The World Health Organisation (WHO) declared COVID-19 as a “pandemic” on March 11, 2020.
The outbreak and the rapid spread of COVID-19 has sent shock waves across global markets. It has disrupted supply chains, leading to the closure of several manufacturing facilities globally; serious disruption of air and sea traffic and closure of vital air routes, like the one between the US and Europe. This is turn has led to the collapse of stock markets around the world, leading to the loss of billions of dollars, which got wiped out in a matter of days. A combination of all these factors has led to a decline in the overall volume of global economic activity, forcing the world economy towards a possible recession. It is forcing Boards across the globe to confront a host of difficult questions on how business should be conducted during a global public health crisis.
We have received several queries regarding the impact of COVID-19 outbreak on businesses. CAM’s crisis management team is closely monitoring this global pandemic and its impact. Our legal professionals are well equipped to provide guidance to clients in this urgent and rapidly developing situation. To provide preliminary assistance to Indian businesses, we have prepared these FAQs to highlight some of the COVID-19 pandemic related key legal issues that companies should be thinking about in the current environment. You may refer to our earlier publication providing high-level analysis of the COVID-19 impact on India Inc.
A pandemic is defined by WHO as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people.” This means a disease outbreak will be labelled as a pandemic when it is widespread, over several countries or continents, usually affecting a large number of people. The disease must also be infectious – cancer affects many people around the world, but it is not infectious and hence it is not defined as a pandemic.
Until recently, WHO had stopped short of calling the outbreak a pandemic because local spread was limited, and most cases had a connection to China or other emerging hotspots – for instance Iran or Italy. But now, evidently, local transmission is widespread, with over 115 countries detecting the virus and more than 10 confirming at least 500 cases.
WHO declared a pandemic last in 2009 for the H1N1 influenza outbreak. At the time, the decision was criticised by some countries, which felt that it caused unnecessary panic. It also led to many nations wasting money on vaccines for a strain of flu that proved to be mild and relatively easy to contain.
COVID-19 has affected all three organs of the State, namely, the Legislature, Executive and Judiciary.
The Supreme Court of India (SC) has announced that from March 16, 2020, the SC will be hearing only urgent matters. The SC has also directed that only the lawyers acting on the matter, i.e., either for arguments or making oral arguments or to assist, along with one litigant only, will be permitted in the court room. The SC has also reserved the right to require thermal-screening at all entrants, and to deny entry to persons found to have high body temperature.
Similar restrictions have been announced by various courts, including the Bombay High Court, Delhi High Court, Karnataka High Court, NCLT, district courts in Karnataka and other tribunals. The restrictions include hearing of only urgent matters, requiring parties to show urgency on matters, which may thereafter be heard only upon the court’s satisfaction of the urgency, limiting the presence of litigants in matters to only those cases where it is mandatory/ unavoidable (such as in cases of anticipatory bail), closure of cafeterias, and potential thermal-screening of visitors to the courts.
The Government of India has issued several advisories pertaining to travel restrictions on account of COVID-19. Some of the key advisories issued as on [March 13, 2020] are:
The Government of India and State Governments have issued several advisories related to the COVID-19 pandemic. Some of the key advisories as on [March 13, 2020] are:
Under the Epidemic Diseases Act, 1897, which was enacted to provide for the better prevention of the spread of dangerous epidemic diseases, the Central and State Governments are empowered to undertake certain actions when they are satisfied that the State, country or any part thereof is visited by, or threatened with an outbreak of any dangerous epidemic disease and the ordinary provisions of law for the time being in force are insufficient for the purpose.
While the Central Government’s power is limited to ships/vessels and ports, the State Government is empowered to take, or require any person to take any measures, and by public notice, to prescribe temporary regulations to be observed by the public, or any class(es) of the public.
