Delivered in Parliament on 3 November 2020
Madam Deputy Speaker, I will speak about the proposed amendments to the COVID-19 (Temporary Measures) Act (the so-called Re-Align Framework) of 2020 and Insolvency, Restructuring, and Dissolution Act (IRDA) of 2018 in tandem. The underlying objective of both amendments—to offer streamlined procedures for renegotiation, restructuring and potential termination of contracts, especially for smaller businesses—is well-founded, and both timely and pertinent in light of the disruptions introduced by the COVID-19 pandemic. It also sets the stage for the longer run: to inspire a stronger risk-taking culture among small firms, who need—as never before—to embrace innovation.
I only wish to raise a few additional points, mainly on the scope of each Bill’s coverage, but also wish to take a step back and highlight a key big-picture issue—on the implications of a less onerous bankruptcy resolution regime for entrepreneurial culture—that the IRDA Amendment inevitably identifies.
The importance of defaults for moratoria
The Re-Align Framework stipulates that contracts signed prior to COVID-19 be made available to possible renegotiation or termination, with a moratorium period pertaining to affected agreements. 1 This is eminently sensible, given the forced stoppage to economic activity imposed by the Circuit Breaker and other COVID-19 containment measures. Construction contracts, in particular, are afforded a stay of up to 122 days for delivery.2
Madam, while I am certain that this duration was chosen carefully, it is unclear to me why the period is 122 days. By my count, the circuit breaker and Phase 1 lasted for 73 days, while that of Phase 1 to the start date of the Bill is 136 days. The closest I am able to establish, 119 days, pertains to the period whereby Phase 2 officially began, to the start date of the Bill. One is left to wonder how this cap was chosen. Following Minister Desmond Lee’s speech, my rust math now sees that it is basically fourt months.
Perhaps more relevant is not so much the maximum number of days for which a delay is allowed, but rather why there is no equivalent minimum (and here I am keenly aware that I seem to always be harping about minimums these days). Since the Circuit Breaker period coincided with a forced cessation of a wide range of economic activity, it strikes me that the moratorium should afford a default of a 55-day floor. Importantly, while larger firms may well be able to accelerate their work schedules to meet or exceed unanticipated delays, smaller firms simply do not possess the economies of scale or scope to do so. Of course, if delivery is possible with a shorter window, so much the better. But allowing for a default returns some bargaining power back to the small business, which was forced to disrupt activity due to no fault of their own. The other benefit of such a default is that small and micro businesses that possess limited understanding of the Re-Align Framework can easily grasp the principle of an automatic extension of the contract terms for the duration of the circuit breaker period.
Asymmetries in the relief assessment process
This brings me to the related issue of how small firms will navigate the complexities of the revised legislation. In particular, Sections 68 and 69 simultaneously remove the right of appeal, while limiting the ability of assignees to obtain informed advice in the adjustment relief assessment process. 3 While this stipulation can expedite what could well be a flood of
assessments, it also presumes the accuracy of the official assessor. This introduces a clear asymmetry in the power dynamic between the two parties. Perhaps a potential route of appeal with an alternative, independent assessor, applicable to special cases, could be considered. At the very least, the circumstances by which the adjustment relief assessor may permit the presence of legal representation should be spelled out.
Executive discretion justified in some instances, but not in others
As written, the IRDA Bill currently confers significant discretion to the executive to alter the jurisdictional parameters by which the Act applies. In some instances, such discretion is well- justified and increases operational flexibility. For instance, Section 250F details specific eligibility criteria for a firm’s acceptance into the simplified winding up program, but also allows for these values to be substituted by the Minister by order in the Gazette. Since it is difficult to ascertain whether these values—such whether as the threshold for sales turnover set at $10 million—are optimal, the added flexibility is most welcome.
However, in other instances, the discretion affords a very wide berth, without clear justification for such leeway. In particular, Sections 72H and 250H allows the executive to freely overturn acceptance and eligibility requirements. This could open up avenues for potential error, thereby undermining confidence in the application of the Act.
Moreover, the language of the Bill does not limit the authority to only the Minister, but also to all political officeholders, such as the “Second Minister, Minister of State, or Senior Minister of State… [and] Parliamentary Secretary or Senior Parliamentary Secretary”. 4 While I understand that this allows secondary officeholders to act in the stead of the Minister should he or she be otherwise predisposed, we should also be mindful that it also raises the risks of potential mistakes, as I have just shared. I would like to suggest that we allow an independent institution, such as the courts, be the adjudication authority instead. Alternatively, the Minister could provide clear, public explanations for every waiver that is granted.
A tiered restructuring and dissolution regime may be even more valuable
As I had alluded to previously, it is difficult to be certain, ex ante, whether the specific parameters used to define micro and small enterprises—the beneficiary targets of the IRDA Bill—are reasonable. Of course, I appreciate that the existing qualification criteria were not chosen in an arbitrary manner. But it is also useful to recognize that the definitions for what constitutes a small enterprise differs worldwide.
The 30-employee threshold specified in the Bill, for example, would encompass medium-sized businesses in Australia, but constitute only small firms in the European Union and United States, and would be a microenterprise in Somalia.5
That said, my point isn’t that definitions differ. Rather, given the inherent difficulty in establishing what constitutes a micro and small enterprise—and, by extension, the nature of firms that may be able to endure more complex restructuring and dissolution procedures—it may be valuable to consider the possibility of a tiered set of bankruptcy rules that apply to micro, small, medium, and large enterprises, consistent with the likely complexity of their
operations. Relatedly, it may be worthwhile considering qualification subject to simply satisfying just one or two—rather than the full set of all—criteria.
A less onerous bankruptcy resolution procedure can foster a risk-taking culture
Madam Deputy Speaker, I believe that the aim of these series of simplified bankruptcy procedures is to reduce the burden that small business owners face at a time where they may be facing significant distress, due to COVID-19.
It is important that such firms are not allowed to fail when the economy is operating far below potential, as is likely the case in Singapore today. Overzealous persecution could wipe out the income the firm’s erstwhile workers would otherwise have to spend on the economy, which in turn may end up prolonging the recession.
However, it is equally important that we understand the tradeoffs we are making. Excessively forgiving bankruptcy procedures can delay foreclosures on nonperforming loans, enabling firms that should otherwise fail to keep operating. Such “zombie” firms, as Minister Edwin Tong shared, are detrimental to overall economic vibrancy, and can inhibit the growth of other, nonzombie firms, as the experience of Japan in the 1990s amply demonstrates.6
On the flip side, there is substantial evidence that appropriately-designed restructuring procedures can encourage entrepreneurship,7 especially for small-business owners who would otherwise assume their firms’ debts as personal liabilities.8 Less onerous insolvency legislation can also promote opportunity seeking and innovation orientation. 9 As we transition our economy toward a knowledge- and information-driven one, continued refinement of IRDA will play an important role in cultivating a culture that is more willing to take on calculated business risks.
Whether we decide on permanently codifying the temporary measures introduced by the IRDA (Amendment) Bill, then, lies in our assessment of whether these reforms are deemed to have fulfilled their objective of improving the business climate for small and micro enterprises, but just during this COVID-19 period, but beyond. To that end, it is imperative that we embed the tools to evaluate the efficacy of the law, even as we begin to roll it out in earnest. At the simplest level, this would entail complementary collection of relevant data on firms that avail themselves to the simplified regime, versus those that decline to it. In a similar spirit, more systematic sector-by-sector tracking of the performance of small firms deploying IRDA provisions should also be undertaken.
Notwithstanding these additional points of feedback, I support both Bills.