shall distribute the proceeds from the sale of the liquidation assets of the corporate debtor in the following order of priority[7]:

(a)    the insolvency resolution process costs and the liquidation costs paid in full;  

(b)    the following debts which shall rank equally between and among the following :—

(i) workmen's dues for the period of twenty-four months preceding the liquidation   commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished       security;

(c)  wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d)    financial debts owed to unsecured creditors;

(e)    the following dues shall rank equally between and among the following:—

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f)     any remaining debts and dues;

(g)    preference shareholders, if any; and

(h)    equity shareholders or partners, as the case may be.

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[1] This includes a company registered under the Companies Act, LLP or any other person incorporated with limited liability under any law for the time being in force.

[2] ‘Corporate debtor’ means a corporate person who owes a debt to any person (Sec 3(8) of the Code)

[3] ‘Financial creditor’ means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to (Sec 5 (7)). Financial debt broadly pertains to debt in relation to money borrowed at interest, acceptance of deposit, lease or hire purchase, derivative transactions etc.

[4] The insolvency professional shall complete the process within 180 days of admission of the application, extendable upto a period of another 90 days by an order of the NCLT(Sec. 12).

[5] Sec. 29 A of the Code defines specific persons disqualified to be a resolution applicant – it bars wilful defaulters, insolvent promoters whose accounts have been classified as non-performing assets, amongst others.

[6] The resolution professional appointed for the corporate insolvency resolution shall act as the liquidator for the purpose of liquidation (Section 34 of the Code)

[7] Section 53 of the Code

The Legal Sphere: Cross Border Corporate Guarantee by an Indian Comp...

The Legal Sphere: Cross Border Corporate Guarantee by an Indian Comp...: Regulation 5 (b) (i) of the Foreign Exchange Management (Guarantees) Regulations, 2000 ( as amended from time to time ), issued by the ...

Cross Border Corporate Guarantee by an Indian Company

Regulation 5 (b) (i) of the Foreign Exchange Management (Guarantees) Regulations, 2000 (as amended from time to time), issued by the RBI applies to the issue of cross border guarantee to be issued by an Indian Corporate and reads as under (relevant extract):

Guarantees which may be given by persons other than an authorised dealer

5. A person other than an authorised dealer may give a guarantee in the following cases, namely:

(a) [(i)] ^{…………………………………………}

      [(ii)]....................................

[(b) (i) An Indian Party[1] promoting or setting up outside India, a Joint Venture or a Wholly Owned Subsidiary, may give a guarantee to or on behalf of the latter in connection with its business: [Emphasis supplied]

Provided that the terms and conditions stipulated in Foreign Exchange Management (Transfer and Issue of Foreign Security) (Amendment) Regulations, 2004 for promoting or setting up such company or subsidiary are continued to be complied with:

Provided further that the guarantee under this clause may also be given by an authorised dealer in India;

(ii) …………………………:

Explanation: Indian Party' shall have the same meaning as assigned to it in Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004.]

While the foregoing provision grants a general permission to Indian Party including Indian Companies to issue guarantee on behalf of its overseas JV/WOS, the RBI has issued various circulars, notifications in relation to cross-border guarantees and co-acceptances from time to time which regulate and limit the issuance of guarantees by Indian parties.

In terms of Clause 2.3.5 of the RBI Master Circular DBOD. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 pertaining to Guarantees & Co-Acceptances, an Indian party may have financial commitment towards its overseas JV / WOS to the limit, as prescribed by the Reserve bank from time to time, of the net worth of the Indian party as on the date of the last audited balance sheet. The financial commitment may be in the form of

(a) ……………………………….

(b) corporate guarantee (only 50 percent value in case of performance guarantee) and /or bank guarantee (which is backed by a counter guarantee / collateral by the Indian party) on behalf of the JV / WOS and

(c) ……………………………….

