Temporary relief for inability to perform contractual obligations due to COVID-19 pandemic through introduction of COVID-19 (Temporary Measures) Bill in Parliament
Introduction
1. On 26 March 2020, the Singapore Government introduced the Supplementary Budget 2020 known as the Resilience Budget to address the rapidly evolving COVID-19 pandemic situation and its impact on Singapore’s economy and society.
2. To complement the Resilience Budget, on 1 April 2020, the Ministry of Law (“MinLaw”) issued a press release on its intentions to introduce the COVID-19 (Temporary Measures) Bill (“Bill”) in Parliament on an expedited basis in the week of 6 April 2020 to offer temporary relief to businesses and individuals who are unable to fulfil their contractual obligations because of COVID-19 pandemic.
3. Based on available information, we understand that the Bill seeks to cover 4 main areas:
- Temporary relief for failure to perform contractual obligations because of COVID-19;
- Temporary revised limits for bankruptcy and corporate insolvency;
- Temporary measures for conduct of AGMs / meetings for companies; and
- Temporary measures for Court proceedings.
4. For the purpose of this e-briefing, we will focus on (a) and (b) above. Kindly note that the information set out in this e-briefing is based on information available on the Bill based on MinLaw’s press release and reporting by various news agencies and may subjected to changes when the Bill is introduced in Parliament.
5. We will review the Bill once the same is published and issue an update to this e-briefing.
Objectives
6. Recognising that COVID-19 is an unexpected event that affects the ability of businesses and individuals to perform contractual obligations and that it would be unfair to penalise them, the Bill seeks provide temporary and targeted protection though:
- providing temporary cash-flow relief for businesses and individuals who may otherwise have to pay damages or risk . having their deposits or assets forfeited due to failure to fulfil certain contractual obligations because of COVID-19; and
- increasing the monetary thresholds and time limits for bankruptcy and corporate insolvency.
7. The measures will be in place for a prescribed period, which will be 6 months from the commencement of the Act (if the Bill is passed) at first instance. Subsequently, it may be extended for up to 1 year from the commencement of the Act.
8. It is noted that the measures introduced in the Bill do not absolve or remove contractual obligations but merely suspend them for the prescribed period. As such, although the amounts payable under any obligation will continue to accrue and be payable, they will only be due 6 months later (or such extended period as the case may be).
Temporary Relief from Legal Action
Proposed Measures
9. The measures introduced in the Bill will only cover 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.
10. The Bill will cover the following contracts:
- Leases or licences for non-residential immovable property (e.g. lease for factory premises);
- Construction contract or supply contract (e.g. contract for the supply of materials);
- Contracts for the provision of goods and services (e.g. venue, catering) for events (e.g. weddings, business meetings);
- Certain contracts for goods or services for visitors to Singapore, domestic tourists or outbound tourists, or promotion of tourism (e.g. cruises, hotel accommodation bookings); and
- Certain loan facilities granted by a bank or a finance company to SMEs (which is defined as businesses with turnover of not more than $100 million in the latest financial year) which may include hire-purchase agreements.
11. The Bill will prohibit a contracting party from taking the following legal actions against a non-performing party:
- Court and insolvency proceedings, and enforcement of judgments or arbitration decisions (excluding international arbitrations);
- Enforcement of security over immovable property as well as movable property that is used for the purposes of business or trade;
- Call on a performance bond given pursuant to a construction contract; and
- Termination of leases of non-residential premises.
In addition, there will be additional relief in respect of forfeiture of deposits for events and tourism-related contracts through prohibiting forfeiture of deposit without a determination from an assessor ruling that it would be just and equitable to forfeit either the whole or a part of the deposit. This would also apply to deposits which have already been forfeited.
Mechanism for Relief
12. The Bill proposes to introduce the mechanism for affected parties to seek relief as follows
- To receive the relief, the party which cannot perform the obligation due to COVID-19 has to serve a notification of relief to the other contracting party.
- The notified party will then be unable to take prohibited actions and must stay proceedings relating to prohibited action that have already commenced, failing which the notified party may be liable for an offence.
- If there is a dispute as to whether the non-performance was due to COVID-19, it will be referred for determination by an assessor from a pool of Assessors appointed by the MinLaw at no cost to either party.
- Parties will not be allowed to be represented by lawyers at the proceedings before the Assessor. The Assessor will issue its determination within 5 days which cannot be appealed.
13. At this juncture, we understand that MinLaw intends to appoint about 100 assessors from sectors such as law and accountancy.
14. We have also considered the potential impact on the specific industries in which the measures on the types of contract will directly affect, and set out the same below. We wish to highlight that this is not meant to be exhaustive and we would be happy to discuss the specific impact arising from the Bill.
Revised Limits for Bankruptcy and Corporate Insolvency
Bankruptcy
15. The Bill proposes to impose the following temporary measures in relation to bankruptcy against individual:
- Monetary threshold for filing bankruptcy applications to increase from S$15,000 to S$60,000;
- Time period to respond to a Statutory Demand to increase from 21 days to 6 months; and
- Monetary threshold for Debt Repayment Scheme from S$100,000 to S$250,000.
Corporate Insolvency
16. In relation to corporate insolvency, the Bill also proposes to impose the following temporary measures:
- Monetary threshold for insolvency to increase from S$10,000 to S$100,000; and
- Time period to respond to a Statutory Demand to increase from 21 days to 6 months.
Relief from obligations to prevent insolvent trading
17. Directors will be temporarily relieved from their obligations to prevent their companies trading while insolvent if the debts are incurred in the company’s ordinary course of business. However, directors remain criminally liable if the debts are incurred fraudulently.
