In our Alert titled “Covid-19: Proposed interim reliefs for financially distressed companies and individuals?” published on 27 March 2020, we have looked at the changes in insolvency laws in Australia and Germany. The Alert also discussed whether similar approaches ought to be adopted by the Malaysian legislators.
 
With there being no sign of the Covid-19 outbreak slowing down, Singapore, India and Russia have now jumped on the bandwagon to introduce temporary changes in their laws to assist companies and individuals in weathering the storm. The United Kingdom (“UK”) has also now confirmed that there will be interim changes to its insolvency laws. In Singapore, the proposed changes extend beyond the insolvency mechanism and will cover areas on contractual law.
 
This Alert will provide an overview on the proposed interim changes in Singapore, India and Russia.
 
Singapore
 
In a press statement dated 1 April 2020, Singapore’s Ministry of Law announced that it intends to introduce the COVID-19 (Temporary Measures) Bill (“Bill”) in Parliament this week. The measures proposed in the Bill are aimed at providing temporary relief to individuals as well as small and medium sized enterprises that are unable to perform their contractual obligations amid the Covid-19 outbreak. The measures will apply to contractual obligations that are to be performed on or after 1 February 2020, for contracts that were entered into or renewed before 25 March 2020. At the moment, the measures will be in place for six months from the commencement of the Act. There will be an option for this period to be extended up to a year. Among others, the measures that will be introduced by the Bill are set out below.
 

Under the Bill, a party to a contract will be prohibited from taking the following legal actions against a non-performing party:
 

The proposed prohibition will provide businesses and individuals with a much-needed temporary cash-flow relief during these difficult times. Without such relief, businesses and individuals will no doubt be faced with various litigation, resulting in further financial losses.
 
Understandably, the Bill does not apply to all contracts but would only apply to those affected the most by the Covid-19 outbreak. In this regard, the Bill will only apply to the following contracts:
 

In the case of construction contracts, if the inability to perform occurs on or after 1 February 2020 and before the expiry of the prescribed period (currently six months), any period for which the subject inability subsists and falls within the aforesaid period shall not be taken into account for the purposes of calculating the liquidated damages payable.^[1]
 
In order for the relief mentioned in the preceding two paragraphs to apply, a party seeking relief must serve on the other party to the contract, a notification for relief. The counterparty who wishes to challenge the relief must then apply to the Registrar to appoint an assessor who will then determine whether or not relief ought to apply in the said case. In this regard, the Bill also provides for the appointment of a body of assessors who will determine whether a party’s inability to perform its contractual obligations was in fact due to the COVID-19 outbreak. The assessor will also have the power to grant relief that is just and equitable in the circumstances. Parties appearing before an assessor cannot be represented by lawyers and the decision of an assessor is not appealable. This is to ensure that applications are dealt with expeditiously and there is finality in the process.
 
To ensure that innocent parties to the contracts are not penalized by the expiry of limitation period due to the prohibition to commence legal proceedings, the Bill also provides for an extension of the limitation period. In this regard, any limitation period for the taking of an action in respect of an inability to perform will be extended by a period that is equal to the period beginning from the date of service of the notice of relief and ending on the earliest of the following:^[2]
 

Just like Australia, Singapore is also proposing to increase the minimum thresholds for bankruptcy and insolvency. In this regard, the minimum threshold for bankruptcy will be increased from $15,000.00 to $60,000.00 whereas the minimum threshold for insolvency will be increased ten-fold from $10,000.00 to $100,000.00. The statutory period to respond to demands from creditors will be increased from three weeks to six months, in the case of company insolvency, and from 21 days to six months, in the case of bankruptcy.
 

Under section 339(3) of the Singapore Companies Act, an officer of a company who was knowingly a party to the contracting of the debt had, at the time the debt was contracted, no reasonable or probable ground of expectation that the company would be able to pay the debt, will be guilty of an offence. If an officer of a company has been found guilty under section 339(3) of the Singapore Companies Act, the Court, may, upon the application of a liquidators or any creditor or contributory of the company, declare the officer to be personally liable for the debt (See section 340(2) of the Singapore Companies Act).
 
Just like Australia and Germany, the Bill will also provide directors with a temporary relief from their obligations to prevent their companies from insolvent trading, provided that the debts are incurred in the company’s ordinary course of business. However, the Bill does not relieve directors from criminal liability in respect of debts that are incurred fraudulently.
 
