India Business Law Journal teamed up with prominent arbitrator Ashok Sharma and a stellar panel of GCs to debate how in-house legal teams should rise to the unprecedented challenges facing Indian companies in a post-lockdown environment
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An edited transcript and video highlights of each topic follow below
We are living through an unprecedented crisis, both in terms of scale and impact. The COVID-19 pandemic has upended our ways of doing business, working, socializing, and just about every aspect of our lives. As of this moment, COVID-19 has affected more than six million people around the world.
India Business Law Journal has partnered with Ashok Sharma, a counsel and arbitrator in commercial and maritime arbitrations, for a discussion with company legal heads – some of the most prominent names in India’s in-house legal community – on how companies can overcome this challenge.
On the panel, which is moderated by Sharma, is made up of: Subir Bikas Mitra, executive director (law and HR) at GAIL (India); Srivals Kumar, general counsel and senior vice president of legal at Raheja Universal; Manjaree Chowdhary, executive director and general counsel at Maruti Suzuki India; Mahesh Sreenivasan, head of legal and company secretarial department of RITES; Rajendra Misra, general counsel of the Indian Hotels Company; and Rajiv Choubey, director, legal at ACC, a LafargeHolcim group company.
What is the expected scenario for companies in a post-COVID-19 environment?
Ashok Sharma: This crisis has brought to fore the need that the legal community has to adopt to new technology and remote work. Most of us are working from home, courts are closed, arbitrations are not taking place. India has practically been pushed into a digital world immediately. Although we were getting ready for that, in certain aspects the legal ecosystem is yet to adapt to the new normal. What is the expected scenario for companies in the COVID-19 environment and post-lockdown period?
Srivals Kumar: To start with, I will say that generally this has been one of the most difficult times for each one of us in our legal career, because none of us would have expected such a big impact on the economy and every sector, per se. There are challenges that one would never have thought through, either in the formulation of any contract, joint venture, or any agreement for that matter. Having said that, one should look at the silver lining behind the dark clouds. COVID-19 definitely brought out a lot of challenges if I take the example of the real estate industry, which I belong to. Real estate was already impacted by the GST [goods and service tax] measures, demonetization and the launch of a regulatory regime in the industry.
There were huge challenges, and there was the economic downturn in the industry per se. This impact will further push it down and change the whole dynamics of the industry. And it doesn’t apply to one industry, but all industries. All senior management teams need to look at it in a different context. In the real estate industry, we will start seeing people who have the ability to look at it from moving from a rental domain to buying their owned home.
We will see a lot of technological innovations happening at home, and more facilities. I think a majority of staff will relook at the way they work. So, I believe the commercial real estate space will see a challenge in the short run. And I think a lot of employees would look at having a nice, cosy corner in their home for working. We’ll see a long-term impact on this as, there would be a lot of people working from home.
This would lead to a rejig from the types of transactions we used to do in a pre-COVID regime, and there will be drastic change in the way we look at it. Ultimately I believe we’ll go into a new ecosystem where digital technology will have a lot of play in our lives, and also a lot of our original contracts and documents will need a relook because the ecosystem in which they were made will drastically change.
Mahesh Sreenivasan: If I could say it in a single sentence, post-COVID work life will never be the same again. Like the AD and BC of the Gregorian calendar, it will be before COVID and after COVID. There will be major changes in how we are dealing with situations and how companies are functioning. The changes I anticipate will be visible in two ways – how the company deals with outside work, and how employer-employee relationships are maintained.
We are already seeing more and more spending will be on the digital medium, while earlier companies were spending money on direct interaction with clients like having meetings, seminars and conferences. These things will not be there, at least in the short-to-medium term. Companies will have to develop more digital products to satisfy the wants of the people.
I think PSUs [public sector undertakings] will have a renewed importance, and in the short term the government’s idea of privatization and disinvestment, etc., will take a backseat. We can see it even in the present announcements, PSU banks are being utilized by the government to grant loans and extend financial help to MSMEs [micro, small and medium-sized enterprises] and companies. Only those companies that can innovate, reinvent and adapt to the changing scenario will able to survive successfully.
