New legislation suspends contractual obligations for the next six months with related disputes subject to a separate dispute resolution system.

By Farhana Sharmeen and Marc Jia Renn Tan

On 7 April 2020, the Singapore Parliament passed the COVID-19 (Temporary Measures) Act (the Act) offering temporary relief to businesses and individuals who are unable to fulfil their contractual obligations because of COVID-19 and providing temporary amendments to bankruptcy and insolvency laws. The Act went into effect immediately.

In light of the extraordinary circumstances caused by COVID-19, the Act applies retroactively and covers contractual obligations to be performed on or after 1 February 2020 and contracts entered into or renewed before 25 March 2020. The measures under the Act apply for six months and may be extended for an additional six months (the Prescribed Period). The intention of the Act is not to absolve or remove parties’ contractual obligations but to suspend them for the Prescribed Period.

Temporary relief from inability to perform contracts

The Act provides temporary relief from the inability to perform obligations arising under the following types of contracts if the inability is materially caused by COVID-19 (the Subject Inability):

  • Loan facilities granted by a bank or finance company to small and medium-sized enterprises (SMEs) if such facilities are secured, wholly or partially, against any commercial or industry immovable property located in Singapore or any plant, machinery, or fixed asset located in Singapore and used for business purposes (Secured SME Loans)
  • A performance bond or equivalent granted pursuant to a construction contract or supply contract
  • A hire-purchase agreement or conditional sales agreement if the good hired or conditionally sold under the agreement is any plant, machinery, or fixed asset located in and used for business purposes or a commercial vehicle
  • Contracts for the provision of goods and services for events
  • Certain contracts for goods or services for visitors to Singapore, domestic tourists or outbound tourists, or promotion of tourism
  • Construction or supply contracts
  • Leases or licences for non-residential immovable property

Upon being served with notice for relief by the defaulting party, the counterparty to the contract is prohibited from taking various legal actions against the defaulting party or its guarantor or surety, including the commencement or continuation of any court or arbitral proceedings concerning the Subject Inability, bankruptcy or insolvency applications, and the enforcement of security over immovable and movable property used for the purposes of business or trade.

With respect to Secured SME Loans, the moratorium only applies in relation to the security relevant to the Act (i.e., commercial or industry immovable property located in Singapore or any plant, machinery, or fixed asset located in Singapore and used for business purposes) and the obligations secured by such security. The Monetary Authority of Singapore (MAS) also notes that the lenders’ contractual right to charge fees and interest for non-payment or late payment of loan obligations due remains unaffected. SMEs seeking the protection of the Act may still incur late charges and higher interest. SMEs should thus engage their lenders to explore the relief measures announced by MAS, which include the deferment of principal repayment, with a corresponding waiver of late charges. (See MAS’ comments on the implications of the Act.)

Disputes arising from the application of the Act

To safeguard against unfair outcomes, professionals such as accountants and lawyers will be appointed by the Ministry for Law as assessors (Assessors) to decide if the inability to perform contractual obligations was materially caused by COVID-19 and will have the powers to grant relief that is just and equitable in the circumstances. The Assessor may take into account the ability and financial capacity of the defaulting party to perform the obligation that is the subject of the application, among other prescribed factors. The process will take no more than five days at no cost to either party. Parties will not be allowed to be represented by lawyers and the Assessors’ decisions will be final and not appealable.

Temporary relief for financially distressed individuals and businesses

The Act also amends bankruptcy and insolvency laws by temporarily:

  • Increasing the monetary debt threshold for bankruptcy for individuals from S$15,000 to S$60,000
  • Increasing the monetary debt threshold for insolvency for businesses from S$10,000 to S$100,000
  • Extending the statutory period for individuals and businesses to respond to demands from creditors from 21 days to six months

Company directors will also receive temporary relief through the suspension of the prohibition against trading while the company is insolvent if debts are incurred in the ordinary course of business. Directors remain criminally liable, however, if the debts are incurred fraudulently.

Looking ahead

In his speech to the Singapore Parliament, Law and Home Affairs Minister K Shanmugam emphasized that the Act does not change the fundamental sanctity of contracts made in Singapore. He stressed that the interventions under this “legal circuit breaker” are temporary, targeted, and necessary given the potentially damaging impact of having a strict enforcement of existing contractual rights. The Act will also provide more time for the Singapore government to more thoroughly assess the developing economic situation in deciding whether further interventions are justified.