The Singapore Government is planning to launch a “realignment framework” to enable small and micro enterprises significantly impacted by COVID-19 to disclaim agreements that they have entered into.
This framework is provided for in the COVID-19 (Temporary Measures) (Amendment No. 3) Bill (the “Bill”) tabled in Parliament on 2 November 2020.
The Singaporean government has said in a press release that “The framework will provide a quick and fair way for businesses to realign and move forward by allowing selected contracts to be renegotiated and to come to a mutual agreement. If they are unable to agree, the contract may be terminated. Businesses will remain liable for outstanding obligations but will not need to pay early termination penalties.” Given the damage that COVID-19 has done to retail and consumer businesses, it is likely to have a significant impact on the sector.
The proposed framework provides parties with a basis to renegotiate certain types of contracts to come to a mutual agreement. If unable to agree, the contract may be terminated. Businesses will remain liable for outstanding debts and obligations, but will not need to pay early termination penalties. The Framework aims to provide a quick and fair way for businesses to renegotiate their contracts and realign with current economic conditions and business objectives.
The government will announce implementation details in due course and answers to FAQs can be found here.
The basic proposition
The COVID-19 pandemic has significantly impacted the viability of many businesses in the retail and consumer sector, and changed the assumptions upon which they entered into contracts before COVID-19. While the Singaporean Government has allowed the calibrated resumption of economic and social activities, safe distancing and travel restrictions will continue to impact many sectors.
It is intended that smaller and micro enterprises which have been significantly impacted by COVID-19 and need to review their business models and contractual obligations will benefit from the realign framework, which will provide a quick and fair way for businesses to realign and move forward by allowing selected contracts to be renegotiated and to come to a mutual agreement.
The bottom line is that if they are unable to agree, the contract may be terminated without early termination penalties, although businesses will remain liable for outstanding obligations.
Eligible businesses under the realign framework will be subject to an as yet undecided annual revenue cap and must have experienced a significant fall in revenue across a comparable timeframe pre-COVID19. The Singaporean Government is in consultation with industry on these key criteria and aims to find a threshold that helps smaller and micro enterprises, and at the same time reaches out to a broad enough spectrum. Details, when finalised, will be set out later in the subsidiary legislation.
What agreements will be affected?
The framework will only apply to a contract which meets the following conditions:
- Is governed by Singapore law;
- Was entered into before 25 March 2020;
- Has at least one party who has a place of business in Singapore; and
- Falls within the following five categories (“Scheduled Contracts”), which are likely to have long-term obligations that may need renegotiation or restructuring:”)
- Leases or licences for non-residential immovable property which have a term of five or less years;
- Hire-purchase and conditional sales agreements for commercial equipment or vehicles (except agreements entered into with banks and finance companies regulated by the Monetary Authority of Singapore (MAS));
- Rental agreements for commercial equipment or vehicles;
- Contracts for sale and purchase of goods; and
- Contracts for sale and purchase of services.
Certain contracts will be excluded from the realign framework, even if they fall within the list of Scheduled Contracts (“Excluded Contracts”). These are:
- Consumer contracts
- Employment contracts
- Insurance contracts
- Leases or licences for non-residential immovable property which have a term of more than five years
- Contracts made in connection with a financial transaction, or for the supply of financial services (except hire-purchase)
- Construction and supply contracts
- Contracts for the carriage of goods for freight by sea, land or air, including any contract for freight forwarding and logistic services
- Contracts for the supply, storage, transportation, collection, treatment or disposal of certain hazardous materials
- Commodity contracts
- Contracts for factoring of receivables
- Contracts (or series of contracts) for the transfer for a business or part thereof as a going concern
- Contracts to which section 4 of the International Interests in Aircraft Equipment Act (Cap. 144B) apply
- Contracts to which the Sale of Goods (United Nations Convention) Act (Cap. 283A) apply
- Contracts affecting essential services and national interest
How will it work?
Under the proposed framework, a contractual party who wishes to renegotiate or terminate a contract must serve a notice on the other party or parties to the contract. The parties will be required to enter into renegotiations with the counterparty. If parties are unable to successfully renegotiate within a stated period, the contracts may be terminated. If the parties fail to agree, either may serve a notice to have an independent assessor make a determination on these issues.
Additional compensation for small landlords
The realign framework will seek to mitigate hardship that smaller landlords in financial hardship might face arising from the termination of the contract. The tenant will have to pay to an eligible small landlord additional compensation for early termination of the lease or licence agreement, that is to be determined by an assessor. The details will be set out later in subsidiary legislation.
Choice to pay arrears by instalment for hirers and renters of commercial equipment
As an alternative to contract termination, the Bill will provide an option for eligible hirers and renters of commercial equipment and vehicles to take up a repayment scheme to pay outstanding arrears in instalments. This is in recognition of feedback from some hirers and renters that while they have been substantially affected by COVID-19, they do not wish to terminate their agreements, as that would mean they have to return the equipment or vehicles and lose their source of income. Instead, they have requested for more time to repay their accumulated arrears. Details of the repayment scheme can be downloaded here.
Other support measures
In view of the impact that COVID-19 has had on businesses, the Singaporean Government is also introducing a Simplified Insolvency Programme under the Insolvency, Restructuring and Dissolution (Amendment) Bill to assist micro and small companies (“MSCs”) that require support to restructure their debts to rehabilitate the business, or to wind up the company as the business has ceased to be viable. Application details will be announced in due course.