Restructuring and Insolvency in the Recovery Phase of the COVID-19 Pandemic: Lessons from Singapore
By Aurelio Gurrea-Martinez (Singapore Management University)
Introduction
After the outbreak of the coronavirus (COVID-19), many countries around the world adopted a variety of legal and economic responses to support distressed businesses. In Singapore, the Government spent close to $S100 billion (that is, around 20% of the country’s GDP) to support businesses, households and employees. Most of this financial support was given in the form of wage subsidies, cash payouts and government-supported loans. Additionally, in the early stages of the pandemic, the Singapore Government also adopted various legal measures, including temporary changes to the general rules governing contracts and insolvency proceedings. The combination of legal and financial responses sought to put the economy into hibernation and avoid the destruction of jobs and viable businesses, at least while companies were unable to generate revenues and cash-flows due to a variety of factors, including travel restrictions and lockdowns imposed in many countries around the world.
From hibernation to recovery
At some point of the pandemic, however, regulators and policymakers need to change their regulatory strategies. First of all, even though the fight against COVID-19 is far from over, life needs to continue. Secondly, Governments have limited resources. Thirdly, various measures adopted to protect debtors may hamper the position of creditors without necessarily improving the financial situation of debtors. As a result, extending these measures can lead to a significant increase in the number of zombie companies, corporate insolvencies of small creditors, disruption of supply chains, and distortions of the real economy by keeping many businesses artificially alive. Additionally, since these measures would probably increase the (already significant) levels of non-performing loans generated by the pandemic, extending these suspensions can even jeopardize the stability of the financial system. Therefore, Governments need to change their regulatory strategies and move from hibernation towards recovery. And this is exactly what, through a comprehensive package of responses, the Singapore Government has been doing in the past months.
The Singapore strategy in the recovery phase of the COVID-19 Crisis
Singapore has adopted several strategies in the recovery phase of the COVID-19 crisis. First, as a response to the problems and distortions in the real economy mentioned in the previous section, the Government decided not to extend most of the temporary changes to the rules governing contracts and insolvency proceedings adopted in the early stage of the pandemic.
Second, despite the attractiveness of Singapore's insolvency and restructuring framework, the ordinary insolvency system might not be suitable for small businesses. Therefore, due to the importance of micro, small and medium-sized enterprises (MSMEs) for the Singapore economy, the Government decided to come up with a simplified insolvency programme to support small companies. This framework, coming into force soon, will allow viable MSMEs to have access to an affordable, simplified and expedite restructuring process. Likewise, it will also provide a simplified winding-up process for small companies that are no longer viable. Thus, by facilitating a quick exit, entrepreneurs will be able to start a new venture, and the assets of their companies can be reallocated towards more productive activities that can generate jobs and growth.
Third, since the insolvency framework for MSMEs only applies to small companies, a new relief scheme has been created to support sole proprietors and partnerships affected by the COVID-19 pandemic.
Fourth, the Government has also enacted a re-align framework for the renegotiation of contracts of businesses significantly impacted by COVID-19. The framework, in force since 15 January 2021 and only available for a limited period of time, provides a quick and fair way for businesses to realign and move forward by allowing selected contracts to be renegotiated by way of mutual agreement with the counterparties. If they are unable to agree, the contract may be terminated. Businesses will remain liable for outstanding obligations but will not need to pay early termination penalties.
Fifth, the Monetary Authority of Singapore, together with the Association of Banks in Singapore and the Finance Houses Association of Singapore have extended the support measures to help individuals and MSMEs facing cash-flow difficulties. Namely, the extended support scheme (standardised) will allow qualifying MSMEs to temporarily defer 80% of principal payments on their secured term loans, as well as loans granted under Enterprise Singapore’s Enhanced Working Capital Loan scheme and Temporary Bridging Loan Programme. In addition, the extended support scheme (customised) facilitates the restructuring of SMEs’ loans across multiple banks or finance companies.