Several States have issued advisories on management and containment of COVID-19, invoking the provisions of the Epidemic Diseases Act, 1897. For instance, the Karnataka Epidemic Diseases, COVID-19 Regulations, 2020, and Haryana Epidemic Diseases, COVID-19 Regulations, 2020, were notified on March 11, 2020, the Delhi Epidemic Diseases, COVID-19 Regulations, 2020 notified on March 12, 2020; and the Maharashtra COVID-19 Regulations, 2020, was notified on March 14, 2020, (collectively, the “COVID-19 Regulations”).
Issued with immediate effect and for a period of 1 (one) year from its notification, some of the key features of these COVID Regulations are as follows:
Some state governments including Maharashtra, Karnataka, Delhi and Haryana have also issued directions to close places of mass gatherings, such as cinema halls, theatres, malls, schools, universities, swimming pools, conferences, workshops, etc., to contain the spread of COVID-19.
Employers are generally obligated to ensure a safe and healthy work environment for their workforce, and must do ‘everything reasonably possible’ to ensure prevention of COVID-19 outbreak at the worklpace. Employers may consider the following actions:
Unless the Government prohibits travel via public transport or to a place or country, the employer cannot prohibit such travels on grounds of COVID-19 outbreak. The employer may inform the employee of the latest travel advisories issued by the Government of India, and invite the employee to inform himself of the risks associated with such a trip and discourage such travel. If an employee travels to a high-risk area, the employer could inform the employee that he may be refused access to the workplace if the health and safety of the other employees are at risk.
An employer may prevent an employee who is suffering from communicable diseases like COVID-19 from entering the workplace for the protection of other employees.
The Karnataka State Government has issued a circular to employers requiring them to grant 28 days paid leave to employees affected by COVID-19. Therefore, employers in Karnataka would be obligated to provide such additional paid leave to their employees.
Given the communicable nature of the disease, it may be advisable for employers to allow affected employees to proceed on paid leave.
It is advisable not to terminate any employee on the sole ground that he/she is a COVID-19 patient or a suspected COVID-19 patient.
Since COVID-19 has been declared a pandemic, there is a likelihood that Governments may impose further restrictions on movement within the city or state, if necessary. In some states, including Karnataka, governments have advised IT/BT companies to allow their employees to work from home.
Therefore, if the nature of the work does not necessarily require employees to be physically present, the recommended course of action would be to ensure that all such employees work from home, even if this is not as per the usual policy of the establishment.
The employer should consider auditing available IT hardware and software, and close any gaps if required to ensure that the IT system is robust and functional during such remote access. It needs to be determined if there are any data security issues to consider and how best to address them. For the formulation of the work from home policy, employers may consider the following key aspects:
Another alternative that employers may explore is to ensure that half the work force comes to office for two weeks, with the other half working from home, followed by a switch for the rest of the two weeks in a month. This would also aid in implementation of the practice of ‘social distancing’ at workplace, as recommended by the World Health Organisation. This will ensure a minimum distance of a few feet is always maintained between two people.
Currently, there are no obligations on an employer to report an employee to the Government. However, under the COVID-19 Regulations notified by certain State Governments (as discussed above), individuals have an obligation to self-report visits to countries or areas where COVID-19 has been reported, and the Regulations provide for isolation of individuals with such travel history in the last 14 days (for individuals who are symptomatic and asymptomatic).
While there is currently no mandated special paid leave for employees who may have had a potential exposure to COVID-19, employers may be advised to provide employees who show symptoms of COVID-19 to proceed on paid leave. The employer may also ask the employee to seek appropriate medical attention for the same.
An employee who has contracted the COVID-19 virus should be asked to go on sick leave, and only return to work upon producing appropriate certification from a company-approved medical practitioner. Employers should stay updated with the Government guidelines, any orders and directives issued by the local bodies, and report suspected or confirmed cases, as necessary, while always ensuring that confidentiality and data privacy obligations towards the affected employees are maintained.
