COVID-19 and its legal impact on companies: What India Inc needs to look out for

Amid the coronavirus outbreak which continues to spread thick and fast, the impact of the disease on domestic and international business is severe. There are several legal questions arising out of the outbreak and to assist India Inc., a new report has come out with related key legal issues that companies should watch out for in the current business environment. 

The report has been released by a legal firm, Cyril Amarchand Mangaldas. It lists the following areas which companies need to look at: Supply Chain Disruption, Impact on M&A Transactions, Insolvency, Corporate Governance & Disclosures, Workplace Issues and Insurance Coverage. 

Supply Chain Disruption

“Considering the supply chain disruption caused by the COVID-19 outbreak, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled,” the report says. Suppliers to contracts may seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or terminate contracts, either because COVID-19 has legitimately prevented them from discharging their contractual obligations, or because they are seeking to use it as an excuse to get out of an unfavorable deal. Further, companies may not be able to perform their obligations under their customer agreements because of their supplier's 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. In this context, the report states that it is important to determine if COVID-19 will be considered as a ‘Force Majeure’ event. 

The Ministry of Finance issued an Office Memorandum on February 19, 2020, which effectively states that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a 'natural calamity', with the rider that 'due procedure' should be followed by any Government department seeking to invoke it. “However, COVID-19 is unlikely to give rise to a valid force majeure defence under every contract and in every circumstance, as different contracts and governing laws stipulate different requirements for different situations,” the report says. 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.

Impact on M&A Transactions

“The outbreak of COVID-19 may impact M&A transactions and the parties to M&A transactions should carefully examine the terms of their transaction documents and consult with their counterparties to promptly address the challenges brought by COVID-19 outbreak,” the report says. Some of the key issues are: Material Adverse Change, Pre-Completion Undertakings, Warranty Limitations, Disclosure, Delayed Closing of M&A Transactions, Breach of Representations, Termination Events. 

Insolvency

The spread of COVID-19 has already resulted in an increase in companies experiencing financial distress as they try to mitigate the financial impacts of supply chain issues coupled with lower customer demand, the report states. “Companies with already high debt levels are finding existing credit lines withdrawn at a time when they are needing to pay suppliers who are able to deliver on time while not receiving customer payments.” As a result, companies may be forced to seek formal and informal protection from their creditors, the report says, adding that increased insolvency is expected in more distressed cases.

Corporate Governance & Disclosures

Against the backdrop of the COVID-19 outbreak, it is critical that the Board of Directors understand the scope and extent of their statutory and fiduciary duties. Directors are required to exercise reasonable care, skill and diligence, and to act in the best interest of the company, the report states. Some key considerations for the Board of Directors are: Business Continuity Risk, Fast-Action Plans, Consumer Connect, Shareholder’s Interest, Regulatory Disclosures. 

Workplace Issues

The report states that the COVID-19 outbreak could begin to throw up a variety of employment law issues relating to travel, health and safety concerns, sickness and absence. Some of the key issues which employers should consider are: Employer’s Obligations, Leave entitlement, Termination, Work from Home, Entry into Workplace, Respect Employee Privacy. It is critical for employers to plan ahead and behave proportionately, reasonably and consistently. “A failure to do so will not only risk legal claims, it may also impact adversely on staff morale and damage future employee relations,” the report adds. 

Check Your Insurance

Every company impacted by the COVID-19 outbreak would need to consider if adverse financial consequences of business interruption resulting from the disease 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 report says. The extent of insurance cover available to a company will depend on the specific terms of each policy. 

“While the full impact of coronavirus on businesses is not clear at the moment, and the outbreak is likely to spread in the coming days, this is an issue which is seemingly becoming critical by the week,” the report concludes. 

The full report can be accessed here.