Navigating Covid19 Crisis For Startups

Everyone is aware of the Global outbreak of COVID-19 and how it has rendered the entire world helpless and vulnerable. The precautionary measure taken to prevent further widespread of this virus is being proven most efficient, which is self-isolation. This compulsory step of self-isolation as imposed by the Government in India has brought life, business, education and jobs to a halt. The Indian economy and India’s Startup ecosystem is taking a hit every day with businesses not being able to run, people not being able to go for their job and earn their livelihood.

This is a particularly tough time for startups as they are fighting to retain the working of their business and dealing with Crisis management. So, in order to survive, they are resorting to cost-cutting to elongate their businesses life expectancy, depending on their industry. The cost-cutting has left these startup employees jobless or being forced to take temporary leave or there are pay-cuts in order to try and compensate for the low revenue. The worst-hit sectors include travel and hospitality due to the restrictions imposed by the Government.

The need of the hour for these startups are working capital and planned future growth. The Government of India is taking steps to assist these startups. Small Industries Development Bank of India (SIDBI) understands the need for financial assistance and stability, in order to fulfill these needs SIDBI is pushing schemes like COVID-19 Startup Assistance Scheme (CSAS). The basic idea behind this scheme is to provide support to the Startups who have stepped up and shown the ability to adjust to the economic effect of COVID-19 outbreak and have ensured the stability of job and finances. The whole idea behind this scheme is to provide working capital to the startups whose liquidity has been hit badly by the pandemic, as quickly as possible and for the quick processing a recommendation committee will be created and these loans will be up to INR 2 Crores. This loan will bear the tenure up to 36 months with a mandator period of 12 months and a maximum of 24 instalments. In order to apply for the loan under CSAS these startups need to meet the eligibility criteria:

I.  Government defined startups which have received funding through at least one of the Alternate Investment Fund registered with SEBI or by any VC/PE/Angel Fund investing in startups in India.
II.  Startups with a minimum employee base of 50 employees. This may also include the foot soldiers.
III.  Startups having FY 2019 and FY 2020 minimum turnover between INR 20 Crores to INR 60 Crores.
IV.  Startups should be EBITDA positive in December 2019. If not, they should be in a position to project positive EBITDA for the quarter ending June 2020.
V.  Startups should have been incorporated for less than 10 years.
VI.  Startups should have a positive Net Worth.
VII.  Startups should have demonstrated innovative measures for ensuring business continuity during COVID-19 period.
VIII.  Startups should have taken adequate measures and ensured employee safety and their financial stability.
IX.  Promoter/ Founder of the startup should have invested his own capital in the business.

Like any business, startups are facing supply chain disruption which will lead to implications of contracts. The supply chain disruption is likely to cause delay or non-performance of contracts, which may eventually result in termination of these contracts as COVID-19 has genuinely prevented the parties to performing their end of the contractual obligation or they are just seeking this situation as an excuse to get out of the obligation. Either way, there is going to be an increase in the number of legal disputes due to non-performance of contracts. Parties under these contracts might also use COVID-19 as an excuse to renegotiate terms of the contracts. In the given context, it is important to assess that if COVID-19 will be treated as a Force Majeure event or not?

In the present scenario, a light may be thrown on the Manual for Procurement of Goods, 2017, specifically its clause on Force Majeure, released by the Ministry of Finance, Government Of India. This manual sets forth the guidelines for the government organizations such as the Ministries, Departments and other entities substantially owned or controlled by or receiving substantial financial assistance from the Central Government, that procure a wide variety of goods and services. The Force Majeure clause of this manual in paragraph 9.7.7 reads as below:

“A Force Majeure (FM) means extraordinary events or circumstances beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/ seasonal rain and any other events specifically excluded in the clause). An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-posto facto. There may be a FM situation affecting the purchase organization only. In such a situation, the purchase organization is to communicate with the supplier along similar lines as above for further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.”

In view of the massive interruption to the supply chains due to the global spread of COVID-19, this outbreak has been considered a force majeure situation. As a result, The Ministry of Finance, Government of India, on February 19, 2020, vide the notification (No.F.18/4/2020-PPD) declared that COVID-19 will be covered under the above Force Majeure clause (paragraph 9.7.7) and be treated under the head of natural calamity/ Act of God.

There are aspects which should be kept in mind while dealing with contractual obligations in this situation, like:

  • Carefully reviewing the clauses in the contracts as the language can differ from contract to contract.
  • If there is a clause to mitigate and exercise reasonable diligence which also can differ from contract to contract.
  • Majority of contracts requires the invoking of the Force Majeure clause via notice in a given period which may differ from contract to contract.
  • Some contracts also provide a clause under which the contract can be put on hold until the Force Majeure event subsides.
  • There can also be clauses in some contracts which give a period of limitation in the occurrence of a Force Majeure event post which either party may cancel the contract with written notice.
  • The party who is invoking the clause of Force Majeure has the burden of proof.
  • To keep the copies of important communication between the parties if any dispute arises later.

If the contract does not have a Force Majeure clause, the party affected by the non-performance of the contract can rely on the doctrine of frustration under section 56 of the Indian Contract Act, 1872. The relevant section is reiterated below:

56. Agreement to do impossible act – An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful – A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss, through non-performance of act known to be impossible or unlawful – Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

Some other ways to reduce the liability of non-performance in case of absence of the Force Majeure clause can be done though invoking clauses like Price adjustment, material adverse change, limitation, exclusion, etc. The effect and invoking any of these clauses will differ from case to case.

Examining the current situation, all the organizations are helpless due to the lock down. This is due to the lack of digitization. There is a huge possibility of organizations moving towards digitization, which will, in turn, increase the demand for cyber security and privacy all over the country among all the sectors even in traditional sectors like education and healthcare. Also, the number of cyber-attacks have significantly increased since the COVID-19 outbreak. The most attacked infrastructures are ‘Work from anywhere’, the increase in working remotely as encouraged by the employers which can create cyber security problems. There has been an increase in attacks on computers, routers and unprotected home networks. The Indian Government has collaborated with the Data Security Council of India (DSCI) to establish a National Center of Excellence that will increase innovation in Indian cyber security.

As such, in this phase of uncertainty, the ties that bind are more important than ever and when startups, that have little bandwidth or resources to deviate from their core business, make the effort, it’s worth crowing about.

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