Affected Industries
Landlords / Licensors of Non-Residential Properties
18. As stated above, the Bill will prohibit landlords / licensors of non-residential properties from terminating the leases and re-possessing the premises leased / licenced for non-payment of rent by the tenants / licensees due to COVID-19.
19. In addition, should relief be granted (either upon acceptance of the notification of relief by the landlords / licensors or determination by an Assessor) the landlords / licensors will also be prohibited from commencing any court or insolvency proceedings against the tenants / licensees which will be considered to be an offence.
20. While the Bill does not absolve the obligations of tenants / licensees to pay rent and rent will continue to accrue and remain payable, the rent will only be due after the prescribed period (which is 6 months or longer).
21. We are of the view that such a measure is not without its problems as it remains to be seen if the tenants / licensees will be in a position to pay the accrued rent in a lump sum or if the tenants / licensees will act in good faith to honour their obligations after the prescribed period.
22. In addition, it will also not be possible for landlords / licensors to take steps to mitigate their losses while the tenants / licensees remain in occupation, even if the landlords / licensors assess that the tenants / licensees would not be in a position to pay the accrued rent after the prescribed period. As such, this may result in an increase in default cases and legal proceedings immediately after the expiry of the prescribed period.
23. It should be highlighted that the temporary relief offered by the Bill appears to only extend to non-payment of rent due to the COVID-19 situation, and does not appear to cover other breaches of covenants by tenants / licensees whether due to the COVID-19 situation or otherwise.
Construction Industry
24. As regards the construction industry, the Bill seeks to protect contractors (or sub-contractors as the case may be) from liability for liquidated damages, or for delays or non-supply of goods under construction contracts or supply contracts, where obligations could not be performed due to COVID-19.
25. The Bill also prohibits calls on performance bonds and it is not clear at this juncture if the Bill prescribes any qualifiers to allow calls for genuine cases of default unrelated to COVID-19.
26. In addition, given the complexity involved in construction projects, it remains to be seen if the Assessors will be fully equipped to consider more complex cases such as those involving concurrent delay and be able to make a just and equitable decision within 5 days without the assistance of parties’ lawyers.
27. There may also be concern as to how the prohibition imposed by the Bill will operate with the Security of Payment Adjudication regime under the Building and Construction Industry Security of Payment Act (Cap. 30B), which aim is to facilitate cash flow in the construction industry. Clarity on this issue would be welcomed.
Banks and Financial Institutions
28. Under the Bill, banks or finance companies would be prohibited from enforcing against (1) commercial or industrial immovable property in Singapore, as well as (2) plant, machinery or other equipment in Singapore that are used for business purposes, for defaults in loan facilities by SMEs due to COVID-19.
29. These measures would also include hire purchase contracts such as hire purchase of vehicles used by private-hire car drivers, whose businesses may be adversely affected during this period. However, the protection offered by the Bill does not appear to extend to other facilities granted to individual borrowers.
30. Should relief be granted (either upon acceptance of the notifications of relief by the banks or financial institutions or determination by Assessors), it would be an offence for the banks or financial institutions to enforce against any of the contracts covered under the Bill.
31. We are of the view that the prohibition under the Bill together with the upward revision of the monetary threshold for bankruptcy and corporate insolvency, as well as the increased time to respond to Statutory Demands, will have an impact on the recovery efforts of banks and financial institutions. This is especially so since the payments will continue to accrue, and the entire accrued sum will be due upon the expiry of the prescribed period. As such, this may result in an increase in default cases and legal proceedings immediately after the expiry of the prescribed period.
Events and Tourism Industry
32. For events and tourism-related contracts, the Bill provides that where the event is postponed due to COVID-19 or if travel cannot continue due to COVID-19, paid deposits cannot be automatically forfeited.
33. If the deposit (or part of it) has already been forfeited, the party forfeiting the deposit must after receiving a notification for relief, restore the deposit as if it had not been forfeited.
34. If there is a dispute, an Assessor can decide if sums paid should be fully or partially returned to a party by taking into consideration any legitimate expenses incurred.
Concluding Remarks
35. Given the rapidly deteriorating COVID-19 situation in Singapore, we note that the Singapore Government has responded regularly to introduce additional measures to control the spread rapidly and at very short notices, including measures to close bars, nightclubs and public entertainment venues through the Infectious Diseases (Measures to Prevent Spread of COVID-19) Regulations 2020.
36. With this Bill, the Singapore Government has taken the next step to legislate measures to protect businesses and individuals affected by the COVID-19 along with other measures that had been implemented such as allowing affected parties to apply to defer payments of loans and taxes.
37. While the Bill will introduce measures which will be welcome by businesses and individuals affected by the COVID-19 situation, it will be important for the Singapore Government to also strike a delicate balance in not causing undue hardship for the players in the affected industries including banks, financial institutions, commercial landlords, developers and main contractors who may also be adversely affected by the COVID-19 situation themselves.
38. With the cooperation of all parties, we are hopeful that the various measures implemented by the Singapore Government including those under the Bill can help to guide everyone through these extraordinary times.
39. Stay healthy and safe from all of us at Eversheds Harry Elias!
NOTE: The content of this article is for general information only and does not constitute any form of legal advice. Please seek specific legal advice regarding your specific circumstances.
Eversheds Harry Elias – Asset Recovery / Restructuring & Insolvency
Eversheds Harry Elias’ Restructuring & Insolvency practice is a leading practice in Singapore comprising of a dedicated team that is well equipped to advise on both contentious and non-contentious matters involving corporate and individual restructuring and insolvency.
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Head, Restructuring & Insolvency
Partner, Eversheds Harry Elias
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Head, Construction & Engineering
Partner, Eversheds Harry Elias
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Senior Associate, Restructuring & Insolvency
and Construction & Engineering
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