Manjaree Chowdhary: I mean, everyone did have some sort of crisis management plan, but they certainly did not have anything that could encapsulate a situation of this enormity. I would like to break this down into a couple of factors. One is purely from a people’s standpoint, that you have to first ensure the safety and security of the health of your own workers. Any every precaution that you take, and you are required to take, by the law and by the directions of the government, etc., you can only top up that. Do not do anything under, because there is absolutely no jurisprudence that exists on something like this. We can only draw analogies from other similar acts. The Disaster Management Act has been enforced for the first time. We are seeing new things develop. So, it’s always good to err on the side of caution. And not only from a legal perspective, I would say, but also from a humane perspective, it is your employees that make your company.
How can companies deal with failure to perform contract obligations and payment defaults?
Ashok Sharma: As well all know, COVID-19 has brought the whole economy to a standstill. Factories are not working and corporates are not working. They are not able to fulfil their contractual obligations. Contractors are not working, and this standstill has led to defaults. So, this is one major area of disputes that is arising due to COVID-19. It is a very important area because if not settled in an amicable manner, it can lead to litigation.
Rajendra Misra: As general counsel, we know that typically, in a normal situation, force majeure is one of the most least looked at clauses. But I think this is a critical moment when the force majeure clause will come into play for various organizations. Therefore, on one hand, one party is not able to perform its obligations, and on the other, the other party has certain expectations arising out of the performance of the obligations by the first party. Therefore, to avoid litigation in future, it is important that two parties try and talk, and circumvent and overcome this situation, which was created not by their own doing. It is an act of God.
Rajiv Choubey: That there are issues in terms of payment, and defaults are a reality. My own assessment is, since there is a question of survival of the business, there are many businesses that have been pushed to the corner, where it’s a do-or-die situation. These are extraordinary times when contracts will not be honoured. I also refer to the recent speech of the finance minister, where she has declared that this, as far as real estate is concerned, that this entire period of COVID-19 is a force majeure situation, and they will get automatic extension for the completion of the contract. If the government of the day also recognizes it, then, irrespective of the fact of how the force majeure contract is drafted, we all have to admit that it’s a force majeure situation.
If I take my previous company, HCL, where we were doing a lot of projects – private and government projects where you get the payment at the end, the exposure is much more. It will all depend on in which industry you are operating, and what is the payment security mechanism. I think unless construction restarts, and unless real estate picks up, I think we are going to see demand of almost 50% in the immediate future. What most of the companies are doing is renegotiating contracts because it was all fine when the sun was shining. But today, we don’t have the same sunshine.
Srivals Kumar: I want to add an important legal viewpoint that contractual issues will come up whether there is a force majeure clause or not. Both parties will put their minds together to see if they can take benefit of that. In its absence, some parties would like to take advantage of the doctrine of frustration, and there are issues where there are licensed agreements or lease agreements that are covered by the Transfer of Property Act and Easement Act. I think the law as it stands today, in respect of the doctrine of frustration, clearly provides that the temporary nature of such issues will not help them to get out of their obligations.
Having said that, I definitely believe that in the current testing times, our judiciary will come up with some new jurisprudence on the subject. This may not be in the short term, because these matters will not come immediately. But I definitely believe that there will be a reapplication of mind by a few courts, where they will discuss these aspects in a different manner.
Rajendra Misra: There would be lease documents where parties at one point of time would have contemplated and negotiated a force majeure. And where this clause is present, the parties would be contractually bound to go by that. The problem would arise in situations where the lease agreements would not have contemplated the force majeure, and there would be several such instances. Where such a provision is not existing in the contract, the problem would be whether parties can ask for frustration of the contract, and would they be permitted to do so.