Employers should consider developing protocols to deal with inter alia: (i) employees returning from travel (whether business or personal); (ii) employees who have been exposed to either confirmed or potential cases of COVID-19; (iii) employees who have symptoms similar to COVID-19, but have not yet been diagnosed; (iv) employees who have tested positive for COVID-19; and (v) consequences and implications of breach of protocols (specifically, of breach of those measures mandated by Government regulations/guidelines). Protocols should cover whether self-quarantine should be requested or required, what reporting is mandated (under law and under company policy), what leave policies will apply and the work-from-home norms and guidelines.
Specific self-quarantine and self-reporting measures as set out in the regulations framed by the State Governments may be included in such protocols.
Information pertaining to medical status or history will constitute sensitive personal data and consent should be taken from employees for collection, disclosure or other use, as permitted under the privacy policy or applicable law. Where there is sufficient language in existing terms of employment (or employee handbooks) around conduct of health checks or actions being taken to ensure employee safety, in such a situation it may be relied on to infer consent. Additional consents may be obtained as needed.
In case an employee refuses to divulge any such information, or refuses to let collection or processing of such information, the employer may take such measures as permitted under the terms of employment to the extent such measures are required to protect the health and safety of other employees at the workplace. Please note that information can be collected, disclosed or processed independently of the above constraints where a legal requirement to do so exists, pursuant to specific directions of State or Central Government or under applicable law.
The impact of COVID-19 is currently varying from country to country. Employers with expats or other employees working abroad should consider reviewing the relevant employment agreements to assess any risks, especially provisions relating to travel, leave, compensation, medical and insurance policy coverage. Employers should consider insisting expat employees to regularly report on the prevailing conditions at their workplace related to COVID-19. If an expat or employee is quarantined abroad, employers should seek legal help to obtain specific advice. The applicable laws vary from jurisdiction to jurisdiction and some countries impose stricter obligations relating to employers’ duty of care.
Given the supply chain disruption caused by the COVID-19 pandemic, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. Counterparties (especially suppliers) to such contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts, either because COVID-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal. Further, companies may not be able to perform their obligations under their customer agreements because of their suppliers’ non-performance and may in turn seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts. Parties may also cite COVID-19 as a basis for renegotiation of price or other key contractual provisions (e.g. volume of materials exported from or imported into affected areas due to shifts in supply and demand). In this context, it is important to determine if COVID-19 will be considered as a ‘force majeure’ event.
The law relating to Force Majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Typically, force majeure events include an Act of God or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force Majeure is an exception to what would otherwise amount to a breach of contract. Whether a contractual obligation can be avoided on the grounds of force majeure is a factual determination based on the specific terms of the contract. The courts would examine, whether in each case, impact of COVID-19 pandemic prevented the party from performing its contractual obligation. Indian courts have generally recognised this concept and have enforced it where appropriate. The law in India has been laid down in the seminal decision of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co. (AIR 1954 SC 44). The entire jurisprudence on the subject has been well summarised by Justice R.F. Nariman of the Supreme Court in a recent decision in the case of Energy Watchdog vs CERC (2017) 14 SCC 80.
Force majeure related language used in most contracts vary widely and, therefore, it is important to review these clauses carefully. Some contracts list specific examples of force majeure events that automatically meet the standard upon the happening of such event, while others rely on generic language usually included in such force majeure clauses.
A force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation.
A COVID-19 pandemic could make it more difficult for parties to perform their contractual obligations. There are two possible instances, which may suggest that a force majeure clause covers a pandemic: (a) if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether COVID-19 outbreak would trigger a force majeure clause in a contract; or (b) if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party. Having said that, whether a party can be excused from a contract on account of COVID-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.
The party claiming force majeure is usually under a duty to show that it has taken all reasonable endeavors to avoid or mitigate the event and its effects. This is a subjective standard and will be interpreted on a case-to-case basis. The force majeure event or circumstance must be causative to the contractual breach and a party claiming force majeure is typically required to establish that it was the force majeure event (and not some other factor) that caused the party to be unable to fulfil its contractual obligations.
