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Covid-19: Insolvency across the three jurisdictions of England and Wales, Hong Kong, and Singapore

Posted: 23/06/2020


At present, global businesses face huge amounts of uncertainty owing to the Covid-19 crisis that is influencing the global economy in an unprecedented manner. From contractual supply chain issues, which have led to the activation of force majeure clauses, among others, to employment issues, insurance disputes, and the real and imminent threat of insolvency of counterparties, businesses need to take quick, effective steps to avoid trouble in these difficult times.

In this article, the commercial dispute resolution team answers a few commonly asked questions from both creditors’ and debtors’ perspectives about insolvency in three key jurisdictions: England and Wales, Hong Kong and Singapore.

Creditor FAQs

If a contract has not been performed, what remedies are available? Am I able to do anything if I think that a counterparty/debtor is about to be wound up?

England and Wales

The devil is in the detail. Check your contract for a termination clause or a force majeure clause, which usually excuses a party from performing their contractual obligations if they are prevented from doing so by circumstances outside their control. Under English law, a force majeure clause must be expressly stated in the contract to be operational - an implied term will not suffice.

If the debtor has failed to comply with the terms of the contract (by way of notification, termination or otherwise), you may have a civil claim against the company for breach of contract but this is likely to be a time-consuming exercise. In addition, unless you can obtain a judgment and enforce it before your counterparty becomes insolvent, any civil claim will be of limited value so you will need to consider other steps to mitigate the losses.

Bear in mind that the Corporate Insolvency and Governance Bill (which is going through Parliament and is intended to become law in short order) prohibits suppliers from terminating their contracts due to a party being affected by Covid-19. This means that suppliers will be obliged to continue to supply the goods or services unless either the company consents to the termination, or the court is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the contract to be terminated.

In these circumstances, ask yourself the following questions: do you have a suitable insurance policy under which you can make a claim? Are you able to make a claim under a new loan scheme offered by the Government to help businesses through these tough times? Are you able to exercise a lien over the assets of the debtor? Alternatively, do you have a retention of title clause in the contract with which to seek the return of the goods or obtain a compensatory sum from the debtor in lieu of the goods?

If you are genuinely concerned about your counterparty’s insolvency, you should audit them regularly. In England and Wales, you can use the Companies House free service to check the company’s insolvency history, if any, and to ensure that it is up to date with its filings. In the UK, most insolvency processes are published in The Gazette, which is also available to search online for free.

If there are concerns that your debtor’s assets are in danger of being dissipated, you can apply to the English High Court to seek an urgent injunction or the appointment of a provisional liquidator, although it is worthy of note that a freezing injunction will not survive an insolvency.

Hong Kong

For non-payment of a contractual debt, creditors may serve a statutory demand on debtors. The debtor will have 21 days in which to either pay the sum owed or contest the demand. If left unanswered, the debtor is deemed unable to pay its debts and the creditor may bring a winding up petition.

As with English law, there are no automatic rights for creditors who think their counterparty is about to be wound up. Some contracts, such as loan documentation, often expressly allow the creditor to enforce in this situation. Without such a right, creditors should check their contracts for provisions relating to liens and retention of title, where applicable, to ensure that their claims have priority in the event that the debtor becomes insolvent.

If the right held is a maritime claim against a vessel, then the res (eg ship, property, interest etc) may be arrested for the claim and this claim would not normally be affected by the subsequent insolvency.

Singapore

Again, the terms of a contract will influence the rights available to a debtor. The importance of good contractual documentation and terms that have been clearly accepted by both parties become paramount when a debtor is delinquent.

Contract terms should specify the rights of the creditor when there is non-performance. Although the use of retention of title clauses in contract documentation provides simple protection, these terms must be appropriately documented and there is a requirement for clear evidence of acceptance of the terms.

Attempting to negotiate the return of goods against issuance of a credit note may be considered but this action is unlikely to withstand the scrutiny of a diligent liquidator that has the funds to pursue transactions which do not uphold the pari passu principle of equal treatment of creditors.  

What steps are required to wind up a counterparty or debtor company? Has the Covid-19 pandemic had any impact on this?

England and Wales

Winding up a company should be treated as a last resort for a creditor and the process should not be used as a means to enforce a debt. Other remedies such as litigation or alternative dispute resolution may be available for that purpose.

It is worthy of note that winding up is a class remedy. Once a petition has been presented to the court, other creditors may wish to become involved in the petition and could even seek a winding up order if you later choose to withdraw the petition.

Ordinarily, to wind up a company that is not currently in an insolvency process, a petition would be filed electronically in the High Court of England and Wales (or a County Court if the debtor’s share capital does not exceed £120,000). The grounds on which you can apply to wind up a company are set out in section 122 of the Insolvency Act 1986.

