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10 July 2020
Many governments in Asia have enacted temporary measures to protect companies from the impact of the COVID-19 pandemic. This article examines the legislative action taken by the Singapore government thus far, with a specific focus on its impact on small and medium-sized enterprises (SMEs).
According to the World Bank, SMEs account for more than 90% of businesses and employ 50% of the workforce in the Asia-Pacific region.(1) In the context of Singapore, SMEs may be broadly defined as companies with an annual turnover which does not exceed S$100 million and have at least 30% of their shares held by Singapore citizens or permanent residents.(2) This broad umbrella covers a significant amount of companies in Singapore.
All the indications are that SMEs are bearing the brunt of the economic and financial fallout from the COVID-19 crisis, not least because many SMEs were already under pressure even before the crisis hit.(3)
Given the central role played by SMEs in the economies of countries in the Asia-Pacific region, it is unsurprising that many governments in Asia have intervened legislatively to ameliorate the impact of the pandemic on SMEs. Among other things, the governments of Singapore, Hong Kong, Thailand, Malaysia and China have all implemented or directed loan repayment holidays of between three and six months for qualified SMEs and made available sums between $453 million and $318 billion for low-interest loans to SMEs.
In Singapore, the government has sought to mitigate the economic and financial impact of COVID-19 via two rounds of legislative interventions. Arguably, both rounds of legislative interventions were formulated with the needs of SMEs squarely in mind.
Specifically, Parliament passed:
The key features of COVID Act 1 are as follows.
Temporary relief for inability to perform contracts
As the widespread lockdowns and disruptions caused by the COVID-19 pandemic have undermined the ability of businesses and individuals to fulfil their contractual obligations, Section 5 of COVID Act 1 was introduced to offer temporary relief to these affected parties.
This relief is available to parties with contractual obligations which are to be performed on or after 1 February 2020 but are unable to do so, where such inability was materially caused by a COVID-19 event. To avail itself thereof, the party seeking relief must serve a notification for relief on the counterparty or counterparties to and guarantor(s) in the contract in accordance with COVID Act 1.
This relief applies to:
If eligible, the act imposes a moratorium restraining the following legal actions against the party who sought relief:
To safeguard against unfair outcomes, disputes arising from the application of COVID Act 1 would be referred to the assessors appointed by the Minister for Law. The act stipulates that the assessors must seek to achieve a just and equitable outcome and that their decisions are final and not appealable.
Raising monetary thresholds for bankruptcy and winding-up applications
COVID Act 1 also increased the monetary thresholds for a creditor to commence bankruptcy or insolvency proceedings against individuals from $15,000 to $60,000 and against companies from $10,000 to $100,000. Together with the moratorium restraining the commencement of insolvency proceedings, this makes it more difficult generally for bankruptcy or insolvency proceedings to be commenced against individuals and companies.
Suspension of insolvency trading rules
COVID Act 1 also temporarily relieves directors from the rule under Section 339(3) of the Companies Act (Cap 50), enabling companies to carry on trading and incurring debt despite being technically insolvent. This applies only if the debt was incurred in the ordinary course of business, during the prescribed period and before the appointment of any judicial manager or liquidator of the company.
On 31 March 2020 the Monetary Authority of Singapore (MAS) announced a package of measures which sought to relieve the financial strain on SMEs. These measures allowed SMEs to opt to defer principal payments on their secured term loans as well as interest accrued thereon up to 31 December 2020. SMEs were also allowed to extend the tenure of their loans by up to the corresponding period during which the principal repayments are deferred.
The MAS also provided a new low-cost funding facility at a rate of 0.1% per annum to eligible financial institutions to support their loans to SMEs.
