COVID-19 (Temporary Measures) Act 2020 and Bank Lending
On 7 April 2020, Singapore government passed the COVID-19 (Temporary Measures) Act 2020 (the “Act”). Alongside a S$59.9 billion stimulus package, this Act is intended to help individuals and businesses alike stave off the dire and far-reaching economic repercussions of the global response to the COVID-19 pandemic. The Act inter alia, aims to provide temporary relief for certain types of entities (SMEs) who are unable to perform certain types of contractual obligations, as well as general temporary relief for financially distressed individuals and firms. The prescribed period referred to in the Act commences at first instance for 6 months from the date of commencement of the Act, and may be extended or shortened by the Minister.
In particular, banks should take note of the protection afforded to borrowers and other obligors by virtue of the Act which may have an effect on security enforcement, insolvency proceedings and other proceedings whether before the courts or an arbitral tribunal once the Act comes into effect.
At present, the commencement date of these provisions of the Act has yet to be announced, but it is expected to commence in mid-April 2020. In addition, procedural rules on how the protective provisions are to operate are presently in the process of being rolled out.
TEMPORARY RELIEF FROM CERTAIN CONTRACTUAL OBLIGATIONS
In brief, Part 2 of the Act operates to grant relief to contracting parties from (1) certain contractual obligations that cannot be fulfilled due to COVID-19 by imposing (2) a moratorium on any court or arbitration proceedings or enforcement of security in respect of that contracting party’s failure to fulfil its contractual obligations. The relief granted by the Act does not apply automatically – (3) parties seeking to rely on the Act must notify its other contracting parties. (4) Relief under the Act is intended to be temporary and not to absolve contractual parties of their obligations. (5) Disputes arising from the notification for relief under the Act may be referred to a panel of assessors appointed under the Act.
It is important to note that Part 2 of the Act is not a ‘get out of jail free’ card – not all contracts will be affected, the Borrower must give notice to the Bank that it wants to rely on Part 2 of the Act, and the Borrower must (presumably) be able to show how the COVID-19 epidemic or compliance with relevant COVID-19 laws has materially affected its ability to pay or to perform its obligations. Upon giving a notice, the Bank may dispute the reasons set out in the notice – if the Bank disputes the reasons, the parties can approach a statutory Assessor, who will determine whether or not in fact the Borrower is entitled to rely on Part 2 of the Act. The Assessor’s decision is binding, and not subject to appeal.
If Part 2 of the Act applies, then any person who without reasonable excuse takes any of the prohibited actions in contravention of the moratorium shall be guilty of an offence and liable on conviction
to a fine not exceeding $1,000. In addition, any contravening legal proceedings will be dismissed immediately and any enforcement of security will be voided and invalidated. That being said, the contractual obligation which is to be performed is not cancelled or indefinitely removed – it is merely suspended until the moratorium period expires. Other contractual obligations (interest incurred, charges, costs & expenses etc.) continue to be incurred.
Part (1): Contractual Obligations to which Part 2 of the Act would apply
A party may rely on Part 2 of the Act in relation to a scheduled contract (as defined below) if it is unable to perform an obligation that is due to be performed on or after 1 February 2020, and such inability is, to a material extent, caused by the COVID-19 epidemic / pandemic or the operation or compliance with any law, order, regulation of Singapore or another country made in connection with COVID-19.
The contractual obligations to which Part 2 of the Act applies (“scheduled contracts”) are set out in Section 4(1) of the Act and the Schedule to the Act. A scheduled contract must be a contract entered into or renewed (other than automatically) before 25 March 2020 and pertain to the subject matters set out in the Schedule to the Act. Some of the subject matters of scheduled contracts which would be particularly salient to Banks include:
- contract for the grant of a loan facility by a bank licensed under the Banking Act (Cap. 19) or a finance company licensed under the Finance Companies Act (Cap. 108) to an enterprise, where such facility is secured, wholly or partially, against any commercial or industrial immovable property located in Singapore; and
- a contract for the grant of a loan facility by a bank licensed under the Banking Act or a finance company licensed under the Finance Companies Act to an enterprise:
where such facility is secured, wholly or partially against any plant,
- machinery, or fixed asset located in Singapore; and
- where such plant, machinery or fixed asset (as the case may be) is used for manufacturing, production or other business purposes;
- a hire purchase agreement or conditional sale agreement as defined under the Hire-Purchase Act (Cap. 125), where the good hired or conditionally sold under the agreement is:
- any plant, machinery or fixed asset located in Singapore, where such plant, machinery or fixed asset is used for manufacturing, production or other business purposes; or
- a commercial vehicle; and
- a lease or licence of non-residential immoveable property.