The usual ground relied upon is that a company is unable to pay its debts within the meaning of section 122(1)(f), where it is shown that a creditor has served a statutory demand on the company for a sum exceeding £750 and the company has failed to pay the sum due within three weeks; or where it can be shown that a company is unable to pay its debts as they fall due (cash flow insolvency); or where the value of the company’s assets is less than the amount of its liabilities (balance sheet insolvency).

Typically, a hearing is then listed within around six weeks of the petition being presented to court. In the current climate, however, all outstanding winding up petition hearings have been adjourned for three months as the Insolvency and Companies Court determined that it could not be heard remotely.

Further, in response to aggressive debt recovery tactics employed by some commercial landlords, the UK Government has temporarily banned the use of statutory demands and winding up orders where the debtor company cannot pay its invoices as a result of Covid-19. Any petition that is not related to Covid-19 will first be reviewed by the court. Further, companies will be afforded a ‘gateway moratorium’ under the bill. This means that companies that are likely to become insolvent or are insolvent, but have not yet entered into an insolvency process, can obtain a 20 business day moratorium, which can be extended. An insolvency practitioner will monitor the company during the moratorium, but the role is limited to ensuring that the company complies with the relevant restrictions of the moratorium only – the directors remain in charge of the company.

Hong Kong

As of yet, no legislative restrictions have been introduced in Hong Kong to restrict creditors’ rights during the Covid-19 pandemic. However, until recently, the Hong Kong Judiciary had put in place a General Adjourned Period (GAP) during which all but essential court hearings were adjourned. The GAP ended on 3 May 2020 but a certain level of disruption is expected to continue due to a backlog of hearings and continued social distancing policies.

It is still therefore open to creditors to make a petition to court for the winding up of a counterparty on one of the grounds listed in Section 177 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. The ground most likely to be applicable to a creditor would be (d): the debtor is unable to pay its debts (of HK$10,000 or above).

Singapore

Evidence of a company’s inability to pay its debts as and when they fall due is usually a requirement for obtaining a winding up order against a company. The evidence frequently submitted to court in support of a winding up application is an unsatisfied statutory demand.

The Covid-19 (Temporary Measures) Act 2020 introduced the following reliefs for businesses commencing on 20 April 2020 and lasting up to and including 19 October 2020:

  • The monetary threshold for corporate insolvency increased from S$10,000 to S$100,000.
  • The time period to satisfy a statutory demand from creditors increased from 21 days to six months.

The above legislation is consistent with the Government’s stated objective of supporting business during this crisis. Providing the above requirements in proving insolvency are met, winding up applications proceed as was the case prior to the enactment of the Covid-19 (Temporary Measures) Act 2020. It is, however, likely that the courts will be sympathetic to companies that contest a winding up application if it can be demonstrated that the business has been badly affected by the global pandemic.

Are there any remedies available to me if a debtor has paid monies out before going into liquidation?

England and Wales

There is a host of potential actions to be considered in these circumstances and legal advice should be sought as soon as this is suspected. Claims can be considered against the company as well as the individual directors who often have Directors and Officers (D&O) liability insurance.

As above, it may be appropriate to seek an injunction to prevent the company from dissipating any further assets as a means to preserve the balance of the assets within the company’s control.

Further, there are several actions to be considered against the directors for authorising the transaction(s). Below are the six main actions:

  • Wrongful trading - the bill suspends the offence of wrongful trading and backdates it from 1 March 2020 until 30 June 2020, or one month after the bill comes into force, whichever is the latest. This does not mean that a claim cannot be brought against a director, but rather the court will carve out any liability of the director over this period of time and so the effect of this is that it lessens the damages award, instead of removing liability in its entirety.
  • Reviewable transactions – certain transactions can be considered and set aside by the court on the application of an office holder such as an administrator or liquidator, including transactions at an undervalue, preferences and transactions defrauding creditors.
  • Preferences – if a company does something or allows something to be done with the intention of putting one of its creditors into a better position than they would otherwise have been in if that act had not been done, this can be reviewed.
  • Transaction defrauding a creditor – under section 423 Insolvency Act 1986, the court may make an order which restores the company to a position that it would have been in if it had not made a transaction at an undervalue with the purpose of putting assets beyond the reach of a person who is making a claim against them.
  • Misfeasance – this covers a wide variety of wrongdoings by the directors including, but not limited to, the misapplication or retention of company funds or assets and breach of fiduciary duty.
  • Fraudulent trading – this is wider than wrongful trading as it applies to ‘any persons’ and not just directors who were knowingly parties to the carrying on of the business in question.

