New bill to ease hassle for small firms seeking to restructure or wind up

Singapore

WITH the number of financially distressed companies expected to rise as debt moratoriums wear off, the government is seeking to make it easier for micro and small enterprises to restructure their debts or wind up their business.

A bill will be introduced in Parliament this month to set up the Simplified Insolvency Programme (SIP). This will enable eligible micro and small enterprises to restructure their debts or wind up the company through two temporary processes adapted from the existing framework in the Insolvency, Restructuring and Dissolution Act (IRDA).

Lawyers and consultants laud this move as a timely one; many of them say they have already seen a rise in number of restructuring enquiries and engagements by businesses hit by the fallout of the Covid-19 pandemic.

Micro and small companies are defined as those with annual revenue of under S$1 million and S$10 million respectively. In 2018, there were over 251,000 micro and small businesses.

Singapore's insolvency laws generally provide processes for companies with substantial assets, so the solutions offered may be ill-suited for distressed micro and small businesses, said the Ministry of Law. This is particularly for those that have depleted their resources as a result of the pandemic.

A typical scheme of arrangement requires two applications to the High Court, but under the SIP, only one is needed.

The restriction on ipso facto clauses and moratorium against creditors' action will be automatically in place for a company that enters into simplified debt restructuring, which would provide breathing room for the company to propose its restructuring plan.

A lower creditor approval threshold of two-thirds in value than required in a typical scheme of arrangement (majority in number holding 75 per cent in value) is also being proposed under the bill.

Justin Yip, a partner in Withers KhattarWong, said: "This would be helpful in better supporting micro and small companies in their attempts to deal with their creditors and turning around their ailing businesses."

These features simplify and expedite the process, and lower the bar for approval, both of which would significantly improve the micro and small companies' chances of survival, he said.

The simplified winding-up process is a voluntary one instead of being court-ordered, removing the need for a court application.

Where the liquidator views the assets of the company insufficient to meet the expenses of winding up, and its affairs do not require further investigation, the company may be dissolved without the need to take further steps for the administration of the winding up.

The scope of the liquidator's functions will be reduced, given the profile of companies in simplified winding up.

A company in the simplified winding up programme, if subsequently viewed as unsuitable for it, may be placed into a court-ordered winding up on the application of the Official Receiver or an interested party.

To qualify for the SIP, micro and small companies must have liabilities of S$2 million or less, and a maximum of 30 employees and 50 creditors. For simplified winding up, there is a cap of S$50,000 on realisable unencumbered assets.

The programme will be available for a period of six months from the commencement of the proposed legislation. It will be administered by the Official Receiver, who may assign private insolvency practitioners to administer the cases accepted.

There will be a co-payment component for applicant companies under the programme.

The SIP is just part of the government's efforts to help businesses facing financial distress.

Another relief scheme that complements it - to help sole proprietors and partnerships (SPP) - is the SPP Scheme.

To be ready for application by Nov 2, 2020, this scheme will be administered by Credit Counselling Singapore, with the support of The Association of Banks in Singapore, the Monetary Authority of Singapore, Enterprise Singapore (ESG) and the participating financial institutions under the ESG loan schemes.

Lean Min-tze, the mergers and acquisitions principal at Baker McKenzie Wong & Leow, said: "The SPP scheme would be an interesting and welcome development for smaller businesses seeking to restructure their debts, as such businesses might not have access to insolvency professionals unless they are willing to incur a certain level of expenditure."

With these new initiatives, industry watchers are expecting more businesses to come forward, even as the government on Monday extended the debt moratorium deadline for ailing companies.

Bob Yap, partner and head of restructuring at KPMG in Singapore, said that the extensions will only help small and medium-sized enterprises in the short term.

"In a situation where a company is operating at cash flow breakeven because of the debt moratorium, it may mean larger cash flow impact when the moratorium is lifted, and therefore may cause the company to be cash flow insolvent.

"In a pandemic like Covid-19, which is unprecedented, we foresee that there should be a spike in micro and small businesses shuttering."