Liquidations may pick up with tapering of Covid support moves

THE pandemic years have not seen a rise in businesses filing for liquidation, according to figures compiled by data platform Handshakes – though corporate lawyers see a chance that filings might pick up as government support dissipates and economic conditions remain gloomy.

Instead, the total number of companies and limited liability partnerships filing for liquidation fell slightly in the last 2 years. The figures were 950 in 2021 and 924 in 2020, compared to pre-pandemic figures of 1,029 in 2019 and 964 in 2018. This year, 497 business entities have filed applications for liquidation as of June.

Temporary relief measures and government financial support during the pandemic may have delayed the commencement of winding up applications, said lawyers. Such measures included grants, loan payment deferrals, loan restructuring assistance and moratoriums on presentation of winding up petitioners.

Despite the introduction of temporary relief measures, winding up applications in 2020 and 2021 did not fall substantially from pre-Covid levels – so “it would reasonably follow” that if relief measures had not been introduced, applications would indeed have risen, said Chan Wei Meng, director of corporate restructuring and workouts at Drew and Napier.

While overall winding up numbers may not show a large difference, Jeremy Leong, managing director of Acton Law, highlighted 2 categories of filings related to insolvency: compulsory winding up (insolvency) and creditors’ voluntary winding up.

For these 2 categories, “the cursory finding is a general upward trend” this year compared to the earlier pandemic years, he noted. For both categories together, there were 236 entities filing applications in the first half of 2022 – already more than half of the full-year figures in 2021 and 2020, at just under 400 each year.

Over the last 5 years, combined filings for those 2 categories were highest in 2019, at 485. Leong suggested that this “may have been an anomaly due to oil prices starting to dip and the initial stress on a number of oil traders and brokers”.

He noted that in 2020, more companies placed themselves into creditors’ voluntary liquidation, despite significant government assistance and the availability of alternatives to liquidation such as judicial management and schemes of arrangement.

But he added: “This may say more about lack of resilience amongst entrepreneurs and the availability of alternatives to entrepreneurship – such as going back to employed work or the gig economy – than it does about the health of the business environment in general.”

According to Handshakes’ data, there were 136 applications for creditors’ voluntary winding up in the first 6 months in 2022, slightly more than half the full-year figures for both 2020 and 2021.

Chan said that in addition to the cessation of relief measures and government support, “business owners may have had better clarity in relation to the ability of rehabilitation given the increased prospect of global economic downturn”, and thus chose to wind up.

Sheila Ng, deputy head of restructuring and insolvency at Rajah and Tann, also noted that while some industries and companies might have been badly hit by the pandemic, others have done well, or adapted and used the opportunity to improve their efficiency and business overall.

Lawyers were mixed on whether the Insolvency, Restructuring and Dissolution Act 2018 (IRDA), which came into effect in July 2020, could have affected insolvency filing numbers.

One key effect of the IRDA was to restrict the exercise of ipso facto clauses, which allow a contract party to terminate, amend, or accelerate payment solely because the other party is insolvent or has commenced debt restructuring or liquidation processes. Restricting the exercise of these clauses provided more breathing room for companies in distress, Ng said.

Coming into effect during the pandemic, the IRDA may have increased awareness of the options for debt restructuring and alternatives to liquidation, she added. “Some companies may have chosen to seek professional advice and go into debt restructuring, instead of liquidating the company when it is too late.”

Tham Wei Chern, director of Fullerton Law Chambers, agreed that debt restructuring through schemes of arrangement has become more popular: “There has already been a push to make Singapore a restructuring hub, and the IRDA built upon previous legislation in the Companies Act such as moratoriums for companies that were intending to enter schemes of arrangements with their creditors.”

But Leong believes that the Act has “not really” had an impact on liquidation numbers, as the main changes to the insolvency regime were in place by 2017 when the Companies Act was amended, with the IRDA only consolidating the legislation.

As government support tapers off in the face of a potential economic downturn and global uncertainties, lawyers expect that more companies will be liquidated, though the increase may not be great.

Ng does not foresee a “sudden surge in numbers” but “would not be surprised to see a gradual increase”.

Tham similarly expects more liquidations given current economic conditions, “including the expectation that interest rates will be heading higher”. He added: “I anticipate that they may be higher than pre-pandemic numbers, but given that the current numbers have not changed very much, this is very much guesswork at this point in time.”

Leong believes that 2022 could turn out to be “a bumper year” for liquidations when reliefs run out, but added the caveat that liquidation data should be considered alongside data on judicial management and schemes of arrangement.

“I wouldn’t hazard anything beyond a speculation based on a straight line extrapolation of the half-year 2022 number of 236,” he said. “But several macroeconomic factors weigh in favour of a high number.” He added that instability in the cryptocurrency market could also affect liquidation figures.

If support arrives or conditions change in time, this could change the outlook, said Tham: “Anecdotally I understand that lenders have been holding back from pulling the trigger, and have been granting more extensions to their borrowers... If more support comes, or the economy turns around, then the borrowers may be able to tide over a cash crunch.”

This story is part of a series by The Business Times (BT) and Handshakes, called the BT-Handshakes Data Series. It is a regular project collaboration to give insights on various business sectors of Singapore, using data from Acra.