The COVID-19 (Temporary Measures) Act 2020 from a Restructuring and Insolvency Perspective
This article looks at the insolvency-related measures under the aegis of the COVID-19 (Temporary Measures) Act 2020 that have been implemented to complement the Singapore government’s fiscal response. These measures can be categorised into the general and the specific.
The genie is out of the bottle. The economic reverberations from the pandemic are expected to last at least a year. Unlike the 2003 SARS outbreak, which was largely confined to East Asia, the global population infected by Covid-19 have increased exponentially around the world. As things currently stand, it is expected that the economic downturn brought about by COVID-19 is likely to be far more serious than past financial crises. The Singapore economy contracted by 2.2 per cent year-on-year in the first quarter, this being the worst contraction since the global financial crisis in 2009.
In light of this unprecedented situation, the Singapore government has introduced three stimulus packages worth around 12 per cent of Singapore’s GDP, or about S$59.9 billion in total, to soften the economic blow of the pandemic. This note looks at the insolvency-related measures that have been implemented to complement the Singapore government’s fiscal response. The intention is that viable businesses are not permanently destroyed but are able to preserve their capabilities for recovery.
The COVID-19 (Temporary Measures) Act 2020
Temporary Relief from Inability to Perform Contracts
Singapore has passed a new law that gives temporary relief to businesses and individuals if they are unable to fulfill their contractual obligations due to the coronavirus outbreak. The Act was passed by the Singapore Parliament on 7 April 2020 on an expedited basis and commenced on 20 April 2020. However, contractual obligations are not abrogated as a result of the Act, rather these are suspended for the duration of the Act.
The measures will cover relevant contractual obligations that are to be performed on or after 1 February 2020, for contracts that were entered into or renewed before 25 March 2020. The measures will be in place for a prescribed period, which will be six months from the commencement of the Act at first instance. Subsequently, the Act may be extended, for up to a year from the commencement of the Act.
The insolvency-related measures under the aegis of the Act can be categorised into the general and the specific.
The specific measures under the Act cover the following scheduled contracts:
- Leases or licences for non-residential immovable property;
- Construction contract or supply contract;
- Contracts for the provision of goods and services for events;
- Certain contracts for goods or services for visitors to Singapore, domestic tourists or outbound tourists, or promotion of tourism; and
- Certain loan facilities granted by a bank or a finance company to SMEs.
For these scheduled contracts, the Act prohibits a contracting party from commencing, amongst other things, insolvency proceedings against the defaulting party. It is important to note that these insolvency proceedings are not limited to winding up and bankruptcy but include applying for a meeting of creditors to approve a compromise or an arrangement, a judicial management order or to appoint a receiver or manager. Court proceedings and the enforcement of security over immovable property as well as movable property that is used for the purposes of business or trade are also some of the legal actions that are prohibited.
General Measures Relating to Bankruptcy and Insolvency
The Act seeks to increase the barriers to creditor-initiated bankruptcy and winding up applications; –
- For individuals: Increasing the monetary threshold for bankruptcy from $15,000 to $60,000 and increasing the time period to satisfy or set aside a statutory demand from 21 days to six months, and
- For companies: Increasing the monetary threshold for winding up from $10,000 to $100,000 and increasing the time period to satisfy or set aside a statutory demand from 21 days to six months.
Creditors may still commence winding up proceedings without issuing statutory demands. However, the disadvantage is that the applicant creditor will not be able to rely on the presumption of insolvency invoked by an unsatisfied statutory demand. The applicant creditor will have to produce other evidence of the debtor’s insolvency. Creditors that serve statutory demands during the duration of the Act can proceed with winding up applications only after the six-month period to invoke the presumption of insolvency has expired. It is therefore expected that the Act will stave off winding up applications for now.
In addition, directors will be given a temporary reprieve from their obligations to prevent their companies trading while insolvent if the debts are incurred in the company’s ordinary course of business. This will give directors the respite to consider business viability and restructuring options for their companies. However, Directors remain criminally liable if the debts are incurred fraudulently.
Temporary Measures for Conduct of Meetings
The Act allows companies to make alternative arrangements for any meetings where personal attendance is required by either a company’s constitution or the Companies Act. These would include certain insolvency-related meetings. The alternative arrangements include allowing:
- Meetings to take place electronically;
- Quorum for a meeting to be reduced;
- Voting at a meeting to be made by proxy;
- The meeting to be deferred.
On 27 April 2020, two Orders1The Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings) (Corporate Insolvency) Order 2020 and the Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings) (Banknruptcy) Order 2020 were issued under the Act in respect of alternative arrangements for conducting meetings in respect of insolvency and bankruptcy matters.
Temporary Measures for Court Proceedings
The Act provides measure to facilitate the conduct of court proceedings using remote communication technology. It should also be noted that the Singapore Supreme Court had, on 5 April 2020, issued a Registrar’s Circular adjourning all non-essential, non-urgent hearings to after 4 May 2020. On 24 April 2020, the relevant period mentioned in this Registrar’s Circular was extended by 4 weeks until (and inclusive of) 1 June 2020. Certain applications for extension of time or variation of court orders relating to insolvency and restructuring matters may be considered essential and urgent. Also, there have been urgent interim judicial management application heard recently.
In 2017, Singapore introduced wide-ranging reforms to liberalise its restructuring and insolvency regime with a view to enhancing its attractiveness as an international centre for debt restructuring. In addition, the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) was passed in Parliament on 1 October 2018 but is currently not in force. It is contemplated that the IRDA may come into force sometime in 2020. It is noteworthy that the Act refers to the IRDA as well as the current legislation.
The insolvency-focused measures encapsulated in the Act will help ensure that firms and individuals have short term breathing space. To a certain extent, this may prevent viable firms being precipitated into insolvency and thus avoiding premature value destruction. In the longer term, companies will have to undertake business viability assessments and explore potential restructuring options.
Endnotes [ + ]
|1.||↑||The Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings) (Corporate Insolvency) Order 2020 and the Covid-19 (Temporary Measures) (Alternative Arrangements for Meetings) (Banknruptcy) Order 2020|