It is important to note that
- not all Borrowers will fall within the category of contracts listed in sub-paragraphs (a) and (b) above. An “enterprise” is defined under the Act as an entity (whether incorporated or not) which is formed and established and carries on business in Singapore where not less than 30% of its shares are held by Singapore citizens or permanent residents, and the turnover of the group to which it belongs does not exceed $100 million in the latest financial year. The definition of “enterprise” is designed to only apply to SMEs and does not apply to large corporates / MNCs; and not all loan facilities will be affected – only loans which are wholly or partially secured against any commercial / industrial property in Singapore, or secured against any plant, machinery or fixed assets used for manufacturing, production or business purposes in Singapore will be affected.
- The scope of protection is clearly designed to only apply to business-generating / operational assets necessary for business continuity. That being said, many of such securities are typically granted by Borrowers on an open all-monies / cross-default basis, i.e. the security covers any and all facilities granted by and outstandings of a borrower to a lender – arguably, that would result in all facilities granted by a lender to a borrower where such securities are involved (whether or not such securities have been granted specifically for the purpose of any particular facility) being affected.
Part (2): Prohibited actions during the moratorium
If Part 2 of the Act applies, then Section 5(3) of the Act prevents a contracting party (“Party A”) from taking the following actions against the other contracting party (“Party B”) during the moratorium period:
- commencing or continuing an action in court against Party B, its guarantors or sureties;
- commencing or continuing any action against Party B, its guarantors or sureties under the Arbitration Act (Cap. 10);
- enforcing any security over any immoveable property;
- enforcing any security over any moveable property which is used for the purpose of a trade, business or profession;
- the making of an application under section 210(1) of the Companies Act (Cap. 50) for a meeting of creditors to be summoned to approve a compromise or an arrangement in relation to Party B or B’s guarantor or surety;
the making of an application for a judicial management order in relation to Party B or B’s guarantor or surety;
- the making of an application for the winding up of Party B or B’s guarantor or surety;
- the making of a bankruptcy application against Party B or B’s guarantor or surety;
- the appointment of a receiver or manager over any property or undertaking of Party B or B’s guarantor or surety;
- the commencement or levying of execution, distress or other legal process against any property of Party B or B’s guarantor or surety, except with the leave of the court and subject to such terms as the court imposes;
- the repossession of any goods under any chattels leasing agreement, hire‑purchase agreement or retention of title agreement, being goods used for the purpose of a trade, business or profession;
- the termination of a scheduled contract (being a lease or licence of immovable property) where the subject inability is the non‑payment of rent or other moneys;
- the exercise of a right of re-entry or forfeiture under a scheduled contract (being a lease or licence of immovable property), or the exercise of any other right that has a similar outcome;
- the enforcement against Party B or B’s guarantor or surety of a judgment of a court, an award made by an arbitral tribunal in arbitral proceedings conducted under the Arbitration Act, or a determination by an adjudicator under the Building and Construction Industry Security of Payment Act; and
- such other action as may be prescribed.
Part (3): Notification of Relief
Pursuant to section 9 of the Act, any party seeking to rely on Part 2 of the Act must serve a notification for relief in accordance with the Act on its counterpart(ies) and any guarantor or surety for its obligations under the contract. At present there is no prescribed period during which the notification for relief must be served, nor is there any prescribed information which must be contained in such notification. Logically, we would expect that the notice must set out what obligation the party is unable to perform, as well as how that is materially caused by COVID-19. However, this has not been legislated or regulations prescribed – we may need to await further guidance from the authorities on this.
Part (4): Duration of the Moratorium
Pursuant to section 3 of the Act, the Minister of Health may prescribe the period for which the Act (and the relief granted under the Act) is in force (the “prescribed period”) by notification in the Gazette. At present, no notification by the Minister has been made in the Gazette as to the prescribed period. The moratorium on the actions stated above in respect of the scheduled contracts will continue in force until the expiry of the prescribed period unless earlier revoked by way of Party B’s withdrawal of its notification for relief, or in the event that Party B’s notification for relief is disputed and assessed to be ineligible for relief under the Act.
Part (5): Disputes Arising from Notification for Relief
Any disputes as to whether a contractual obligation is one that is eligible for relief under the Act will be adjudicated by a panel of assessors appointed under the Act in accordance with sections 13 and 14 of the Act. The decision of the assessors will be final and binding and there will be no appeal from an assessor’s determination. Parties are also not permitted to be represented by advocates and solicitors at proceedings before an assessor. At this point in time, the authorities have not indicated who the assessors are, nor how the assessment process / applicable rules / procedure will be – we may need to await further guidance from the authorities on this.