Most contracts provide that for an event to qualify as force majeure, it must be unforeseeable or not reasonably foreseeable at the time of execution of the contract.
Force majeure clauses commonly contain a prompt and time bound notification requirement, which can operate as a contractual condition precedent to relief or not. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to invoke force majeure.
Courts place the burden on the party asserting force majeure defense to demonstrate the existence of force majeure. Such clauses are construed strictly by the courts.
The language of the force majeure clause will determine the remedies available to the parties.
Some contracts may provide for immediate termination of the contract upon the happening of the force majeure event. Others may provide that the contract will be put on hold until the force majeure event is resolved. Some contracts may provide for limitations in time after which either party may terminate the agreement with written notice to the other (i.e. if non-performance caused by the event is prolonged or permanent). Others may require the contract to remain in effect until the force majeure event is resolved. Some contracts will only allow for certain obligations to be suspended.
On February 17, 2020, the China Council for the Promotion of International Trade (CCPIT), revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over USD 15 billion. In India, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on February 19, 2020, in relation to the Government’s ‘Manual for Procurement of Goods, 2017’, which serves as a guideline for procurement by the Government. The Office Memorandum effectively states that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a ‘natural calamity’, caveating that ‘due procedure’ should be followed by any Government department seeking to invoke it.
However, while such a certificate may be used to argue that a contract cannot be performed, COVID-19 is unlikely to give rise to a valid force majeure defense under every contract and in every circumstance, as different contracts and governing laws stipulate different requirements for different situations. Companies are, therefore, well advised to proactively manage the related legal risk and carefully assess which party must ultimately bear the financial losses caused by COVID-19.
If the contract does not include a force majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible by reason of some event which the claiming party could not prevent and that the impossibility is not self-induced by the claiming party or due to his negligence.
Counterparties may also attempt to invoke other contractual clauses like price adjustment clauses, material adverse change (MAC) clauses, limitation or exclusion clauses, to limit or exclude liability for non-performance. The ability to invoke such other grounds will depend on the wording of the relevant clause, and how the clause is construed by courts. Further, companies should also consider the ramification of non-performance clauses under the contracts, such as liquidated damages clauses, under which the amount of compensation for non-performance has been predetermined and agreed by the parties.
Companies may consider the following curative actions in connection with their commercial contracts:
The Board has an obligation to be reasonably informed and use good faith efforts in overseeing a company’s operations. A critical responsibility of the Board in this regard is its oversight of material risks to the company. Management should keep the Board sufficiently well informed and engaged to enable the Board to consider and understand material risks posed by the COVID-19 outbreak and their potential magnitude, as well as managements’ plans to mitigate and address those risks.
Each company, depending on the nature of its business, is likely to experience a unique impact caused directly or indirectly by COVID-19. The Board should ensure that: (i) the appropriate senior management team report to the Board on key risks arising out of COVID-19 pandemic; (ii) the Board understands those key risks; (iii) professional advisers assist, if necessary and appropriate, in identifying, managing and mitigating the risk; (iv) a contingency plan is put in place for foreseeable scenarios; and (v) it monitors the ongoing implementation of its decisions and guidance and remains sufficiently flexible to respond to the evolving situation. Specifically, the following aspects and their implications should be considered by the Board:
The Board needs to engage with the management team to evaluate business continuity risk, in case supply chain is disrupted for any critical raw material and empower the management team to take quick decisions in such situations, requiring immediate and prompt action.
The Boards should ensure that the management teams put in place fast-action plans in order to deal with the COVID-19 pandemic. The management team should contemplate situations where supply could be disrupted for prolonged periods and should liaise with suppliers to understand the extent to which their ability may be hampered. At the same time, the Board should empower the management team to commence negotiations with alternate suppliers in different countries to mitigate all possible risks.
It is vital for the Board to communicate with shareholders regarding the company’s assessment of potential impact of the COVID-19 pandemic and the company’s action plan to tackle the situation. Re-assessment of revenue and profitability projections may be required. It is of utmost importance to maintain confidence of shareholders, particularly for companies that have suffered disproportionate impact of this epidemic.
