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Coronavirus
Asia-Pacific

Singapore update: The practical impact of the COVID-19 temporary measures legislation

For further information, please visit the White & Case Coronavirus Resource Center.

The COVID-19 (Temporary Measures) Act (the "Act") was enacted on 7 April 2020. The Act provides temporary relief to businesses and individuals who are unable to fulfil their contractual obligations or are facing financial distress due to Coronavirus Disease 2019 ("COVID-19").

In this client alert we:

  • summarise the key terms of the Act as they relate to companies; and
  • consider the practical implications of the Act.

 

Temporary relief for inability to perform contractual obligations due to COVID-19

The COVID-19 pandemic and its impact on economic activity has resulted in many businesses being unable to fulfil their contractual obligations. As a result, such businesses are exposed to the consequences of failing to comply – such as damages claims, forfeiture of deposits, termination of leases and insolvency proceedings.

When do the measures apply?

The Act applies to prescribed contractual obligations (referred to in the Act as "scheduled contracts") that are to be performed on or after 1 February 2020 (which was the approximate date when the impact of COVID-19 started to be significantly felt in Singapore's economy) in respect of contracts that were entered into or renewed before 25 March 2020 (which is the day after stricter measures were introduced by the Multi-Ministry Taskforce to further minimise the spread of COVID-19). The Act does not apply to a scheduled contract entered into or renewed (other than automatically) on or after 25 March 2020.

The measures will be in place for a period of six months from 20 April 2020 up to and including 19 October 2020 and may be extended or shortened for or by a period determined by, as relevant, the Minister for Law or the Minister for Finance (being the "prescribed period"). However, the measures will not be in place for longer than one year.

The Act applies where:

a) a party to a scheduled contract is unable to perform an obligation in the contract, being an obligation that is to be performed on or after 1 February 2020;

b) the inability is to a material extent caused by a COVID-19 event; and

c) that party has served a notification for relief on the other party or parties to the contract and any guarantor or surety for its obligation in the contract.

What are the scheduled contracts?

The types of contractual obligation covered by the Act include:

a) a contract for the grant of a loan facility by a bank licensed under the Banking Act (Cap. 19) or a finance company licensed under the Finance Companies Act (Cap. 108) to an enterprise (which is defined to mean a business in Singapore where not less than 30% of its shares or other ownership interest is held by Singapore citizens or permanent residents or both and the turnover of the group to which it belongs does not exceed S$100 million in the latest financial year), where such facility is secured, wholly or partially, against any commercial or industrial immovable property located in Singapore;

b) a contract for the grant of a loan facility by a bank licensed under the Banking Act or a finance company licensed under the Finance Companies Act to an enterprise:

  1. where such facility is secured, wholly or partially, against any plant, machinery or fixed asset located in Singapore; and
  2. where such plant, machinery or fixed asset, as the case may be, is used for manufacturing, production or other business purposes;

c) a performance bond or equivalent that is granted pursuant to a construction contract or supply contract;

d) a hire-purchase agreement or conditional sales agreement as defined under the Hire-Purchase Act (Cap. 125), where the good hired or conditionally sold under the agreement is (i) any plant, machinery or fixed asset located in Singapore, where such plant, machinery or fixed asset, is used for manufacturing, production or other business purposes; or (ii) a commercial vehicle;

e) an event contract (being a contract for the provision of a venue, accommodation, amenities, transport, entertainment, catering or other goods or services for (i) a business meeting, incentive travel, conference, exhibition, sales event, concert, show, wedding, party or other social gathering, or sporting event; or (ii) the participants, attendees, guests, patrons or spectators of any of the events mentioned in paragraph (i));

f) a tourism-related contract (being (i) a contract for the international carriage of passengers by sea or land; (ii) a contract for the provision of transport, short-term accommodation, entertainment, dining, catering, tours or other tourism-related goods or services for visitors to Singapore, domestic tourists or outbound tourists; or (iii) a contract for the promotion of tourism in Singapore or the distribution for the purposes of trade or retail of products related to such tourism);

g) a construction contract (which is defined to have the meaning given by section 2 of the Building and Construction Industry Security of Payment Act (Cap. 30B)) or supply contract (which is defined to have the meaning given by section 2 of the Building and Construction Industry Security of Payment Act (Cap. 30B)); and

h) a lease or licence of non-residential immovable property.