Hong Kong

Unlike other common law jurisdictions, there are no ‘wrongful trading’ or ‘insolvent trading’ provisions in Hong Kong which would entitle a creditor to take action against directors of a company for trading in circumstances where they knew, or ought to have known, that liquidation was imminent. However, action can still be taken against directors for fraudulent trading.

Wrongful and insolvent trading aside, certain pre-insolvency transactions made by the debtor can still be challenged by creditors and potentially set aside by the liquidator. These include:

  • transactions at an undervalue made within five years prior to the date of liquidation (unless made in good faith and on reasonable grounds);
  • unfair preferences (ie transactions which unfairly prefer one creditor over another), normally occurring within six months prior to winding up; and
  • transactions made with a fraudulent purpose or with an intention to defraud creditors.

Singapore

The primary objective of a liquidator of an insolvent company is to obtain the best price possible when realising the company’s assets. Strategies to achieve this may include continuing to trade the company for a limited period and for the assets to be distributed in accordance with the priorities afforded to creditors as specified in the Companies Act. The most fundamental principle of insolvency law is the pari passu principle, which requires equal treatment of creditors within the same class.

If there is a suspicion that payments prior to liquidation have preferred certain creditors, a liquidator is entitled to review these transactions and seek recovery from the party that benefited.

It is important to formally notify a liquidator that there appears to have been payments that have effectively preferred certain parties and request that these be investigated. A request should be made of the liquidator to review the apparent preferential payments and to report his or her findings to the party that made the request.

A liquidator has a duty to act in the interests of the creditors. If it can be shown that the liquidator has not done so, then an application can be made to the court to have the liquidator removed.

Debtor FAQs

My company is having financial problems owing to Covid-19 – what local or state assistance is available?

England and Wales

The Government has introduced a raft of packages to help businesses to trade and operate through Covid-19, which are operational until at least 30 June 2020, if not beyond. These packages include but are not limited to:

  • The deferral of VAT payments.
  • Business rates relief being offered to various sectors, including some retail, hospitality and leisure businesses.
  • The Coronavirus Job Retention Scheme, which covers the wages of employees who are unable to work because of Covid-19, limited to 80% of their salary up to a maximum of £2,500 per month. An employee had to be placed on furlough by 10 June in order to apply for this scheme and the intention is for it to cease by October 2020.
  • The Coronavirus Business Interruption Loan Scheme (CBILS), which provides financial support of up to £5 million to small and medium sized businesses with turnovers up to £45 million that are suffering cash flow disruption.
  • The Coronavirus Large Business Interruption Loan Scheme (CLBILS), which provides financial support of up to £25 million for larger businesses with an annual turnover of £45 million to £500 million.
  • The Covid-19 Corporate Financing Facility, whereby the Bank of England purchases short-term debt from large companies.
  • £750 million in grants and loans from Innovate UK (the UK’s innovation agency) for smaller innovative businesses focused on research and development.
  • A £500 million co-investment loan scheme for high-growth companies, called Future Fund.
  • Bounce back loans, which enables businesses to borrow between £2,000 and £50,000 by way of a fast track scheme, with cash arriving within 24 hours of approval.

Hong Kong

The Hong Kong Government announced an HK$137.5 billion financial relief package to assist companies struggling during the Covid-19 crisis, which includes a partially state-funded job retention scheme.

There is currently no additional legislative protection for debtors in Hong Kong and creditors’ rights remain unrestricted.

Singapore

The Government has made significant commitments to support Singapore citizens and businesses through the global pandemic. Below are three of its commitments to businesses:

  • Low interest rate loans - on 20 April 2020, the Monetary Authority of Singapore (MAS) and Enterprise Singapore launched a new facility to lend Singapore dollars at 0.1% interest per annum to eligible financial institutions. Banks are expected to pass on the cost savings, to make more loans to SMEs at a lower cost. 
  • Deferment of income tax payments - income tax payments due in April, May and June 2020 have been deferred for three months.
  • Jobs Support Scheme - the Government-funded Jobs Support Scheme provides a cash grant of 25% to the employer for the first S$4,600 gross monthly wages for each Singapore citizen and permanent resident for nine months. The grant for April 2020 has been increased to 75% to reflect the significant disruption experienced during the ‘circuit breaker’ lockdown.

Am I able to escape a contract using a force majeure clause or otherwise because of Covid-19?

England and Wales

Unlike many civil law jurisdictions, force majeure clauses in England are not automatically implied into the terms of a contract – it needs to be an express term. In the event that your contract contains a force majeure clause, you may be able to invoke it and to notify your counterparty of the suspension of the contract as a result of Covid-19.