Despite the swift and decisive actions initially taken by governments to soften the effect of the COVID-19 crisis on SMEs, it soon became apparent that more needed to be done. In Singapore at least, data from 'bizinsights.net', an authorised information service provider of the Accounting and Corporate Regulatory Authority, showed that the number of companies and businesses that had ceased operations in the first three months of 2020 had jumped 78% to 18,923 from 10,611 in the same period in 2019. It is likely that many of these companies were SMEs and that this is only the beginning; there are fears that the real fallout will only be felt in the coming months.(6)
Hence, the government took further decisive steps. In particular, given that most of the legislative measures in COVID Act 1 merely sought to defer contractual obligations in order to offer further relief to SMEs facing financial concerns, Parliament more recently passed COVID Act 2.
The measures under COVID Act 2 are significant, not least because they represent a "substantive intervention" by the government with regard to contractual rights.(7) The key measures in COVID Act 2 are as follows.
Relief from rent
First, COVID Act 2 provides relief for SME tenants by mandating the co-sharing of rental obligations between the government, landlords and tenants. COVID Act 2 implements this in two ways:
While the rental relief is available to all SMEs, the additional rental relief is available only to tenants:
Cap on late interest charges
Under COVID Act 1, default late payment and interest charges continued to run, since the moratorium and other reliefs only suspended or deferred contractual obligations rather than permanently waiving them. Section 7A of COVID Act 2 goes a step further by placing a cap on the late payment interest and charges accruing from debts not paid due to the temporary moratorium up to a prescribed amount (ie, the amount of late payment interest and charges above the cap will be forgiven by way of legislative fiat).
Relief from failure to vacate property
When a tenant fails to vacate a premises after their tenancy has expired (known as 'holding over'), the law, via contract or otherwise, typically allows the landlord to charge double rent for this period. Section 7B of COVID Act 2 relieves tenants from the consequence of having to pay double rent for holding over. Instead, tenants would have to pay only the amount prescribed.
Therefore, while the first round of measures under COVID Act 1 provided SMEs in Singapore with temporary reprieve through the postponement of liabilities and obligations, as well as restraining enforcement actions, the second round of measures under COVID Act 2 sought to provide more substantive relief to SMEs.
Of particular note is the substantive intervention by the government into contractual obligations, including mandated rental relief from landlords, the legislatively imposed cap on late payment interest and associated charges, as well as relief from the consequences of holding over.
This represents an acknowledgement that drastic steps are required in order to support distressed SME businesses in these challenging times. On the other hand, care must also be taken to ensure that the contractual certainty which is the sine qua non for commercial parties doing business in Singapore is not undermined, as the long-term implications may outweigh the temporary respite afforded to affected SMEs. The balance is a delicate one.
It remains to be seen what further steps may be taken by the government to support SMEs. Among other things, as noted by Singapore's senior minister of state for law, there may be a need in the coming months to look at modifying existing restructuring laws to cater for the needs of SMEs.(8)
Based on a World Bank study, possible further steps could include:
All of these merit close consideration. Further, given that the debts owed by SMEs are frequently supported by personal guarantees given by the companies' founders or sponsors, the rehabilitation rules for personal bankruptcies may need to be re-examined.
Ultimately, in these unprecedented times, SMEs and their owners require swift and cost-effective methods to sustainably manage and restructure their debt burdens, so that they can focus on transforming their businesses to meet the challenges of the post-COVID-19 economy. To achieve this, Singapore's restructuring laws may need to be adjusted so they can be used to facilitate not just large-scale restructurings, but SME restructurings as well.
For further information on this topic please contact Keith Han or Tan Meiyen at Oon & Bazul LLP by telephone (+65 6223 3893) or email (firstname.lastname@example.org or email@example.com ). The Oon & Bazul LLP website can be accessed at www.oonbazul.com.
(1) For further details see here.
(3) For further details see here.
(6) For further details see here.
(7) For further details see here.
(8) For further details see here.
(9) For example, see the World Bank's "Report on the Treatment of Micro, Small and Medium Enterprises Insolvency". Available here.
Zephan Chua, trainee, assisted in the preparation of this article.
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