Singapore's New Simplified Insolvency Programme for Micro and Small Companies

By Hui Min Chiow (Student, Singapore Management University)

Introduction

In response to the severe and continuing economic effects of the COVID-19 pandemic, the Singapore Government implemented a comprehensive package of legal and economic measures to keep businesses going. Despite these efforts, many companies severely affected by the COVID-19 crisis have ended up in insolvency, or are expected to face financial trouble in the following months. Thus, they may need to restructure their debts (if their business remains viable) or to be wound up (if the business is no longer viable) so that their resources can be reallocated towards more productive activities.

Though the insolvency regime in Singapore has recently been overhauled, culminating in the Insolvency Restructuring and Dissolution Act 2018 (IRDA), the ordinary insolvency system might not be suitable for micro and small companies (MSCs). These companies have a markedly different profile from larger companies, with far fewer assets, and less complex organisational and financial structures. For this reason, many countries around the world are amending their insolvency framework for MSCs, and Singapore has joined this group of countries by adopting a simplified insolvency programme to temporarily assist MSCs in the recovery phase of the COVID-19 pandemic.

Enactment of the Simplified Insolvency Programme (SIP)

In October 2020, the Government introduced in Parliament an amendment to the Insolvency, Restructuring and Dissolution to include the new simplified insolvency programme (SIP), specifically seeking to support MSCs affected by the COVID-19 pandemic. The SIP was passed by Parliament on 3 November 2020, and applications for the programme opened on 29 January 2021. While the SIP has initially been made available from 29 January 2021 to 28 July 2021 (6 months), it may be extended should the need arise.

Primary features of the SIP

The SIP provides simpler, faster, and lower-cost restructuring and insolvency proceedings for eligible MSCs and complements existing insolvency processes in the Insolvency, Restructuring and Dissolution Act. Namely, the SIP is composed of two separate programmes – the Simplified Debt Restructuring Programme (SDRP) and the Simplified Winding Up Programme (SWUP). Both programmes are administered by the Official Receiver, who may assign private insolvency practitioners (restructuring advisors) to oversee and manage the cases. Only the MSC, and not its creditors, may apply for the SIP.

To qualify for the programme, MSCs must fulfil the following criteria:

1. An annual sales turnover of not more than $10 million;
2. Company liabilities (including contingent and prospective liabilities) not exceeding $2 million;
3. Number of creditors not exceeding 50;
4. Number of employees not exceeding 30;
5. Incorporated in Singapore; and
6. Unencumbered assets of not more than $50,000 (only applicable for SWUP).

The MSC must also not be presently involved in any winding up or judicial management proceedings. Among other criteria affecting suitability, debtors with special complexity and those requiring significant expertise might not be eligible for the simplified debt restructuring procedure. Additionally, as a way to prevent opportunistic behaviour by non-viable debtors seeking to apply for the simplified debt restructuring procedure, unsuitable debtors for the programme include those unlikely to be able to formulate and approve a plan within 90 days. Additionally, if creditors representing at least 1/3 of the company’s creditors object, the application will not be approved. Therefore, the new SIP provides small companies with an attractive insolvency and restructuring framework without undermining the interest of the creditors, which is consistent with the balanced approach adopted under the Insolvency Restructuring and Dissolution Act.

Simplified Debt Restructuring Programme (SDRP)

The SDRP is aimed at the restructuring of debts and potential rehabilitation of viable MSCs. Under the programme, the existing pre-packed scheme of arrangement in the IRDA has been adapted to require only one application to the High Court, instead of the two applications generally required under the IRDA. The threshold requirement for creditors’ approval under the scheme has also been lowered to two-thirds in value, down from requiring a majority in number holding 75% in value. The agreement should be reached within 90 days, although an extension may be granted. To allow the company some breathing room to develop its restructuring plan, companies subject to the SDRP will enjoy an automatic moratorium to protect them from creditors’ actions, and there will be a temporary restriction of ipso facto clauses. Additionally, a restructuring advisor may be appointed by the Official Receiver to facilitate the success of the reorganization procedure. However, even though the restructuring advisor will be overseeing the process and formulates the plan, the debtor remains in possession. As many MSCs do not have enough resources to fund the restructuring advisor, the remuneration of the restructuring advisors will be subsidised.

Simplified Winding Up Programme (SWUP)

The SWUP facilitates the orderly winding up of non-viable MSCs in an efficient and cost-effective manner. It adapts the existing creditors’ voluntary winding up process in the IRDA by removing the need for a Court application to begin the winding up. This allows the MSC itself to make a direct application to the Official Receiver. The SWUP also allows for early dissolution. Where the liquidator views that the assets of the company are insufficient to meet the expenses of winding up, and its affairs do not require further investigation, the company may be dissolved within 30 days. This eliminates the need for the traditional further steps such as the further realisation of assets and distribution of dividends.

The scope of the liquidator’s functions has also been curtailed, in recognition that certain complex and costly aspects of a traditional winding up process are not suitable for MSCs. For example, no creditors’ meetings will be convened under the SIP, and the liquidator may only commence legal proceedings to preserve the rights of the company.  If the MSC is ultimately found to be unsuitable for the SWUP, the Official Receiver or an interested party may apply to place the company into a Court-ordered winding up under the IRDA instead.

Conclusion

The enactment of the SIP complements the comprehensive package of legal and economic responses adopted by the Singapore Government in the recovery phase of the COVID-19 pandemic. The possibility of having access to more affordable, expeditious, and simplified restructuring and insolvency procedures will help MSCs affected by the COVID-19 crisis solve their financial difficulties either by achieving a debt restructuring or by reallocating their assets towards more productive activities while having access to a quick exit through a simplified winding up procedure. As a result, the adoption of the SIP is a welcome addition to Singapore’s business and restructuring ecosystem, as well as Singapore’s response to the COVID-19 pandemic, especially taking into account the importance of micro and small companies for the local economy. Besides, the temporal scope of this programme will help test the desirability of this simplified insolvency framework. The results of this programme will be useful in helping the Government decide whether such a scheme should be permanently adopted in the IRDA, and whether any adjustments are needed to ensure the insolvency and restructuring framework in Singapore remains attractive to both debtors and creditors.