1. INTRODUCTION

In light of the ongoing COVID-19 pandemic outbreak, the Ministry of Corporate Affairs (the "MCA") on March 23, 2020 has provided a clarificatory circular1 with respect to the spending of the funds set aside for Corporate Social Responsibility ("CSR") activities, for COVID-19.

In addition to the aforesaid circular, the Ministry of Finance at a press conference held on March 24, 2020 announced certain steps to reduce the impact of the ongoing pandemic on the companies and amended the threshold to trigger insolvency proceedings under Insolvency and Bankruptcy Code, 2016 ("IBC"). The amended threshold under the IBC has been notified by the MCA through its notification dated March 24, 2020 ("MCA Notification2").

2. PERMISSBLE USE OF CSR FUNDS

Section 135 of the Companies Act, 2013 (the "Act") mandates companies meeting certain thresholds to constitute a CSR committee. Such a committee shall formulate and recommend a CSR Policy indicating the activities to be undertaken by the company from amongst the activities listed under Schedule-VII of the Act. The Act further obligates the board of a company to ensure that the company spends at least 2% (two percent) of the average net profit for the immediately preceding 3 (three) financial years, in, every financial year as per the CSR Policy.

Given the ongoing pandemic which is currently treated as a notified disaster as per the Government of India, the MCA has clarified that spending CSR funds to battle COVID-19 will be an eligible CSR activity.

The clarificatory circular further enumerates that the CSR funds may be spent for various activities to battle COVID-19 which are enlisted under item (i) (promotion of health care, including preventive health care) and item (xii) (disaster management, including relief, rehabilitation and reconstruction activities) of Schedule-VII of the Act. Further, it may be noted that the items which are enlisted in Schedule-VII of the Act are broad-based and may be interpreted liberally for the purpose of battling COVID-19.

3. RELIEF MEASURES FOR COMPANIES UNDER THE ACT

In view of the prevalent situation, the Ministry of Finance on March 24, 2020 announced certain relief measures for companies under the Act to cushion the impact of the ongoing pandemic on the economy. A notification to this effect is awaited from the MCA. Such relief measures are discussed below:

3.1 Filing of documents – Dispensation of the late fee

No additional fees shall be charged for late form filing in respect of any document, return or statement, which is required to be filed with the MCA-21 registry, irrespective of its relevant due date, during a moratorium period starting from April 1, 2020 to September 30, 2020.

3.2 Time period for holding board meetings

Section 173(1) of the Act requires that every company shall hold the first meeting of its board of directors within 30 (thirty) days of the date of its incorporation and thereafter hold a minimum of 4 (four) meetings of its board every year, such that not more than 120 (one hundred and twenty) days shall elapse between two consecutive board meetings.

The above mentioned mandatory time intervals have been extended by a period of 60 (sixty) days till September 30th, 2020.

3.3 Requirement of resident director

Section 149(3) of the Act requires every company to appoint one director who stays in India for a period of at least 182 (one hundred and eighty-two) days in a financial year.

The above requirement has been relaxed and a non-compliance of the period of minimum residency by at least one director in India, as mandated shall not be treated as a violation under the Act.

3.4 Meeting of independent directors

As per Section 149(4) of the Act, every listed public company shall have at least 1/3rd (one third) of its total number of directors as independent directors. Further, the company and the independent directors are required to abide by the provisions of Schedule IV (Code for Independent Directors) of the Act.

Schedule IV requires that in every financial year, the independent directors shall hold at least 1 (one) meeting without the presence of the non-independent directors and the management. Further, all independent directors shall endeavor to attend this meeting, which shall amongst other businesses, review the performance of the non-independent directors, the chairman and the board as a whole.

Relaxation has been given for compliance with the above provision, for the financial year 2019-2020, if the independent directors were unable to hold even one such meeting, the same shall not be viewed as a violation under the Act.

3.5 Relaxation in filing declaration for commencement of the business

As per Section 10A of the Act, a newly incorporated company is required to file a declaration of commencement of business within 6 (six) months of its incorporation.

Relaxation has been given for compliance with the above provision by providing a time window of additional 6 (six) months to file such declaration of commencement of business beyond the existing time limit.

3.6 Applicability of Companies (Auditor's Report) Order, 2020

The MCA had on February 25, 2020 issued the Companies (Auditor's Report) Order, 2020. This order was applicable for reporting on financial statements of companies whose financial year commences on or after April 1, 2019.

The said order shall now be applicable from the financial year 2020-2021 by way of the extension.

3.7 Relaxation in the timelines for maintaining deposit repayment reserve

Section 73 of the Act requires that every company inviting, accepting or renewing deposits, must maintain at least 20% (twenty percent) of the amount of the deposits maturing during the following financial year in the form of a deposit repayment reserve account in a separate bank account of a scheduled bank. This reserve is required to be created on or before the 30th day of April each year.

Relaxation has been given for compliance with the above provision, for the deposits maturing during the financial year 2020-2021. Companies may now create such a deposit repayment reserve till June 30, 2020.

3.8 Relaxation in the time period to invest the amount for debentures maturing during a particular year

As per Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, certain specified categories of companies that have issued debentures, are required to maintain a deposit or invest an amount towards the redemption of the debentures. This amount shall be equivalent to at least 15% (fifteen percent) of the amount of debentures maturing during the year ending on 31st of March of the next year. This reserve is required to be maintained on or before the 30th day of April each year.

Relaxation has been given for compliance with the above provision whereby the companies may now invest or deposit the mandated amount till June 30, 2020.

4. RELIEF MEASURES FOR COMPANIES UNDER THE IBC

4.1 As per Section 4 of IBC, the minimum default amount to trigger insolvency and liquidation of the corporate debtor at present is INR 1,00,000 (Rupees one lakh).

The new threshold has been prescribed in the MCA Notification. The minimum default amount to trigger insolvency and liquidation of corporate debtor now stands at INR 1,00,00,000 (Rupees one crore).

4.2 Additionally, the Ministry of Finance in its press conference notified that in the event the current pandemic situation of COVID-19 continues even after April 30, 2020, it may consider suspending Section 7 (initiation of corporate insolvency resolution process by financial creditor), Section 9 (initiation of corporate insolvency resolution process by operational creditor), and Section 10 (initiation of corporate insolvency resolution process by corporate applicant) of IBC for a period of 6 (six) months in order to save the companies from being forced into insolvency proceedings in such 'force majeure' causes of default.

5. INDUSLAW VIEW

With the clarification on the use of CSR funds, the government has sent a clear message to corporates, encouraging them to step forward and contribute to the fight against the outbreak of COVID-19.

The range of relief measures announced, provide the much-needed compliance relief to the industry. The intent of the government is not only to lower the compliance burden but to additionally reduce the financial burden on the companies which it may accrue in terms of penalty or late filing fees.

The government has taken an appreciable step by raising the default limit under IBC which otherwise could have clogged adjudicating authorities with innumerable insolvency petitions. The objective of these measures is to cushion the global impact caused by the outbreak of COVID-19 and also provide respite to the entities so that they can focus on running the business and accelerate recovery.

Footnotes

1. Circular available at http://mca.gov.in/Ministry/pdf/Covid_23032020.pdf

2. Notification available at https://ibbi.gov.in//uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.