Sixth, viable companies unable to pay their debts have been encouraged to engage their lenders and try to reach an out-of-court agreement. As it is known by lawyers and insolvency practitioners, workouts can save significant costs for debtors and creditors. They can also prevent the judicial system from becoming overwhelmed from a potential wave of insolvency cases. Moreover, due to the reduced coordination costs and holdout problems existing in MSMEs and even large firms without complex capital structures with dispersed creditors, workouts can be easily achieved in the context of these companies. For that purpose, debtors just need to make sure that the workout is also in the interest of the creditors, and this is something generally shown by proving that the company is economically viable, and therefore it is worth more alive than dead. To maximize the chances of having a successful workout, companies may want to follow some of the good practices for workouts enacted by the Association of Banks in Singapore, as well as those enacted by other international organizations such as INSOL and the World Bank.
Seventh, for larger firms with more complex capital structure potentially requiring a more sophisticated restructuring framework, the new Insolvency, Restructuring and Dissolution Act 2018 came into force on 30 July 2020. Therefore, local companies, as well as foreign debtors with a substantial connection with Singapore, can use the provisions of the new restructuring framework. Moreover, as some of these provisions were adopted in 2017, there are already several cases establishing precedents on various relevant matters, including the concept and scope of rescue financing provisions, the use of pre-packs, the scope of the moratorium, and the concept of substantial connection. Therefore, the existence of new restructuring tools to facilitate the reorganization of viable companies facing financial trouble, the certainty provided by an increasing case law dealing with the new legislation, and the efficiency and reliability of the sophisticated judiciary existing in Singapore, will make the insolvency system a powerful tool to support distressed businesses in the recovery phase of the COVID-19 crisis.
Eighth, the Government is spending significant resources in creating jobs and providing new skills to workers that need to be reallocated towards other business activities. As it was mentioned in a recent speech given by Agustin Carsten, General Manager of the Bank for International Settlement, ‘policymakers must encourage and enable businesses in the most severely damaged sectors to reallocate their resources toward those sectors that are more likely to thrive in the post-pandemic economy’. Indeed, while the pandemic has severely damaged certain sectors and businesses (e.g., hotels, restaurants, airlines, etc), it has actually boosted others (eg., tech companies). Therefore, since resources are limited, it is important to put more efforts on saving viable companies while providing workers of non-competitive businesses with the skills and opportunities needed to find a job in other companies or industries.
Ninth, as part of the country's Smart Nation initiative, Singapore has become one of the world's leading fintech hubs, and it has also facilitated the digital transformation of companies, especially MSMEs. This increasing relying on technology and fintech is contributing to face some of the challenges of the pandemic.
Tenth, providing certainty and maintaining an attractive legal and institutional environment for businesses and commercial transactions has always been a priority for Singapore. In the current situation, this attractive business environment will probably encourage many companies with flourishing business to reallocate to Singapore and it will provide local entrepreneurs to have more chances to start a new venture.
Additionally, the legal and financial measures to support businesses are also accompanied by an ambitious and coordinated package of public-health responses, not only needed to save lives but also boosting the economy. In my view, Singapore's comprehensive legal, economic, technological and public-health response to the COVID-19 crisis is expected to contribute to the quick recovery of the local economy.
Conclusion
Even though the desirability of the policies to be implemented in the recovery phase of the COVID-19 crisis might differ depending on the legal, economic and institutional features of a country, some lessons can be learnt from the Singapore experience. Perhaps, the most important one is that, against the 'hibernation policies' still existing or extended in many countries, it is essential to move to the recovery phase of the COVID-19 pandemic. In terms of insolvency law, this shift implies that, instead of relying on suspensions of creditors' rights and the extension of stays temporarily protecting distressed debtors, it would be more desirable to focus on other policies. First, the use of workouts should be promoted. This goal can be facilitated by enacting some good practices for workouts, and making sure that the business community is aware of them. Second, due to the significance of MSMEs in most countries around the world, as well as the unsuitability of traditional insolvency proceedings for MSMEs, regulators and policymakers are encouraged to implement simplified insolvency frameworks for MSMEs. Third, the ordinary insolvency system should be strengthened and equipped to deal with the wave of (larger) insolvency cases probably arising in the recovery phase of the COVID-19 pandemic. Finally, regulators should explore different ways to facilitate new financing, including the adoption or increasing use of DIP (rescue) financing provisions, the suspension (if not abolition) of rules subordinating shareholder loans existing in certain countries and the simplification of rules for the injection of equity financing.