All indications are that Small and Medium-sized Enterprises (SMEs) are bearing the brunt of the economic and financial fallout from the COVID-19 crisis.
Given the central role played by SMEs, it is unsurprising that the government of Singapore has directed loan repayment holidays of between three and six months for qualifying SMEs; and made available sums between $453 million and $318 billion for low-interest in loans.
The government has also sought to mitigate the impact of COVID-19 via two rounds of legislative interventions:
The COVID-19 Act (COVID Act 1) on 7 April 2020; and
The enhanced COVID-19 Act (COVID Act 2) on 5 June 2020.
COVID Act 1
Temporary relief for inability to perform contracts
Section 5 of COVID Act 1 was introduced to offer temporary relief to parties with contractual obligations which are to be performed on or after 1 February 2020 but are unable to do so because of a COVID-19 event. Parties seeking relief must serve a notification for relief on the counterparty or counterparties to and guarantor(s) in the contract in accordance with the act.
This relief applies to:
- Loans by banks and financial institutions to SMEs secured against immovable property or plant, machinery or fixed assets used for commercial purposes;
- Construction or supply contracts;
- Event contracts;
- Tourism-related contracts;
- Hire purchase agreements or conditional sales agreements for plant or machinery used for commercial purposes or vehicles; and
- Leases or licences of non-residential property.
If eligible, the act imposes a moratorium restraining the following actions against parties seeking relief:
- Commencement or continuation of an action in court or arbitration;
- Commencement of any insolvency proceedings;
- Enforcement of security over immovable property or moveable property used for commercial purposes;
- Repossession of any goods under a hire-purchase agreement or retention of title agreement;
- Termination of any lease or licence of commercial or industrial property due to non-payment of rent.
To safeguard against unfair outcomes, disputes arising from the act are referred to assessors appointed by the Minister for Law.
Raising monetary thresholds for bankruptcy and winding-up applications
COVID Act 1 increased the monetary thresholds for creditors to commence bankruptcy or insolvency proceedings against individuals from $15,000 to $60,000 and against companies from $10,000 to $100,000.
Suspension of insolvency trading rules
COVID Act 1 temporarily relieves directors from the rule, enabling companies to continue trading and incurring debt despite being insolvent.
On 31 March 2020, the Monetary Authority of Singapore (MAS) also announced a package of measures providing SMEs the option to defer principal payments on their secured term loans and 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.
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.
The general sense is that COVID Act 1 and the MAS Measures were largely effective in (i) staving off commencement of legal proceedings and other enforcement action which would have severely disrupted businesses; and (ii) providing respite to the cash flow stresses of SMEs.
Yet, despite the swift and decisive actions taken, data from bizinsights.net showed that the number of businesses that ceased operations in the first three months of 2020 jumped 78% to 18,923 from the same period in 2019.
Hence, the government took further decisive steps, and passed COVID Act 2.
COVID Act 2
The measures under COVID Act 2 are significant, representing a more "substantive intervention" as to contractual rights.
Relief from rent
COVID Act 2 provides relief for SMEs by mandating the co-sharing of rental obligations between the government, landlords and tenants. This includes:
- Relief paid for by the government which is available to all SMEs.
- Relief to be paid by landlords (‘additional rental relief’) which is available only to eligible SMEs.
The following criteria must be satisfied for additional rental relief:
- SME at group level;
- Substantial drop in average monthly revenue of 35% or more in April and May 2020 compared with April and May 2019;
- Tenancy must have been entered into before 25 March 2020; or entered into before 25 March 2020 but expired and renewed automatically or in accordance to the tenancy agreement.
Cap on late interest charges
Under COVID Act 1, default late payment and interest charges continued to run, since contractual obligations were only deferred rather than permanently waived. Section 7A of COVID Act 2 places a cap on the late payment interest and charges accruing from debts not paid up to a prescribed amount.
Relief from failure to vacate property
When a tenant fails to vacate a premises after their tenancy has expired, the law typically allows landlords to charge double rent for this period. Section 7B of COVID Act 2 allows tenants to pay only the amount prescribed.
Both COVID Acts will likely be supplemented by amendments to ease companies and individuals off the relief measures, as repayment obligations will eventually have to be fulfilled. The MAS has indicated recently that it is working with banks on this.
Specifically, Singapore’s central bank hopes to avoid the “cliff effect”, whereby deferred loan repayments all fall due on 1 January 2021, leading to immediate defaults across many industries.
As Singapore's Senior Minister of State for Law noted, it may be necessary in the coming months to consider modifying existing restructuring laws to cater to SMEs. Possible steps include:
- Streamlining formal legal requirements for SMEs entering into rescue processes;
- Implementing a fast-track process mandating completion within a certain period;
- Increasing use of pre-packs where feasible;
- Mandating use of mediation in formal restructuring processes.
Given that debts owed by SMEs are frequently supported by personal guarantees, the rehabilitation rules for personal bankruptcies could be re-examined.
An earlier version of this article was published on www.internationallawoffice.com