Ashok Sharma: I mean, legally speaking, section 56 [of the Indian Contract Act] might come into play. But then, it is a very complicated issue, like a Gordian knot. The parties are not able to perform for reasons that are beyond their control. Malls are closed because of the lockdown, and so shops are not operating. But then the rent liability is going to be there. And the landlord will expect the rent. There are no easy answers to this question.
Rajiv Choubey: I would like to add one point. Suppose I am heading an IT company and I’m occupying a large space. If I have better alternatives where I can get an office space at a reduced price, in such a scenario the lessor would prefer to renegotiate rather than losing the lessee. As in such times, getting a lessee at even the negotiated price or a reduced price will be difficult. I think a very business-oriented decision will be taken, and people know the ground realities. I think we will see a lot of negotiations and conciliations and mediations, rather than disputes.
Mahesh Sreenivasan: All the panellists are unanimous that we need to renegotiate the contract. Frustration and force majeure are the last way out. We are trying to renegotiate in many contracts.
What is the impact of suspending sections 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC), which deal with filing an insolvency application?
Ashok Sharma: As we all know this COVID crisis has brought the work of companies to a standstill. As a result, a lot of defaults are happening on the part of the corporates making them eligible for insolvency and bankruptcy action. As a circuit breaker, the government has recently suspended the operation of certain sections of the IBC.
Rajendra Misra: We all know the unfortunate situation that the industry finds itself in today. And like you pointed out correctly, Dr Sharma, defaults and prospects of defaults are happening. Today, the liquidity runways are short for many companies. And therefore, under the current scenario, how is it that the government is going to protect businesses? Businesses need some sort of protection, as, if there is no intervention, what would happen is that the path towards insolvency and bankruptcy would have just gotten sped up. It would have been a really unfortunate scenario for no fault of the entrepreneurs or the owners. Therefore, I would say that it’s a welcome step, where some sort of a speed breaker has been put in place to protect the industry.
Subir Bikas Mitra: As everybody says, the COVID crisis is deepening, and its impact on the industry and business is likely to be very severe. The extent of impact will depend on the nature of industry, and the company-specific situations. If we look at it from the perspective of the IBC, since its notification way back in 2016, it has caused lot of hue and cry. You know, the government is very much conscious about it. They have already taken a few measures.
On 24 March, they have enhanced the threshold measures that trigger the IBC from ₹100,000 (US$1,300) to ₹10 million. The limit of section 12 [of the IBC] of 330 days has been enhanced, keeping in view the lockdown period. But at the same time, the government is contemplating to bring in section 10A, so as to amend sections 7, 9 and 10 for the period of six months.
It is definitely is going to help because, you know, if you look at the industrial perspective, there has been a mixed reaction. One is that yes, it’s a very welcome proposition. But the second aspect is that it needs corporate governance because, most of the time, section 10 is being invoked by none other than the directors of the company after siphoning out the funds. This is the kind of thing that should come with a lot of precautionary measures about the duties and functioning of the directors.
Srivals Kumar: The whole purpose of the IBC was that, at the time, when the company is still in a position to be taken over by new management or a new shareholder, things can go back on track. However, if we put this in abeyance for a period of six or nine months, there are very good chances that a certain proportion of promoters may misuse this provision. One of the aspects that can be thought through would be that we get the IRP [insolvency resolution professional] to come on board and ensure that there is no disposal of assets, or any other action that may impend the entire prospect of the company in the long run.
Has working from home (WFH) become a viable alternative?
Ashok Sharma: One of the major impacts of the COVID-19 pandemic has been that it has changed the way we all have been working. It has changed the legal ecosystem. Now we have virtual courts and virtual hearings. Corporates are operating from home. Is working from home a viable alternative to the way of working in the pre-COVID days?
Manjaree Chowdhary: The office environment brings a certain amount of energy. It creates an ecosystem. All your tools are within your reach and you can utilize them anytime. Especially from a legal perspective, when you have litigations, your files, everything. I think most of them would like to go through them, and it’s the old habit. To bring about a complete change for all of that is very hard.
