We are in various phases of lockdown for over 100 days now. What kind of disputes and litigations do you foresee due to current pandemic and subsequent disruption?
The economic slowdown has caused greater scrutiny of covenants and obligations by lenders, investors/shareholders and Regulators. Consequently, we are likely to see an increase in actions based on anticipatory breaches without even waiting for the actual/ formal breach to occur.
There is near-zero tolerance for non-compliance. Hence, we can expect an increase in frauds being discovered. This will cause an increase in the number of civil, criminal and regulatory actions e.g. auditors will investigate whistleblower complaints or suspicious transactions even more carefully. Further, auditors may escalate the same to either the audit committee or Ministry of Corporate Affairs, even without waiting to issue their auditors report. This may also increase the number of shareholders disputes either between parties or through complaints to Regulators.
Last, lender/vendor/ landlord-tenant disputes on payments will rise on account of the slowdown. These disputes may find their way to court, as parties may at times prefer to litigate than pay, in order to use the funds as working capital, and take a chance with the busy court dockets. This will strain the court’s regular docket of work with such pandemic driven defaults/situations.
What kind of impact do you see on lenders and borrowers both due to the suspension of IBC for the period of six months?
The IBC has resulted in the best recovery amongst all methods available to lenders, both in terms of money and time. However, the success of the law in removing entrenched promoters and keep the business going has caused I-C to be singled out for suspension. India has not framed COVID-19 specific legislation like Singapore but has adopted a more ad hoc approach, such as suspension of IBC.
While one can understand the need to foster the engine of entrepreneurship in India, it may have been better if the suspension was balanced and allowed the creditors a corresponding extension of their right to sue as well. One can only hope that this is temporary, else the importance of repayment under debt contract fostered by IBC may be lost if this continues repeatedly. Last, any further extension of the IBC suspension may cause IBC to also join a league of creditor laws having great intentions but little effect.
Do you see disputes between lenders and borrowers, as well as other corporate disputes getting resolved through alternate mechanism, other than litigations, as they are costly and time-consuming?
Arbitration has established itself as the chosen form of dispute resolution in commercial contracts. The preeminence of arbitration is likely to be even more as court function in a limited format with fewer matters getting listed. Hence, commercial parties, who can afford the cost of arbitration will continue to use the same. Arbitral tribunals have continued to hear matters at length throughout the lockdown, making the location of the parties, arbitrators and counsel only an IP address.
Mediation and Lok Adalats are going to be used increasingly to de-clog court dockets. However, the game-changer is going to be the use of pre institution mediation as provided for under the Commercial Court Act 2015. This may help with easing the pressure on courts while providing the parties with the right to escalate and resolve disputes. It may be relevant for especially for landlord-tenant/vendor disputes as it allows a third party to effectively give the parties an independent assessment to an alternative to a negotiated settlement, which at times helps with efficient and economical resolution.
Can you identify the sectors and industries that will face maximum litigations and disputes in the current scenario?
We are likely to see increased stress in infrastructure, real estate and financial services. While the first two have been battered significantly, even prior to COVID-19, the pandemic situation may see increased disputes ranging from force Majeure, increase in costs and extension of time claims as well as termination disputes in long term contracts.
As regards the financial services space may find Increase in litigation. This may centre around misselling and in accounts where risk appraisals were either not done or done cursorily.
Regulatory filing around all sectors are likely to be scrutinised as well resulting in an increased disputes exposure. Newly constituted bodies such as NFRA and IBBI will try and assert their writ resulting in more litigation.
How can the government contribute in lessening the disputes in the current scenario?
The Government has dealt with the issue on multiple fronts. The most promising has been the call to arms on decriminalisation of petty/technical offences. This reduces the scope of harassment and helps de-clog courts, which permits courts to spend more time in adjudicating the more serious offence. This is definitely an idea whose time has come.
In addition, while various ministries have recognised COVID-19 as a Force Majeure event, there is inconsistency in recognising it’s effect. Therefore, it may help if the government voluntarily grants the uniform extension for contracts across all sectors as differing standards increase litigation.
Last, the Government should consider the promulgation of a National Litigation Policy which provides for a comprehensive, consistent and considered approach to Government litigation. This would help as the Government being the biggest litigant in the Indian court system will have the ability to end the litigations on a rule-based system i.e. without allegations of fear or favour.