India Needs Legal ‘Circuit Breaker’ to Save Economy Amid COVID-19

The lack of economic activity could be the proverbial final nail in the coffin for small and medium businesses.

Published
Opinion
4 min read
The coronavirus lockdown may get extended but the economy needs to get back on track, too.
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It has been clear for some time now that the coronavirus crisis is not just a matter of public health, but perhaps the greatest challenge to economies around the world as well – and India is no exception to this.

The nationwide lockdown measures – although necessary – have ground economic activity to a halt, and are now set to continue till 3 May, which is only going to mean further disruption to Indian businesses.

What we need in these troubling times is a law that permits parties to defer their contractual obligations due to the impact of measures to contain COVID-19. A ‘circuit breaker’, as it were, to help small and medium sized businesses navigate a unique period in history, when they have been brought to a hard stop.

Why Government Must Act

The world is faced with a recession of record dimensions – almost 10 million people have sought unemployment benefit in the US; and an estimated 50 million people (who are also consumers) are expected to lose their jobs in India.

These are mind-boggling numbers, which even the most resilient government would be hard pressed to deal with, and that too in just a matter of three weeks.

Should the Indian government intervene and staunch the flow of blood or should it consider that employment or economic buoyancy are a function of the market and let them balance themselves with time?

The answer is clear: the bottom has fallen out, and this is that rare moment when the government will have to step in and legislate to protect weaker sections of society and small businesses like lorry owners, cabs, autos, food and beverage businesses, and medium sized businesses from collapse.

These affected parties should be permitted the opportunity to claim force majeure as a right, defer the performance of contractual obligations, without being circumscribed by contract, or be compelled to declare that contracts are frustrated – with its attendant consequences.

The government must contemplate such action in the backdrop of some salient principles: (a) we are a country governed by the rule of law; and (b) the government, or for that matter the courts, do not generally interfere with private contracts between parties or alter the performance of obligations.

Still, such intervention would not be without precedent.

If the Americans Can Do It...

During the Great Depression, Minnesota passed a law that allowed its courts to extend the period of redemption from foreclosure sales for any time that was believed to be just and equitable.

This was challenged by mortgagors as unconstitutional, since the United States’ Constitution expressly bars the enactment of any law which impairs performance of contractual obligations.

The case ultimately made its way to the US Supreme Court which held that the state has a duty to safeguard the vital economic structure upon which the good of all depends and upheld the Minnesota law which in effect allowed mortgagees to defer performance of their obligations during the Depression.

If such a thing was possible in the US, which believes in pure free market capitalism, then why not a similar law in India?

The Singapore Example

Interestingly, while Indian Constitution guarantees freedom of trade, it also says it is open to the state to impose such restrictions as may be necessary in public interest. As a result, the government could very well enact a law under the framework of the Constitution.

This would retain freedom of contract, not alter the terms – only defer some of them for a limited period and achieve the objective of injecting liquidity into the hands of contractual parties and be that much needed legal ‘circuit breaker’ we need at this moment.

This would help supply chains, vendors, employees, consumers, small businesses, which make up that vital underlying circuitry of the economy from permanent damage. After all, without their help, we cannot expect the economy to rise again.

The Singapore government has already introduced the COVID-19 (Temporary Measures) Act, 2020 which seeks to give temporary protection to contractual parties from being sued and prohibits certain actions from being taken against counterparties or their guarantors if the inability of the counterparty to perform such contracts is to a material extent caused by COVID-19.

The law applies to leases, construction or supply contracts, performance bonds, contracts relating to goods and services, certain secured loan facilities, etc, which are termed as scheduled contracts. It has been made retrospectively effective from February.

The Singapore law does not absolve parties but allows them to suspend their obligations for a fixed period. It also relaxes certain compliance requirements under the company law pertaining to meetings and filings.

What Can India Do?

While we have increased the threshold for insolvency proceedings to one crore from one lakh in India, we have not nearly gone far enough. We need a law that permits parties affected by COVID-19 to suspend their contractual obligations for a limited period. India is now undergoing an unprecedented 40-day lockdown.

Many sectors, such as aviation, manufacturing, infrastructure, construction, media, were barely surviving in a slowing economy before the impact of the epidemic. The Indian economy is not also expected to grow at more than 1.9 percent this year.

The epidemic and the lack of economic activity could also be the proverbial final nail in the coffin for the small and medium scale sectors and the urban gig economy.

A contractual moratorium is therefore the need of the hour. Even a small measure like allowing businesses to defer rentals for a limited period or not penalising small contractors for delaying supplies or removing the need to deposit the entire margin money for bank guarantees would go some way.

Restaurants, media, consultants, professionals, small shops are going to see tumultuous times and need to preserve liquidity for the hard months up ahead. We would, therefore, need to borrow some of the vital design features of the Singapore law and enact a similar law and ensure that our circuits are preserved.

(The writer is a partner at Delhi-based law firm MSA Partners. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

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