Framework to exit contracts will help SMEs reset their business: Edwin Tong

Singapore

ON their own, small and micro enterprises may not have the leverage to renegotiate contracts that have become too onerous due to Covid-19.

But as Singapore moves towards recovery, businesses should be enabled to reallocate resources, "rather than being stuck in a prolonged, painful, unproductive struggle, when circumstances and business assumptions have clearly changed", said Second Minister for Law Edwin Tong in Parliament on Tuesday.

That is why the government is introducing the Re-Align Framework, to help small and micro enterprises renegotiate or exit contracts without penalties, and the Simplified Insolvency Programme, to make it easier for such firms to restructure their debts, or liquidate and distribute their assets.

Mr Tong gave further details and clarifications on the Covid-19 (Temporary Measures) (Amendment No 3) Bill, which sets out the Re-Align Framework. Tabled on Monday under a Certificate of Urgency, the Bill was passed on Tuesday after the debate.

The framework will not apply to contracts terminated before Nov 2. But to ensure smooth implementation, and prevent a rush of terminations, it will apply to contracts terminated from Nov 2, even before the Act comes into force.

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Mr Tong gave anecdotes of small businesses that could not get counter-parties to renegotiate. If trapped in such contracts, they are unlikely to meet their obligations, and would be heading for insolvency and potentially litigation.

There is likely to be a substantial fallout on the economy and jobs, he added, noting that the number of small and medium-sized enterprises (SMEs) expected to see revenue fall 90 per cent or more this year may be as high as five times that in 2019.

The intransigence of some counter-parties suggests that if left to the market alone, then in many cases, necessary realignment of contracts may not happen, said Mr Tong. This is why the government is intervening.

Together, the Re-Align Framework and Simplified Insolvency Programme will ensure that businesses are not stuck in limbo and "resources are instead quickly unlocked for more productive ventures in the new operating environment".

The framework is a necessary complement to government support, ensuring that "the cash infusions are not drained away because businesses are stuck in their contracts", he said.

Addressing fears that this could be used as an "escape route" for contract termination, Mr Tong said that parties must work together to find terms under which it makes sense for both sides to carry on.

The vast majority can be expected to "act commercially and rationally", he added. Rational tenants will not choose to exit their tenancies unnecessarily.

"Those that choose to exit probably genuinely believe that they have no choice... Even in those cases, the landlords can engage in discussions, try to understand the difficulties, and find a solution."

Nonetheless, acknowledging that a small minority might attempt to misuse this, he noted that the assessor system is a safeguard. Disputes can be brought to a dedicated team of assessors, whose decision is final.

The Re-Align Framework will have a revenue threshold for eligibility. It also aims to cover individuals who enter into contracts for a business or trade purpose, such as freelancers, private-hire car drivers, as well as non-profit organisations.

Firms will not have to go through an onerous process to show that they have been affected by Covid-19. There will be an objective criterion based on the fall in revenue over a specified period, compared to a relevant pre-pandemic period.

The government is in consultations with industry on the precise criteria, and will announce it when it is finalised, said Mr Tong.

And while the legislation covers four main types of contracts, the Bill empowers the law minister to amend the schedule of specified contracts.

The contracts currently covered are leases or licences for non-residential property in Singapore with terms up to five years; contracts for the supply of goods or services; hire-purchase and conditional sale agreements for commercial equipment and vehicles, including those with banks and financial institutions; and rental agreements for commercial equipment and vehicles.

In his wrap-up speech at the end of the debate, in which 10 MPs spoke, Mr Tong noted that the goal is to help the economy in the long-term, and that the government seeks a fair balance rather than being "pro-landlord", "pro-tenant", "pro-supplier", or so on.

In response to Kebun Baru MP Henry Kwek's suggestion to extend earlier relief measures related to bankruptcy and insolvency, Mr Tong said that the aim now is to move away from earlier efforts to "hold the line", and to encourage restructuring and exits if it makes sense.

He also clarified that businesses which have benefited from the Rental Relief Framework may still use the new Re-Align Framework.

But tenants on a statutory repayment scheme under the former cannot simply terminate their tenancy if there are outstanding arrears.