A constant communication with consumers should be maintained in order to keep them abreast of any disruption of services and allow them the opportunity to secure alternate sources of supply. The company may also consider the possibility of offering an alternate supply link to the customer. If the company is engaged in providing vital products or services, it should also be prepared to deal with possible litigations, if the company is not able to meet orders or experiences significant delays.
Listed entities would need to ensure that if there is a material effect on the business or operations of the company, whether arising directly or indirectly on account of the COVID-19 pandemic (e.g. closure of an important manufacturing facility due to supply chain disruptions), the required intimation needs to be sent to the Stock Exchanges where the company’s shares are listed. Disclosures and communication about the current and potential impact of the COVID-19 outbreak on the business and operation should be carefully planned and coordinated with the legal teams to ensure compliance with applicable law.
It is expected that the MCA and SEBI may announce relaxation in the rules and permit companies to hold an Extraordinary General Meeting (EGM) and Annual General Meeting (AGM) of shareholders virtually to avoid physical congregation of shareholders and the possible spread of COVID-19. No official announcement has been made so far. However, there is every likelihood that such an announcement may be made if containment measures for COVID-19 fail beyond April 30, 2020.
Whether a MAC has or has not been triggered would need to be assessed on a case by case basis, depending on the impact of the event on the target company and would depend heavily on the specific wording of the MAC clause. Factors to be considered to assess whether a MAC has been triggered would include:
All in all, unless the COVID-19 pandemic clearly fits into an exception to the applicable MAC definition, it will be based on the judgement of the courts/ tribunal as to whether a MAC has occurred. While Indian courts have historically been reluctant to excuse buyers from their obligations to consummate a transaction on the basis that a MAC has occurred, it will be interesting to watch how the jurisprudence evolves given the current situation.
With respect to M&A transactions that are currently under negotiation, parties should consider specifically addressing how the COVID-19 pandemic should be treated in the agreement. This will provide clarity about the risk that could impact the transaction. Sellers are likely to suggest that any negative effects from the COVID-19 pandemic cannot impact the transaction. Buyers may not be willing to take risks arising from the COVID-19 pandemic. Given the courts’ approach to strictly interpret MAC clauses, buyers should not rely on general terms and they should negotiate a specific closing condition, if commercially required, regarding the spread of the COVID-19 outbreak. Sellers are unlikely to take deal execution risks relating to COVID-19 and are likely to push back on the buyers seeking specific closing conditions or pause the transaction to allow the COVID-19 pandemic and its consequences to play out. As in any other case of a known risk, parties will need to find a mutually agreeable position and document the same clearly.
The COVID-19 pandemic may significantly reduce accessibility, communication and physical meetings. Sellers should consider including information in the virtual data room about the possible impact of the pandemic on the target including, relevant, appropriate mitigation and contingency plans. Buyers should consider conducting due diligence on the level of risk to business continuity and on the target’s scenario planning. Further, COVID-19 pandemic may cause delays to due diligence activities, including the impossibility to conduct on-site audits and inspections, and exercising the relevant access rights. For all these reasons, the opportunity to negotiate a later long-stop date, allowing extra time to complete the due diligence, should also be explored. From the buyers’ perspective, the following aspects should be considered while conducting due diligence:
Sellers should consider whether standstill covenants – i.e. obligation to operate the business of the target in the ordinary course of the business and to refrain from taking certain actions without buyer’s approval – may conflict with a target’s need to respond to the COVID-19 pandemic, and whether any carve outs are required. Sellers should assess ways to limit interactions or potential exposure to COVID-19 across their supply chains. They will also have to look at how it might be construed and whether a buyer’s consent would be needed to undertake such actions. Parties should also evaluate whether to extend closing deadlines where delay is likely to be caused by the COVID-19 outbreak. Additionally, if a possible impact of COVID-19 on the target is identified during due diligence, buyers should consider including a condition precedent to protect themselves from its impact.