Russia
 

In Russia, a federal law amending various legislations has been passed recently to allow the Russian Government to impose a moratorium on insolvency and bankruptcy proceedings. The Russian Government shall specify the term of the moratorium, which can be further extended should the Covid-19 outbreak persists. At this moment, there is no indication as to how long the moratorium will be in place.
 
It is understood that the moratorium will not apply across the board to all debtors but only to certain categories of debtors who have suffered the most due to the Covid-19 pandemic. At the moment, there is also no indication as to the categories of debtors in respect to which the moratorium will apply. This is different from the Australian approach where all companies are afforded the same level of protection in the form of increase in timeframe to respond to statutory demands.
 
The changes proposed by the Russian Government is also different from the rest of the pack in that save for transactions conducted in the ordinary course of businesses, all transactions during the moratorium period involving a transfer of property or results in the creation of liabilities, will be deemed null and void. Even for transactions conducted in the ordinary course of business, they must not exceed 1% of the debtor’s assets based on the latest financial statements. Such measures may prove counterproductive amid the Covid-19 outbreak. In such difficult times, debtors may look to the disposal of properties, even at fire-sale prices, to raise funds to keep themselves afloat. With such prohibition in place, it is now more difficult for companies to raise funds.
 
It must also be noted that the moratorium itself merely stops creditors from commencing insolvency and bankruptcy proceedings. Unlike the approach taken by the Singapore Government, it does not prohibit creditors from filing claims against debtors for unpaid amounts under their business arrangements. This means that a creditor could still sue a debtor in court for unpaid amounts under a contract and then use the judgment obtained to commence insolvency or bankruptcy proceedings once the moratorium is lifted. As such, it does not fully alleviate any financial concerns a debtor may be facing.
 

The moratorium would also relieve debtors from their obligations to file for bankruptcy in the event that the insolvency criteria are met. This will provide directors of companies with temporary relief from the liability of insolvent trading.
 
India
 
Less extensive measures were adopted by the Indian Government in terms of amending its insolvency laws to help companies and businesses to stay afloat amid the Covid-19 outbreak. So far, the Indian Government has only raised the minimum threshold at which a creditor can file a winding up petition from the current Rs 1 Lakh^[3] to Rs 1 crore.
 
Unlike other countries, there is no increase in the 10-days timeframe given to respond to a statutory demand.^[4]
 
Furthermore, there is also no indication of any temporary relief in terms of directors’ liability for allowing the company to trade during such difficult times. While it is not mandatory for directors to commence insolvency proceedings and there are no specific provisions under the Insolvency and Bankruptcy Code, 2016, penalising directors or officers for carrying on business while insolvent, the Insolvency and Bankruptcy Code, 2016, does provide for the offence of wrongful trading. Under section 66 of the Insolvency and Bankruptcy Code, 2016, a director will incur personal liability if, before the commencement of insolvency, the director knew or ought to have known that there was no reasonable prospect of avoiding the commencement of the insolvency and the director failed to exercise due diligence in minimising the potential loss to the creditors. Hence, under this wrongful trading provision, a director could still be made liable for carrying on business while insolvent if he or she knew (or ought to have known) about the insolvency and failed to exercise due diligence during this period in minimising the potential loss to the creditors.
 
Be that as it may, the Indian Government has indicated that if the Covid-19 outbreak persists beyond 30 April 2020, it may consider suspending the rights of creditors to file for winding up for a period of six months.
 
Update on the United Kingdom insolvency laws
 
In the previous Alert, we have seen how UK’s Insolvency Services has begun to consult insolvency practitioners in late March 2020 on urgent changes to company legislation in light of the Covid-19 outbreak. On 28 March 2020, Alok Sharma, UK’s Business Secretary, announced that the UK Government will introduce some changes to the insolvency laws to ease pressures on UK businesses. Like other countries, UK will also be introducing a temporary suspension of the wrongful trading provision as well as a moratorium on insolvency proceedings. However, the measures to be taken by the UK differs in several respects.
 
Firstly, the moratorium will apply for a shorter period of three months instead of the six months period introduced by Australia and Singapore. Secondly, the moratorium period appears to be subject to a condition that companies and businesses are expected to utilise the moratorium period to seek a rescue or restructure. While this may work for larger companies and industry players, it may not work for smaller and medium sized companies whose only option is to wait for the storm to pass.
 
This Article is written by Janice Ooi (Senior Associate) of Skrine.
 
 

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