Meaning of ‘Financial Commitment’:

Regulation 2(f) of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004 defines ‘Financial Commitment’ as

the amount of direct investment by way of contribution to equity, loan and 100 percent of the amount of guarantees and 50 per cent of performance guarantees issued by an Indian party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary;

Further, Section B.1 of the RBI Master Circular No. 11/2014-15 on Direct Investment by Residents in Joint Venture (JV) /Wholly Owned Subsidiary (WOS) Abroad dated July 1, 2014 (amended up to May 6, 2015) stipulates that the total financial commitment of the Indian party in all the Joint Ventures / Wholly Owned Subsidiaries shall comprise of the following:

a)    100% of the amount of equity shares;

b)    100% of the amount of compulsorily and mandatorily convertible preference shares;

c)    100% of the amount of other preference shares;

d)    100% of the amount of loan;

e)  100% of the amount of guarantee (other than performance guarantee) issued by the Indian party;

f)  100% of the amount of bank guarantee issued by a resident bank on behalf of JV or WOS of the Indian party provided the bank guarantee is backed by a counter guarantee / collateral by the Indian party.

g) 50% of the amount of performance guarantee issued by the Indian party provided that the outflow on account of invocation of performance guarantee results in the breach of the limit of the financial commitment in force, prior permission of the Reserve Bank is to be obtained before executing remittance beyond the limit prescribed for the financial commitment.

Financial commitment shall also be subject to the following conditions:

(a)  The Indian party / entity may extend loan /guarantee only to an overseas JV / WOS in which it has equity participation.

Indian entities may offer any form of guarantee - corporate or personal (including the personal guarantee by the indirect resident individual promoters of the Indian Party)/ primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:

     (i)  All the financial commitments, including all forms of guarantees and creation of charge are within the overall ceiling prescribed for the Indian party.

    (ii)  No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee.

    (iii) In cases where invocation of the performance guarantees breach the ceiling for the financial, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

   (iv) As in the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

b)………..

  c)  All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

d) ………...

e) ………..

f………...

g) ………..

Limitation:

With effect from July 03, 2014, the limit of Overseas Direct Investments (ODI)/ Financial Commitment (FC) to be undertaken by an Indian Party under the automatic route has been restored to the limit prevailing, as per the extant FEMA provisions, prior to August 14, 2013. It has, however, been decided that any financial commitment exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet).

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[1] Regulation 2(k) under the Foreign Exchange Management (Transfer or Issueof any Foreign Security) (Amendment) Regulations, 2004 defines ‘Indian Party’ as ‘a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932[or a Limited Liability partnership (LLP) as defined under clause (ma) of Regulation 2 of this notification] making investments in a Joint Venture or Wholly owned subsidiary abroad, and includes any other entity in India as may be notified by reserve Bank:

Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the “Indian Party”.’

1  Liberalized Policy for NRI investments- entities owned and controlled by NRI’s will be treated as at par with NRI’s for investment in India

I.  Foreign Exchange Management (Transfer or Issue of Security By A person Resident Outside India) Regulations, 2000, under Clause 3(ii) provides that “A NRI may purchase shares or convertible debentures of an Indian Company on non-repatriation basis other than under Portfolio Investment Scheme subject to the terms and conditions specified in Schedule 4”

II.    Press Note No.7 (2015 series) dated June 3, 2015 has clarified that investments by NRI’s under schedule 4 of the aforesaid FEMA regulation will be deemed to be domestic investment at par with the investments made by residents.

III.  A corresponding press release by the Press information Bureau dated May 21, 2015 has further elaborated as under :

“since the investment made under schedule 4 are on non-repatriable basis, it needs to be clearly provided that such investments, for the purposes of FDI Policy are domestic investments. This will enable investments by NRI’s, OCI cardholders and PIO cardholders under schedule 4 on non-repatriation basis, across sectors without being subjected to any of the conditions associated to foreign investments.

IV.     Furthermore, with a view to further liberalize the Policy on NRI investments, the Government of India vide Press  Note dated November 10, 2015 (http://dipp.nic.in/English/acts_rules/Press_Notes/pn12_2015.pdf), under item no.6 of the Annexure lays down as under:

‘In order to attract larger investments, which are possible through incorporated entities only, the special dispensation of NRI’s has now also been extended to companies, trust and partnership firms, which are incorporated outside India and are owned and controlled by NRI’s. Henceforth, such entities owned and controlled by NRI’s will be treated as at par with NRI’s for investment in India.’

V.       The term control has been defined under clause 2.1.7 of the Policy and reads as under:

‘Control’ shall include the right to appoint the majority of the directors or to control the management or policy decisions including by virtue of the shareholding or management rights or shareholders agreements or voting agreements.

As such, any investment in India through a wholly owned subsidiary in India or by the NRI shareholders directly, would be covered under the liberalized FDI Policy on NRI investment and investment would be treated at par with domestic investments and would not be subject to any of the conditions associated with foreign investments.