Buyers should consider requesting warranties around risk assessments, scenario planning, adequate insurance and adverse impact of COVID-19. Sellers conceding these should seek knowledge and materiality qualifiers.
Sellers should consider a general COVID-19-related exclusion of liability. Ring-fencing of such clauses may be explored such that COVID-19-related claims can only be made under specific warranties and not under general warranties. Buyer’s knowledge, changes in law and other limitations may also be relevant in this context. Where warranty insurance is being considered, the COVID-19 outbreak could also impact exclusions in the policy.
Sellers should carefully evaluate the need for COVID-19-related disclosures (for example against material contracts warranties), being as specific as possible to satisfy any requirement for fair disclosure.
The disruption brought by the COVID-19 outbreak may also result in certain representations and warranties given by a seller and target no longer being true when repeated at closing. All parties should conduct a comprehensive assessment of the impact that the COVID-19 outbreak may have on the representations and warranties.
The challenges posed by the COVID-19 outbreak may cause delays in closing of M&A transactions – for instance, if conditions precedent require a court order or regulatory approval to be obtained, the same may be delayed on account of various emergency measures, which have been put in place. The parties required to satisfy any closing conditions that may be delayed should consult with their counterparties to manage expectations and negotiate the appropriate waivers. Parties may consider moving certain closing conditions to the post-completion covenants or extending the long-stop date. The persistence of the COVID-19 pandemic may also lead to the occurrence of a range of termination events. The parties should evaluate carefully if a termination event has occurred or is likely to occur, due to the present COVID-19 situation and its foreseeable impact.
With exceptional travel restrictions and safety measures being imposed by various governments, it may not be possible (or advisable) for in-person meetings to be held, which may impact negotiations, signing and internal management of both parties. Parties should consider re-arranging their schedules accordingly and ensuring a secure access to support remote and virtual communications.
Parties should conduct a careful review of the financing documents to analyse actual and potential default(s), which could be caused by the COVID-19 outbreak including, but not limited to, material adverse effect, financial covenants, cessation of business covenant, litigation-related provisions. Borrowers should also review the following aspects under the financing documents:
It is also likely that borrowers may in the short-term face liquidity mismatches, rendering them unable to repay their debts as and when they fall due. From a governance perspective, where the management and/ or boards of borrowers are of the view that there is a clear likelihood of the borrower not being able to discharge all its debts, there should be greater care to ensure that there is no preferential treatment of a creditor (or class of creditors) over another.
It is also worth noting that unlike some contracts, there are typically no defences or mitigating factors under financing transactions (such as force majeure or frustration of contracts) when it comes to the obligation of borrowers to repay their debt.
Borrowers will be required to assess if the changes to the business environment in the foreseeable future on account of COVID-19 are likely to adversely impact their ability to discharge their obligations under the financing documents or trigger other provisions, such as having to provide additional security on account of a deterioration in the collateral cover, or mandatory prepayment obligations, which may get attracted on account of such provisions. Some of these may, in the first instance, necessitate disclosure obligations under the financing documents, which borrowers and obligors should do promptly. Care should also be taken to assess whether any part of such information could be classified as price-sensitive information and whether (in addition to its lenders) a public disclosure would also be required.
Lenders should have a clear understanding of the rights afforded to them under the financing documents. In doing so, however (and assessing which of these rights they may want to exercise), lenders are also likely to be mindful of the anticipated liquidity challenges and related impact, which COVID-19 may have on the ability of the borrower to continue operating in the ordinary course, at least in the short term. Given the uncertainty regarding the extent and duration of COVID-19, lenders may also instead focus on short-term arrangements, which would balance the need to stabilise the affected businesses and protect their own interests, which may range from limited waivers to additional/ short-term financing, depending on the requirements of the businesses.
