Higher forced liquidations this year, with pandemic yet to do its worst

BT EXCLUSIVE: VIRUS OUTBREAK

Higher forced liquidations this year, with pandemic yet to do its worst

Observers foresee numbers to climb from H2, with commodities, construction and retail among hardest-hit sectors

Mon, May 11, 2020

Kelly Ng


EVEN as the number of compulsory liquidations have gone up over the past four months, the true measure of distress that the global pandemic has had on Singapore companies will only be made clear from the third quarter, when subsidies and legal reprieve wear off.

As it is, 102 companies were forced to wind up in the first four months of this year, compared to 67 over the same period last year, according to data from BizInsights, an information service provider for the Accounting and Corporate Regulatory Authority.

Unlike firms that decide to wind up their affairs voluntarily, those forced to liquidate are typically unable to pay their debts.

That being said, non-urgent cases have been adjourned amid tightened lockdown measures. Temporary laws have also kicked in last month that raised the debt thresholds for insolvency and bankruptcy.

Correspondingly, only four firms here were ordered by the courts to wind up in April, compared to 45 in January.

Still, lawyers and analysts foresee these numbers to climb from the second half of this year, with commodities, construction and retail among the industries expected to be the hardest hit.

Observers also said that proceedings for such cases take at least several weeks to proceed.

"Before Covid-19, Singapore was already going through an economic slowdown, which may explain the increase in numbers. It is not uncommon for organisations to take a few months before they recognise that they cannot go on, and to make arrangements for that," said Chee Yoh Chuang, executive director of corporate advisory firm RSM Global.

"Most companies should have at least three months' worth of reserves to keep themselves afloat," said lawyer David Chan.

Meanwhile, the authorities' suspension of contractual obligations will buy firms some time to sort out their finances, added Mr Chan, a partner at Shook Lin & Bok. "That said, a deferment means the companies will eventually still have to pay up and fulfil their obligations. But we probably will not see a spike or peak until the third quarter this year."

Provisions under the Covid-19 (Temporary Measures) Act, which commenced on April 20, give individuals and businesses more time to satisfy contractual obligations.

This statutory moratorium will last through October 2020, but the government has the power to extend it for another six months.

Data from the Ministry of Law showed that 1,941 notifications for relief were submitted - by businesses and individuals - via the government's online portal as at May 4, about two weeks since the law came into effect.

Six in 10 of them relate to hire-purchase and conditional sales agreements, while 26 per cent were leases and licences of non-residential property.

As part of the legislation, the debt threshold for corporate insolvency has also been raised 10 times, from S$10,000 to S$100,000.

Chua Hak Bin, a senior economist with Maybank Kim Eng, expects liquidation numbers to spike after wage subsidies drop sharply in June for most firms - from 75 per cent to 25 per cent - and the grace period of six months ends for loan moratoria.

Andrew Chan, who specialises in corporate and personal insolvency at Allen & Gledhill, noted that the current numbers exclude winding-up applications not yet heard because they do not meet the requirement of being essential or urgent to proceed under present circumstances.

However, he also said not all distressed firms will wind up. "Companies and businesses have in the past bought some breathing space via consensual restructuring, filing for a scheme moratorium under the Companies Act, or filing for judicial management," Mr Chan noted. The latter two options, if granted, protect debtor firms against creditors' actions.

Blossom Hing, director of Drew & Napier's corporate restructuring and dispute resolution team, expects companies in the commodity, energy and retail space to be among the worst hit by financial distress, given that oil prices were already on a downward trend last year.

"The Covid-19 outbreak has dealt the oil and gas industry a double whammy. As for the commodities space, because these firms tend to trade with each other, a liquidity crunch will have knock-on effects across the sector. When one is in trouble, others may also face headwinds," she said.

Ms Hing also flagged the possibility of the temporary relief legislation being modified later to address the impact of the economic blow in a fair and equitable way.

Lawyer Chew Kei-Jin, who is managing director at Ascendant Legal, said that his firm has been advising clients on matters relating to the construction sector, as well as corporate clients seeking help to restructure their loans, over the past month.

He highlighted, however, that some of the reliefs which allow for deferment of contractual obligations do not eliminate these obligations. They still have to be met eventually.

Danny Ong, restructuring and insolvency lawyer at Rajah & Tann, stressed most companies that will ultimately cease operations may not necessarily do so as a result of "sudden collapse due to Covid-19", as their businesses may already have entered into distress territory before the outbreak. This may be due to pre-existing factors such as the US-China trade war, intense competition, and tightening liquidity in the credit market.

Both Rajah & Tann's Mr Ong and Shook Lin & Bok's Mr Chan also said the upcoming recession will unveil bad corporate practices, citing some local examples mired in fraud allegations.

"Now that most employees are working remotely, it may be even harder to cover up these things, causing improper corporate governance issues to come out of the woodwork. A lot of insolvencies and corporate defaults may stem from these questionable practices," Mr Chan said.