Maintaining productivity is another challenge. In an office when it’s pack-up time, everything is finished and you will come back to it the next day. Now, this is very different when working from home. One, you have to learn to become very disciplined, to have your shower, get dressed, have breakfast and sit in a designated place as if you were in an office. Not everybody has the wherewithal or the infrastructure to deal with it. Everyone’s got families. Some people have children, some have pets and other members in the family. There is going to be a constant sense of intrusion, and it disturbs your productivity. So, how do we work towards managing that? That will only come with practise and with discipline.
Mahesh Sreenivasan: Work-from-home, you can like it or hate it, but you cannot wish it away. It is here to stay. COVID-19 has offered us an opportunity to be a culture that finally allows a work-from-home option. I feel it is good for people with small kids, or those with disabilities or an illness. Post-COVID, this is going to be a reality, and we have to accept it. And for that, we need to have technology and invest massively on it.
Srivals Kumar: It depends on the type of business activity. For the service industry, I think it can be very easily done. But as for the manufacturing industry, or for a highly skilled profession like, say, an architect, it can’t be done online. The next important thing is that there are no technological protocols clearly established. So even now, when we have videoconferencing for various court hearings, I think across the board in India, courts are using different tools for that.
I think we have to look across and see whether we can build a similar technology protocol, which enables everybody to work effortlessly. In cities like Mumbai, I think the travel time is very high. I see people traveling at least two hours one way. I think this will come as a boon for people working in a certain area where work can be done more digitally.
Subir Bikas Mitra: This option needs to be explored but it cannot be considered everywhere. For example, operating petrochemical plants, or the terminal for natural gas supply, cannot be done from home. But the time has come that we need to segregate even within the organization to see how far it is practicable to work from home. Well, you know even today the activities that can be carried out in e-mode, for example the functioning of the Supreme Court, the high courts. But we are found to be completely unprepared. The time has come for us to think about how to be future-ready.
Rajendra Misra: In our wildest of dreams, we couldn’t have imagined lawyers and courts working from home. Therefore, COVID-19 has brought some pleasant changes. One of them being that adoption of technology has been thrust upon us. In the legal industry, the younger generation was more adaptable to technology, but the older generation was not. The way technology has been adopted has been fantastic. And coming specifically to the subject of working from home, I think we will have to look at it in respect of the nature of the work.
How can the legal department support businesses? What are checks and balances that need to be considered?
Ashok Sharma: COVID-19 has brought a lot of changes – working from home, maintaining social distancing, regularly sanitizing your hands, and businesses have been seriously affected. How can the legal departments help businesses to come back on track? What are the checks and balances that can be considered?
Srivals Kumar: Once reopening happens, I think the most important aspect that the legal team would have to look at is statutory compliance. Whether in the past 60-day period certain compliances were supposed to be done, and whether they were performed or not. The second big aspect would be a review of the major contracts. They can look at whether the milestones for the company or the other side have been met. Whether there has been any trigger of force majeure, or if there have been any verbal discussions with other parties that need to be documented, so that it can be taken to a logical end when production or the normal course of business starts. Another important aspect is that the standard operating practices within the organization, such as the IT or work from home policies, would require a review.
The legal department would have to look at what is the next step. God forbid that a similar circumstance happens, how would you relook at a major contract and protect the interests of the company? We all recollect the last time we had some disasters and floods, every company would look at putting together a business continuity plan. But I think in the past three or four years, things have been normal, so we never did those things. There would be an attempt at a relook of the critical aspects of business and to ensure compliance. The Ministry of Home Affairs (MHA) has come out with an advisory on payment of wages and maintaining the workforce. I definitely believe that the advisory is not in terms to the law. My advice is that private entrepreneurs are not mandated to pay.
Rajiv Choubey: We are a continuous process industry, and, if you see the MHA guidelines, this process was allowed to operate. But then you have the state regulation, local authorities, the municipalities, the district magistrate, the superintendent of police. So the order was that you have to close down. We tried to convince them; this is a continuous process that has been allowed to operate. But you know, things work differently at the ground level.