Every company impacted by the COVID-19 outbreak would need to consider if adverse financial consequences of business interruption resulting from COVID-19 can be claimed under the insurance policy. Companies should review their existing business interruption insurance policies to protect themselves against any losses sustained from exposure to the epidemic. The extent of insurance cover available to a company will depend on the specific terms of each policy. However, the following aspects should be considered:
It may also be advisable for the company to contact the insurance company and obtain a written confirmation regarding the specific coverage of the policy. Specific clarification should be obtained as to when COVID-19 will become a notifiable event for claiming insurance and determining the relevant loss period.
Insurance Regulatory and Development Authority (IRDAI) on March 04, 2020, issued a circular stating that where hospitalisation is covered in a health insurance product, insurers should ensure that the cases related to COVID-19 are expeditiously handled and all expenses incurred during the course of treatment, including during the quarantine period, must be covered by all the insurers subject to the terms of the policy contract and extant regulatory framework. IRDAI has also asked insurers to offer need-based health insurance plans to cover the cost of treatment for coronavirus. Also, all claims reported under COVID-19 shall be thoroughly reviewed by the claims review committee before repudiation. This is relevant in the context of employee-related insurance obtained by companies.
Post COVID-19 being termed as a pandemic by WHO, insurers may deny claims if pandemic and outbreaks are expressly excluded under the terms and conditions of the policy. Most standard insurance policy contracts exclude pandemics from coverage because they are considered a high-risk item with unnaturally higher level of claims. Actuaries are also unable to calculate the risks related to possible pandemics as the situation is very different each time and depends on the underlying disease each time. Some policies exclude epidemics and pandemics altogether, whereas some policies cover medical costs overseas in relation to pandemics and epidemics, but not cancellation costs or loss of bookings.
In such a scenario, several factors will determine whether one’s claim will be covered:
The spread of COVID-19 has already resulted in an increase in companies experiencing financial distress as they try to mitigate the financial impact of supply chain issues coupled with lower customer demand. The impact of COVID-19 has been substantial on certain industries, such as civil aviation, ports & airports, hospitality, tours & travels, and retail to name a few. There has also been a signification impact on the manufacturing industry due to disruption in supply change, unavailability of raw material and a drop in demand. If the current situation continues (or worsens), there may very well be some cases of insolvency filings, which are necessitated.
While larger companies (or those forming part of a large group) may be better placed to deal with working capital requirements (which are likely to be exacerbated on account of the COVID-19 outbreak), Small to Medium Enterprises (SMEs) are likely to face a more challenging scenario. Therefore, a disruption in the operating capability of SMEs (which is also dependent on their respective counterparties – both on the demand and supply side) may result in them being disproportionately affected by the COVID-19 pandemic, specifically on operational and solvency concerns.
In the context of payment defaults, creditors – both operational as well as financial – will need to evaluate and assess their respective options, specifically under the current circumstances. Lenders are also likely to assess whether enforcing security (where available) or initiating insolvency proceedings is the most feasible outcome. Therefore, while insolvency is a legal option available to creditors, it is unlikely that they will resort to it in the first instance.
Companies suffering or anticipating solvency issues should consider proactively engaging with their lenders and other stakeholders to negotiate waivers or restructuring (where required) to ensure continuity of business. Contractual waivers and forbearance options may be explored in this regard. The available options and the conditions to any financial support will depend on the severity of the company’s financial crisis, the terms of its financing arrangements, and other factors that may be unique to the stakeholders of the relevant entity. A careful analysis of the facts would be required in order to chart the best course.
While the full impact of the COVID-19 outbreak on businesses is not clear at the moment, and the outbreak is likely to spread in the coming days, and it is seemingly becoming critical by the week. If you would like to discuss any of the issues highlighted in this paper or any other legal implication in relation to the COVID-19 impact, please feel free to reach out to us.
*The author would like to thank Nivedita Rao, Rashmi Pradeep, Shaneen Parikh, Arun Prabhu and Abhijeet Das for their valuable suggestions.
