The COVID-19 pandemic has changed the business world as we know it. New problems, challenges and questions are rearing up their ugly heads.

During the webinar that addressed the applicability of Force Majeure on Contractual Obligations and Current Government Relaxations on MSMEs, many SMEs had questions that I along with my team have attempted to answer here:

 1. Can company take loan for current payments like rent, salary as all the payments are not released. After the post situation.

Presently there appear to be no restrictions prescribed by the Reserve Bank of India (“RBI”), on a company availing loans provided that the lending institution is agreeable to extending loans to the company on a bilateral basis. This will also depend upon the company fulfilling the eligibility criteria pertaining to such loans and meeting other prerequisites prescribed by the lending institution for being granted loans.

2. Government of Gujarat has sent a notification to workers connected with the manufacturing of essential commodities, saying if they do not remain present at the factory, the employer can deduct his wages. Presently absent workers are demanding wages even if they are not coming for work. How should we handle this, legally?

The resumption of essential services and manufacturing activities can be done, however the standard operating procedures prescribed for MSMEs including for social distancing, transport, sanitisation, medical facilities etc. must be adhered to at all times. While it is correct that the Ministry of Labour and Employment vide its circular dated 20 March 2020 has issued an advisory to all the public and private establishments to not terminate their employees, including casual and contractual workers from job and not to reduce their wages during the period of the lockdown. Any warranted disciplinary action for a worker in the essential services or manufacturing industry may be evaluated on merits if an employee who is not a COVID -19 patient or in direct or indirect contact with a COVID -19 patient refuses to come to work.

3. What are the immediate measures the Central Government is intending to make for MSME'S as they would be the most disrupted?

Basis the information available in public domain, the measures that the Government may consider taking, inter alia, includes the following:

                    (i) On 17 April 2020, the Central Board of Direct Taxes, in order to provide relief to the MSME sector announced that it is in process to release tax refunds to the tune of INR 7,760 Crore. Such refunds will help the MSMEs to carry on their business activities and ensure that there are no pay cuts and laying off solely on account of the pandemic. However, it is pertinent to note that only such MSMEs who have paid advance taxes will benefit from this.

                  (ii) The MSME Minister Mr. Nitin Gadkari, vide press release dated 14 April 2020 expressed that he is striving to increase the existing credit guarantee limit available to MSMEs from INR 1 lakh crore to INR 5 lakh crore wherein 75 % of the advances granted by the financial institutions will be guaranteed under the Credit Guarantee scheme of the government. This will help MSME’s to avail collateral free term loans or working capital loans to meet the financial requirements of their business.

                (iii) The Finance Minister Mrs. Nirmala Sitharaman, vide press release dated 24 March 2020, announced that they may consider suspending the application of sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for a period of 6 months if the pandemic extends beyond 30 April 2020. This means that the creditors will not be able to push the SME’s into insolvency proceedings on account of non-fulfilment of their obligations for a period of next 6 months (if implemented). Alternatively, the SMEs will not be able to file an application under section 10 of the Code to declare themselves as insolvent.

4. How will non-compliance by an appraisal agency on the notification issued by Government of India for appraising projects be treated? Would it be considered a violation, breach or a criminal offence?

All the appraising agencies shall collect data and review for violations under different directives and advisory issued by Government of India. It remains to be seen what actions may be taken, however, it is pertinent to note that, a failure to comply with the directives issued by the Central Government or the State Government under the Disaster Management Act, 2005 and State Government directives under the Epidemic Disease Act, 1897 on account of COVID-19 will attract penal consequences.

5. If a loan is already in the NPA status will the moratorium period be available for the NPA loan amount? Would this be applicable to the overdue principal and interest amount?

As per the Regulatory Package issued by RBI moratorium benefit is at the option of the lender, and if granted, is only applicable to dues falling between 1 March 2020 and 31 May 2020 (“Moratorium Period”). Therefore, if an account is already an NPA before March 1, 2020, the dues already outstanding as on March 1, 2020, do not get the moratorium benefit.

6. Does Force Majeure apply for EMI payment?

As per the Regulatory Package, RBI has permitted all the lending institutions to grant to the borrowers a moratorium for a period of 3 months on payment of instalments with respect to term loans, falling due during the Moratorium Period. Such instalments also include equated monthly instalments. Accordingly, the residual tenor and the repayment schedule of the eligible term loans shall stand extended by 3 months. However, it is to pertinent to note that interest on the outstanding portion of the dues will continue to accrue. Also, please note that force majeure is a contractual arrangement and will only apply if the loan documents expressly provide for a force majeure clause. In our experience, lenders do not usually include force majeure clauses favouring borrowers in loan documents.

7. Is there is any provision for extension of date of commencement of commercial operations (“DCCO”) for term loans due to the lock down scenario?

On 7 February 2020, RBI had permitted banks (i.e. Scheduled Commercial Bank and all Small Finance Banks) to extend the DCCO for commercial real estate projects delayed for reasons beyond the control of promoters by an additional one year over without treating the same as restructuring. As per the Governors Statement on 17 April 2020, it has now been decided to extend a similar treatment to loans given by Non-Banking Financial Companies (NBFC’s) for commercial real estate projects. This move will benefit both, the NBFC’s and also the real estate sector.

With regards to any legal support please connect with me.

Also read: Review of Foreign Direct Investment (FDI) policy

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