What is the procedure for obtaining relief?

A party who wishes to obtain relief under the Act should serve a notification for relief on the other party or parties to the contract and any guarantor or surety for its obligation in the contract.

As a safeguard against unfair outcomes, assessors will be appointed by the Minister for Law to resolve disputes arising from the application of the Act. They will decide if the inability to perform contractual obligations was due to COVID-19 and will have the power to grant relief that is just and equitable in the circumstances. The assessors' decisions will be final and not appealable. The process is proposed to be affordable, fast, and simple. No party will be allowed to be represented by lawyers and each party must bear the party's own costs for proceedings before an assessor.

What are the consequences of obtaining relief?

The Act prohibits the counterparty to the contractual obligation from taking certain actions until after the earliest of:

a) the expiry of the prescribed period;

b) the withdrawal of the notification for relief; and

c) the assessor making a determination that the case in question is not one to which the Act applies.

During this period, the actions which the counterparty may not take include:

a) the commencement or continuation of an action in a court against the notifying party or its guarantor or surety (so far as such proceedings relate to the contractual inability relating to COVID-19 and not any other matter);

b) the commencement or continuation of arbitral proceedings against the notifying party or its guarantor or surety (again to extent that the proceedings relate to the contractual inability relating to COVID-19 and any other matter);

c) the enforcement of any security over any immovable property;

d) the enforcement of any security over any movable property used for the purpose of a trade, business or profession;

e) the making of an application for a meeting of creditors to be summoned to approve a compromise or arrangement in relation to notifying party or its guarantor or surety;

f) the making of an application for a judicial management order in relation to notifying party or its guarantor or surety;

g) the making of an application for the winding up of the notifying party or its guarantor or surety;

h) the making of a bankruptcy application against the notifying party or its guarantor or surety;

i) the appointment of a receiver or manager over any property or undertaking of the notifying party or its guarantor or surety;

j) the commencement or levying of execution, distress or other legal process against any property the notifying party or its guarantor or surety, except with the leave of the court and subject to such terms as the court imposes;

k) the repossession of any goods under any chattels leasing agreement, hire-purchase agreement or retention of title agreement, being goods used for the purpose of a trade, business or profession;

l) the termination of a lease or licence of immovable property as a result of the non-payment of rent or other moneys;

m) the exercise of a right of re-entry or forfeiture under a lease or licence of immovable property; or

n) the enforcement against notifying party or its guarantor or surety of a judgment of a court or an arbitral award.

Businesses should note that the Act extends any period of limitation prescribed by any law or in any contract for the taking of an action in relation to the COVID-19 related contractual inability by a period equal to the period beginning on the date of service of the notification for relief and ending on the earliest of:

a) the expiry of the prescribed period;

b) the withdrawal of the notification for relief; and

c) the assessor making a determination that the case in question is not one to which the Act applies.

Similar extensions apply to certain provisions under the Companies Act (Cap. 50), including in respect of:

a) actions relating to undervalued transactions entered into or the giving of an unfair preference at "the relevant time";

b) the invalidation of certain floating charges created within six months of the commencement of the winding up; and

c) the ability of a liquidator to recover property acquired or sold by a company from or to a director within a certain period.

 

Temporary relief for financially distressed businesses due to COVID-19

During the prescribed period, the Act temporarily increases:

a) the monetary threshold under the Companies Act (Cap. 50) for which a company is deemed to be unable to pay its debts from $10,000 to $100,000; and

b) the statutory period to pay a demand from a creditor from three weeks to six months.

The Act does not require that these debts were incurred on or after 1 February 2020.

In addition, in respect of the offence under the Companies Act (Cap. 50) that an officer of a company should not contract for a debt if the officer had, at the time the debt was contracted, no reasonable or probable ground of expectation of the company being able to pay the debt, the Act introduces a safe harbour provision to enable the company to carry on trading while insolvent by temporarily relieving the officers from the remit of this provision if the debts are incurred in the company's ordinary course of business during the prescribed period and before the appointment of a judicial manager or liquidator of the company.

