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How the Simplified Insolvency Programme Can Help Micro and Small Companies In Financial Distress 2021
The article was first published on 9th October 2020 and updated on 1st February 2021.
The Covid-19 pandemic has changed the way businesses are run, and it’s difficult to predict what the future holds for industries that have been hard-hit during this period. This is especially so for micro and small companies that are lacking in financial resources, and are now facing potential insolvency.
In 2018, there were over 251,000 micro and small businesses, comprising approximately 207,000 micro enterprises and 44,000 small enterprises. Micro and small companies are defined as those with annual revenue of under S$1 million and S$10 million respectively.
In times like this, micro and small businesses need to understand and adjust to the new realities, and to decide if they should look at restructuring their debts, or wind up their business if it has ceased to be viable.
As such, the Simplified Insolvency Programme (SIP) was announced by Deputy Prime Minister Heng Swee Keat on Monday, 5th October 2020, which will be adapted from the existing framework in the Insolvency, Restructuring and Dissolution Act (IRDA).
Insolvency, Restructuring and Dissolution Act
The IRDA came into effect on 30th July 2020 to enhance Singapore’s debt restructuring ecosystem - it unifies Singapore’s legislation in relation to personal and corporate insolvency and debt restructuring into a single statute. As a result, the Bankruptcy Act has been revoked and relevant provisions in the Companies Act have been deleted.
The implementation of the IRDA provides guidelines regarding insolvency / restructuring proceedings, new provisions on wrongful trading, increased monetary thresholds under the Corporate Insolvency and Bankruptcy Regime, as well as new procedure for the early dissolution of a company in liquidation, amongst other changes.
There is also no longer a need for companies to make an application to court to be placed under the judicial management. Instead, upon obtaining a resolution passed by majority in number and value of the company’s creditors present and voting, a company can opt to be placed under judicial management. This allows for a voluntary judicial management process to commence without the need to incur additional court expenses.
Under the IRDA, secured creditors are required to notify the trustee in bankruptcy or the official assignee within 30 days after the bankruptcy order of the intention in order to claim interest on the debt owned by the bankrupt. This will facilitate the overall administration of the bankrupt’s estate as the trustee or the official assignee would be able to have a clearer picture of the bankrupt’s assets earlier on.
Simplified Insolvency Programme
The processes under Singapore’s insolvency laws are usually for companies with substantial assets, hence it may not be suitable for micro and small businesses that are already in financial distress due to the pandemic. The SIP aims to ease the processes for micro and small businesses to restructure their debts or wind up their business in the most cost efficient way.
Under the proposed SIP, eligible micro and small companies will be able to restructure their debts or wind up operations through two temporary and new processes adapted and modified from the existing IRDA framework. The usual procedure would require companies to get two applications to the High Court, instead the SIP would only require one application through the pre-packaged scheme of arrangement under the IRDA.
The proposed SIP will be available for a period of six months upon commencement, and will be administered by the Official Receiver, who may assign private insolvency practitioners to administer the cases.
Simplified debt restructuring
An ipso facto clause provides for rights to terminate or modify the operation of a contract upon the occurrence of certain trigger events. When a company enters into simplified debt restructuring under the SIP, the restriction on ipso facto clauses and moratorium against creditors’ action will be automatically in place.
A lower creditor approval threshold of two-thirds in value is also being proposed under the SIP. In a typical scheme of arrangement, a majority in number holding 75% in value is required.
With such implementations, micro and small businesses would be given more space and time to deal with their creditors, and hopefully be able to turn around their financial situation, and improve their chances of survival during this pandemic.
Simplified winding-up process
There will be no need for a court application as the simplified winding-up process is voluntary instead of being court-ordered. As long as the liquidator deems the company’s assets to be insufficient to meet the expenses of winding up, and no further investigation is required, the company may be dissolved without additional procedures such as the realisation of assets and distribution of dividends.
Certain complex and costly aspects of a conventional winding up are also not required for a simplified process, given the profile of companies applying under the SIP.
However, if the company in the simplified winding-up programme is subsequently deemed as unsuitable, it may be placed into a court-ordered winding up on the application of the Official Receiver or an interested party.
Who qualifies for the Simplified Insolvency Programme
Micro and small companies must have liabilities of S$2 million or less, with a maximum of 30 employees and 50 creditors. For simplified winding up, there is a cap of S$50,000 on realisable unencumbered assets and it cannot be a foreign company
Additional Reporting on 1st Feb 2021
The application fee for both programmes under the SIP is $450, while the administration fee will be $18,750 for the SDRP and S$2,700 for the Swup.
Fees for additional services such as legal advice and valuation must be borne by the firm and paid directly to the service provider.
For non-corporate businesses, they can tap on the Sole Proprietors Scheme and Partnerships Scheme administered by Credit Counselling Singapore
Under the SPP Scheme, individuals operating as Sole Proprietors or Partnerships may seek the assistance of CCS in restructuring their unsecured business debts owed to the participating banks and financial institutions. The Scheme allows for lower monthly instalment payment for unsecured business borrowings by extending the loan repayment period to up to a maximum of 8 years, with interest rate capped at 7% p.a.
To be eligible for the SPP Scheme, the following criteria apply:
1. Businesses must be operating as sole proprietors or partnerships (excludes Limited Liability Partnerships and Sole Proprietorships/Partnerships that are owned by private limited companies);
2. The firm’s total unsecured debt does not exceed S$1 million;
3. The firm owes unsecured debts to two or more lenders; and
4. The firm’s unsecured debts are owed to the participating lenders.