View: Why India needs courts more than a vaccine

On a day when global equities rallied celebrating the possibility of a vaccine to prevent Covid-19 cases, Indian stocks slumped. Both were reflections on how investors perceive a post-Coronavirus world.

What tests at Moderna revealed gave hopes of a fear-free future. A good intentioned but ill thought of idea to suspend the Insolvency and Bankruptcy Code for some firms in India signaled a muddier business climate, thanks to the snail-paced judicial process.

As administrators digested the fallout of the lockdown, they readily granted a three-month moratorium on payments to banks. In a business and commerce chain there are more parties involved than just the borrowers and lenders.

While the Reserve Bank of India’s moratorium takes care of one-leg of economic activity, i.e., between banks and borrowers, other uncovered areas expose businesses to a bigger threat.

Many companies including Eicher Motors, Adani Gas, Indian Oil and GAIL have declared force majeure, a clause that grants immunity from litigation for breach of contractual obligations. It provides a scope to renegotiate contracts.

Established firms with a battery of lawyers design contracts that protect them from unexpected situations, but lakhs of other businesses do not have that luxury.

During this unprecedented lockdown, where little economic activity took place, cash flows have just dried up leaving millions with no option than reneging on contracts.

Many of the British-era legislation have been stifling, but Section 56 of the Indian Contract Act of 1872 could well come to the rescue of these to fight against any claims.

It deals with the `frustration of contract’ that could be invoked by any business which has been affected by events beyond its control.

In this test of survival for businesses, to believe that IBC could shutter businesses was short sighted. The government may have suspended the application of IBC, but it can’t do so with the Indian Contract Act. Commercial disputes instead of landing at the National Company Law Tribunal, would end up at civil courts, a horror even Alfred Hitchcock wouldn’t want to experience.

This is what Law Minister Ravi Shankar Prasad told the Parliament on March. 11: Total pending cases in the Supreme Court is 60,603 as on March 3. The number of cases awaiting judgement in High Courts is 46.15 lakhs, and it is 3.19 crore cases in district and subordinate courts. It is common knowledge that many of these cases are in cold storage for years, if not decades.

What would be the fate of businesses if they were to return to civil courts to resolve disputes instead of the time bound resolution via IBC. It’s a different matter that the NCLTs are also subjected to similar abuse of delay with innumerable excuses.

“The blanket ban may give a tool in the hands of unscrupulous borrowers to delay and defeat the objects of IBC,’’ says Rajesh Narain Gupta, managing director at RNG Partners. “What happens to the cases which were doubtful or bad before Covid and where the borrower may take undue advantage. What kind of alternate remedy the lender will have is not clear.’’

Covid-19 has come in handy for those abusers. Every bankruptcy case does not mean liquidation. It is a legal protection to reorganize business that’s becoming unviable with prevailing financial metrics.

The lockdown was a measure to prevent a surge in Coronavirus cases. The administration should have thought of similar measures on how to deal with a surge in litigation instead of turning Nelson’s eye to it.

Instead of suspending IBC, it should have planned to increase the judiciary’s capacity to deliver quick resolutions. An exclusive law to deal with business disputes arising out of Covid-19 may be necessary if the economy has to bounce back quickly. Furthermore, scores of new courts to deal with these disputes need to be set up, even if it means pulling judges out of retirement to fill them up.

Suspending the bankruptcy law is to reverse this government’s best reform measure for businesses and an injustice to its former Finance Minister Arun Jaitley who was behind it. That law is a tool to keep businesses alive and not kill. Rest of the world may turn better with a vaccine, but not having a judicial system to quickly resolve Covid-19 related disputes, India may end up keeping zombie companies alive than agile ones.

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