TEMPORARY RELIEF FOR FINANCIALLY DISTRESSED INDIVIDUALS AND FIRMS
Where firms or individuals are unable to seek relief under Part 2 of the Act, they are also still able to avail of the temporary modifications to Singapore’s bankruptcy and insolvency laws by virtue of Part 3 of the Act. Part 3 of the Act raises the debt threshold for bankruptcy of an individual from $15,000 to $60,000. The statutory period to respond to demands from creditors before a presumption of insolvency is raised has also been extended from 21 days to 6 months. The debt threshold before a winding up application may be made in respect of companies has also been raised from $15,000 to $100,000. The statutory period to pay the sum due or compound for it to the satisfaction of the creditor has also been extended from 3 weeks to 6 months.
The temporary modifications as set out above will apply across the board to all bankruptcy / insolvency proceedings for as long as the Act remains in force.
FORCE MAJEURE (FM) CLAUSES
Notwithstanding the enactment of the Act, Banks should also note that Borrowers may avail of FM Clauses if provided for under the terms of the facility. Borrowers may claim that the COVID-19 pandemic falls within the protection offered by the FM clause. Whether or not this claim succeeds will depend on the construction of the FM clause in the facility agreement, and it is not always straightforward to discern whether or not a FM event (i.e. the COVID-19 outbreak) falls within the scope of a FM clause.
The precise drafting of the FM clause is of primary importance. If the contract expressly stipulates “pandemic, “epidemic, “communicable diseases” or other equivalent language as a FM event, then the courts would be more likely to interpret the FM clause as covering the COVID-19 outbreak. Without express reference, there would be uncertainty as to what is covered by the clause. In such a case, a party would have to argue that, for example, the
COVID-19 outbreak is an “act of God” or is otherwise captured by the definition of FM.
Once it has been determined that the COVID-19 outbreak falls within the scope of a FM clause and (if required) the Borrower has taken all reasonable steps to avoid its effects, Banks should carefully examine the FM clause in order to determine what becomes of the Borrower’s obligation to repay. For example, if the clause states that “all payment obligations are suspended / delayed” as a result of a FM event, then the Borrower would probably be entitled to delay its obligation to repay. Conversely where the clause does not expressly provide that the Borrower’s obligation to repay is delayed or suspended (or other equivalent language) on the occurrence of a FM event, then it is likely that the borrower would not be entitled to delay its obligation to repay.
Further, the Bank should check if the Borrower has procured strict compliance with the FM clause. Typically, a FM clause would require a party to give written notice to its counterparty of the circumstances resulting in the failure or delay of its contractual performance. In this regard, we note that there has been case law to the effect that a party could not rely on a FM clause because he did not provide the requisite written notification under the clause.
Aside from FM clauses, a Borrower may also attempt to rely on common-law frustration – the law of frustration provides that if neither party is at fault
and there is an intervening event that results in the underlying sub-stratum for the contract being removed or making performance of the contract impossible, then a party may rely on frustration to discharge the contract. This is however a very limited legal avenue / relief, and the threshold required to plead frustration is high. It is unlikely that a party to a loan / facility will be able to allege frustration of contract, since it is not the case that the underlying reasons / substratum of the loan / facility are removed, simply that it is a hardship for a party to make payment on its obligations to repay, bearing in mind that the loan has already been disbursed / facility utilised. It is also usually the case that most loan / facility agreements would have contractually removed the right to plead defences of frustration or illegality on the part of the Borrower as a defence or to discharge the contract.
Singapore’s quick reaction to the unfolding COVID-19 pandemic seeks to imbue stability in Singapore’s economy in order to facilitate a quicker recovery. The protections afforded to Borrowers under the Act are nuanced and attempt to strike a balance between giving debtors the opportunity to rehabilitate their finances without derogating from the rights of creditors. In doing so, the COVID-19 (Temporary Measures) Act 2020 seeks to reassure creditors that their interests remain protected and preserved, if only deferred for the time being.
The above content is for general information purposes only. It is not and does not constitute nor is it intended to provide or replace legal advice, a legal opinion or any information intended to address specific matters relevant to you or concerning individual situations. Should you require specific legal advice, please do not hesitate to contact the Partner listed or your regular contact at the firm. Copyright of Oon & Bazul LLP