 

Practical implications of the Act

The Act is legislation borne out of necessity in light of challenging circumstances. The Singapore Government has sought to provide businesses with breathing space to assess their position and consider what actions to take in light of the COVID-19 situation. In light of the measures put in place by the Act, we have identified several practical implications below for consideration by businesses and creditors.

Contractual obligations outside Singapore

International businesses should carefully consider the consequences of relying on the Act. For example, businesses with local liquidity constraints wanting to conserve cash by deferring a payment obligation (where liquidity could be obtained from an offshore affiliate) should consider the knock-on effect on other contractual terms to which the Singapore entity may or may not be a party (such as finance arrangements elsewhere in a global group which contain a suspension of payments event of default) before suspending the performance of their contractual obligations. The Act does not purport to have extraterritorial effect and therefore, for example, the enforcement of offshore security may not be restricted.

Creditors' unaffected contractual rights

In general, the Act does not affect the underlying contractual obligations other than suspending the right to enforce those obligations for a period of time. Although creditors may be prohibited from commencing certain legal actions upon a default of a financing which is covered by the Act, the contractual rights of creditors to charge fees and interest for non-payment or late payment remain unaffected. Therefore, businesses which are seeking to come under the purview of the Act should keep in mind that they may continue to incur late payment charges or increased interest rates even though their payment obligations may be suspended during the prescribed period.

Notwithstanding the measures put in place by the Act, creditors may still be able to rely on their contractual rights in certain situations during the prescribed period. These situations include:

a) loan financings extended by banks and finance companies which are:

  1. unsecured; or
  2. not secured by assets which are immovable properties in Singapore or plant, machinery or fixed assets located in Singapore and which are used for manufacturing, production or other business purposes;

b) financings extended by creditors which are not banks or finance companies and which do not fall under any other category of scheduled contracts which are subject to the Act; and

c) the exercise of a bank's contractual right of set-off as this does not amount to an enforcement of security.

Further, creditors retain the right to take any legal action to recover debts which were due and payable before 1 February 2020 as the Act does not apply to contractual obligations which are to be performed before 1 February 2020.

Force majeure and frustration

The ability to take an action pursuant to an applicable force majeure clause in a contract or the Frustrated Contracts Act (Cap. 115) remains unaffected by the provisions of the Act providing temporary relief for the inability to perform contractual obligations. Therefore, businesses should analyse their contracts for any force majeure clause and consider if the COVID-19 pandemic constitutes a force majeure event within the ambit of such clause. Businesses should then consider the available options that would effectively address their inability to perform their contractual obligations, including whether they should:

a) rely on the applicable force majeure clause in the contract;

b) assert that the contract is frustrated and therefore the Frustrated Contracts Act (Cap. 15) applies; and/or

c) rely on the measures under the Act.

Third party assignee

It is arguable whether the assignee of an assignment of contractual rights (which is not a party to the scheduled contract) by the assignor (who is party the scheduled contract) will be prohibited by the Act from taking any legal action. The ambit of the Act centres around the parties to the scheduled contracts and an assignor of an assignment of contractual rights which is captured in separate documentation would technically not be considered a party to the scheduled contract. However, as the spirit of the Act is to relieve businesses from the consequences of being unable to perform their contractual obligations due to COVID-19, it is arguable that the prohibitions on enforcement would apply to the third-party assignee as well. Further, for equitable assignments, any legal action would have to be taken jointly by the assignee and the assignor.

Relief from insolvent trading

Further, temporary relief from liability arising from insolvent trading could lead to certain officers of companies incurring additional debt during the prescribed period notwithstanding the current and foreseeable financial position of the company does not clearly support its repayment, which may precipitate corporate insolvency. Creditors should keep this in mind when evaluating whether to extend credit to companies in need. Notwithstanding the terms of the Act, directors will remain criminally liable if such debts are incurred fraudulently and remain subject to their fiduciary duties as directors.

Proving insolvency

It has become more difficult for creditors to prove the insolvency of a company in winding up applications given that the Act has increased the monetary threshold for which a company is deemed to be unable to pay its debt and the statutory period to pay a demand from a creditor. However, provided that creditors are not prohibited by the Act from making winding up applications, they can rely on other methods to prove corporate insolvency, for instance, by relying on the financial statements of a distressed debtor.

 

Find out more about business response to the Coronavirus outbreak:
Coronavirus: Managing business impact and legal risks

 

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