Just to give you an example, at one of our cement plants, despite the instructions, the particular district magistrate took a view that, “I will not allow you to operate after 7pm”. If you see the MHA circular, there are separate guidelines for plants in EOUs [export-oriented units) and SEZs [special economic zones] whereas there are separate guidelines for a company that is operating outside of municipal limits, or within a municipal limit. I think there has been a lot of confusion on the ground, and even in terms of logistics, or moving material, our trucks have been stopped. But fortunately, we have restarted and we are at least able to produce to almost 50% of our capacity.
In terms of renegotiating contracts, in certain cases we had invoked force majeure, and there was negotiation and discussion around it following a legal analysis. I think it has been quite a busy and exciting time for legal as a function.
Rajendra Misra: I think my mantra is to partner with the business. At this point of time, it’s important for the legal function to be a business partner. For example, there are a lot of government notifications, rules and guidelines that are coming every day. In the past two months, there has been a flurry of notifications, and really, business doesn’t know what to do. They’re confused because there are so many central and state-level notifications, and, as Rajiv has explained, even municipal-level guidelines.
The legal department can help businesses navigate this labyrinth at this time. The second way in which we can help our business is by renegotiating onerous contracts, enforcing force majeure and also keeping track of where the business may have got certain notices from suppliers, from counterparties, and advise them so we don’t end up in litigation, as resources are limited.
Liquidity is a problem at this point of time. As a legal function, we can play a crucial role in helping the organization get liquidity by partnering with the finance function, for example, by freeing up certain properties that may be encumbered, to enable those properties to be used for the purpose of getting liquidity.
Subir Bikas Mitra: The importance of the legal department does not require any further emphasis or reiteration. I would like to draw a simple comparison between the in-house legal department versus outsourcing the legal function. The legal department should not be treated as a cost centre. It should be treated as a firewall for the organization to manage turbulent times. You can’t expect the kind of confidentiality that is maintained by the in-house legal department from the outsourced legal function. The in-house department always provides business-like solutions. They always promote settlement rather than litigation. They believe the company should not be perceived as a litigant company. The legal department’s role is a very meaningful one.
Manjaree Chowdhary: In the present situation, it’s very important help your teams navigate. I think we are running through such a flurry of notifications, directives and regulations at every given level, from the centre down to the lowest authority. And if you happen to be an organization that is functioning across India, then you can multiply that by 20 times over. It really becomes a huge task.
To ensure that your commercial teams get up to speed fast, and are able to execute, support from the legal team becomes imperative. All of us here are a very seasoned and long-time general counsel, and as we all understand, business does want not “legalese”. They want simple, practical solutions as to how you can add, within the ambit of law, to try to run and do certain things that are practical.
For example, you know, social distancing becomes a challenge in certain situations. So, how do you manage that? What is the legal recourse for that? I continue to stress that we will have to very carefully adhere to the norms because it is [subject to] a criminal prosecution. It will all be very well when no one will come to say anything to you, until you have a few cases lodged against your organization. Then all hell will break loose, and then the local administration is completely going to forget about the great measures you put into place. The local authority will come down and seal your premises for a few days.
For larger companies, you will be in the news the next day, you know, and that is where the damage starts to happen. It becomes a trial by media more than anything else. You have to guard against all of that and, you know, push your teams to be compliant as far as possible.
There are going to be new opportunities out of this situation. The businesses will have to relook at many new things. In certain sectors, you’ll find a lot of mergers and acquisitions, and in others you will find new business models that will be invented, which will become highly digital, using more technology.
All of us belong to profit-making organizations. How do you as a team, support, partner with them, and get them quick solutions? Because, believe me, the pressure is going to be on, from the promoters and from the shareholders, to get the numbers, irrespective of the situations we are in. I think the legal team has a huge role to play, one of close partnership and one of trust.
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