Legislative measures to mitigate the impact of the covid-19 pandemic on SMEs
Everything indicates 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 not surprising that the Singapore government has imposed loan repayment holidays of three to six months for eligible SMEs; and released amounts between $ 453 billion and $ 318 billion for low-interest loans.
The government has also sought to mitigate the impact of COVID-19 through two sets of legislative interventions:
▪ The COVID-19 law (COVID Act 1) of April 7, 2020; and
▪ The reinforced COVID-19 law (COVID Act 2) on June 5, 2020
COVID Act 1
Temporary relief in the event of inability to perform contracts
Article 5 of the COVID 1 law was introduced to provide temporary relief to parties with contractual obligations that are to be performed as of February 1, 2020 but who are unable to do so due to a COVID event -19. Parties requesting a waiver must serve a waiver notice on the counterparty (s) and guarantor (s) in the contract in accordance with the law.
This relief applies to:
▪ Loans from banks and financial institutions to SMEs secured by real estate or plant, machinery or fixed assets used for business purposes;
▪ Construction or supply contracts;
▪ Event contracts;
▪ Contracts related to tourism;
▪ Contracts for the hire-purchase or conditional sale of installations or machinery used for commercial purposes or of vehicles; and
▪ Leases or licenses of non-residential properties.
If eligible, the law imposes a moratorium restricting the following actions against parties seeking redress:
▪ The opening or continuation of legal action or arbitration;
▪ Opening of any insolvency proceedings;
▪ Realization of security on immovable or movable property used for commercial purposes;
▪ Take back of any goods under a hire-purchase contract or a retention of title contract;
▪ Termination of any lease or license of commercial or industrial property for non-payment of rent.
To guard against unfair results, disputes arising from the act are submitted to assessors appointed by the Minister of Justice.
Raising the financial thresholds for bankruptcy and liquidation applications
The COVID 1 law has increased the monetary thresholds allowing creditors to initiate bankruptcy or insolvency proceedings against individuals from $ 15,000 to $ 60,000 and against businesses from $ 10,000 to $ 100,000.
Suspension of Insolvency Trading Rules
COVID Act 1 temporarily frees administrators from the rule, allowing companies to continue negotiating and incurring debt despite their insolvency.
On March 31, 2020, the Monetary Authority of Singapore (MAS) also announced a package of measures providing SMEs with the ability to defer principal payments on their secured term loans and accrued interest thereon until 31 March. December 2020. SMEs were also allowed to extend the mandate. of their loans up to the corresponding period during which principal repayments are deferred.
MAS has also provided a new low cost financing facility at a rate of 0.1% per annum to eligible financial institutions to support their loans to SMEs.
The general meaning is that the COVID 1 law and the MAS measures have been largely effective in (i) preventing the initiation of legal proceedings and other enforcement measures that would have seriously disrupted businesses; and (ii) provide respite from the cash flow tensions of SMEs.
Yet despite the swift and decisive action taken, data from bizinsights.net showed that the number of businesses that went out of business in the first three months of 2020 jumped 78% to 18,923 from the same. period in 2019.
As a result, the government took further decisive action and passed the COVID 2 law (see below).
COVID Act 2
The measures provided for by the COVID 2 law are important, representing a “more substantial intervention” as regards contractual rights
The COVID 2 law relieves SMEs by imposing the sharing of rental obligations between the government, landlords and tenants. This includes:
▪ Government paid relief that is available to all SMEs.
▪ Relief payable by owners (“additional rental relief”) which is only available to eligible SMEs
The following criteria must be met for additional rental relief:
▪ SMEs at group level; ▪ Substantial decrease in average monthly turnover of 35% or more in April and May 2020 compared to April and May 2019;
▪ The rental must have been:
▪ Concluded before March 25, 2020; Where
▪ Concluded before March 25, 2020 but expired and renewed by tacit agreement or in accordance with the rental contract.
Ceiling on late payment interest
Under COVID 1 law, late payments and interest charges continued to apply, as contractual obligations were only deferred rather than permanently canceled. Article 7A of the COVID 2 law caps late interest and charges arising from unpaid debts up to a prescribed amount.
Relief from failure to leave the property
When a tenant does not vacate the premises after their lease expires, the law generally allows landlords to charge double the rent for that period. Article 7B of the COVID 2 law allows tenants to pay only the prescribed amount.
Both COVID laws will likely be complemented by changes aimed at relieving businesses and individuals of the relief measures, as repayment obligations will eventually have to be met. MAS recently indicated that it is working with the banks on this issue.
Specifically, Singapore’s central bank is hoping to avoid the “cliff edge,” whereby deferred loan repayments are all due on January 1, 2021, resulting in immediate defaults across many industries.
As Singapore’s Chief Minister of State for Law noted, there may be a need in the coming months to consider amending existing restructuring laws to meet the needs of SMEs. Possible steps include:
▪ Rationalization of formal legal requirements for SMEs entering rescue processes;
▪ Implement an expedited process requiring completion within a certain timeframe;
▪ Increasing use of prepackages where possible
▪ Oblige recourse to mediation in formal restructuring processes.
As the claims of SMEs are frequently backed by personal guarantees, the rules for reorganizing personal bankruptcy could be reviewed.