As explained above, the devil is in the detail and it will depend on the drafting of the clause as to whether it can be invoked in these circumstances. Generally, a force majeure clause will be interpreted according to both the express words of the clause and the general intention of the parties.

If there is no force majeure clause within your contract or it appears not to be applicable, you may be able to terminate the contract by frustration. However, the bar for this has historically been set very high and it must be impossible for the parties to carry out their obligations as set out in the contract.

If you are unable to suspend or terminate the contract in its entirety, you should try to negotiate a variation of the contract with your counterparty to find a way through the issue to the benefit of all.

Hong Kong

The position in Hong Kong is very similar to that in English law. Although it may be possible for a party to escape a contract using a force majeure clause, this would depend on the precise wording of that clause and the party falling squarely within that wording.

Without a specific clause in the contract, there is no automatic principle in Hong Kong law that would entitle parties to escape a contract because of Covid-19. A party would have to rely on the doctrine of frustration to try to bring the contract to an end, by showing that the Covid-19 crisis has substantially altered the parties’ rights and obligations to the point that performance of the contract is either impossible or radically different to what had originally been intended.

A party may, in exceptional circumstances, be able to rely on the doctrine of frustration where, for example, its performance of the contract has been rendered illegal or impossible by Covid-19 related legislation.

Singapore

The Covid-19 (Temporary Measures) Act 2020 provides temporary relief from legal action for businesses and individuals who are unable to fulfil their contractual obligations due to Covid-19.

The Act specifies five types of contracts for which temporary relief is provided:

  • Loans from banks/finance companies to SMEs, which are secured against commercial or industrial immovable property located in Singapore, or plant machinery or fixed assets in Singapore used for business purposes. The loans must have been entered into before 25 March 2020.
  • Construction and supply contracts entered into before 25 March 2020, where the companies are unable to perform their obligations (eg meet delivery deadline) on or after 1 February 2020.
  • Tourism-related contracts (eg venue or catering for a wedding, tour or cruise package) entered into before 25 March 2020. The contracts are for events/tours held or scheduled to be held on or after 1 February 2020.  
  • Hire-purchase agreement or conditional sales agreement for plant or machinery in Singapore used for commercial purposes (eg manufacturing) and commercial vehicles (eg used as goods vehicle, private bus, private hire car). These agreements must have been entered into before 25 March 2020.
  • Lease or licence for non-residential property entered into lease or licence before 25 March 2020.

A party seeking relief has to serve a notification for relief on the other contracting party and any guarantors or performance bond providers. The contracting party on whom the notification for relief is served is prohibited from taking certain legal actions against the non-performing party from 20 April 2020 to 19 October 2020.

If parties are unable to come to an agreement on appropriate relief, an application may be made to the Panel of Assessors for Covid-19 Temporary Relief (PACT), appointed by the Minister for Law.

The assessor will decide whether the case is one for which the relief under the Act applies and will seek to achieve an outcome that is just and equitable in the circumstances. The determination by the assessor is binding on the parties and is not appealable. Parties will not be allowed to be represented by lawyers in proceedings. The application is currently free and costs will not be awarded against any party.

Hearings will generally be conducted by exchange of emails, unless the assessor is of the view that there is a need for a hearing to be conducted over video-conference or in person. The registrar will inform the relevant parties of the determination when ready.

What possible defences are available to me in defending a winding up order?

England and Wales

The court will normally dismiss a winding up petition if it is either based on a debt that is genuinely disputed on substantial grounds or if the company has a genuine right to set-off or cross-claim.

In this current climate, if your business has been affected by Covid-19, any winding up petition brought against your company ought to be adjourned until at least 30 June 2020, buying you some time to seek to negotiate a repayment plan or otherwise with the creditor. Further, you can seek the gateway moratorium referred to above, which will provide temporary relief to allow you to seek to trade out of insolvency.

Hong Kong

A winding up order in Hong Kong will also generally be dismissed where there is a bona fide dispute on substantial grounds to the debt being claimed by the creditor.

The Hong Kong courts have also confirmed that, where there is a dispute over the debt and that dispute is subject to an arbitration clause, the winding up petition ought to be dismissed unless that arbitration dispute has been resolved. Indeed, the petition itself can be defeated simply by the debtor commencing the arbitration.

Singapore

The Covid-19 (Temporary Measures) Act 2020 increased the monetary threshold for corporate insolvency from S$10,000 to S$100,000, and the time period to satisfy a statutory demand from creditors from 21 days to six months. In introducing these temporary measures, the Government clearly recognised the potential for businesses to be affected by the global pandemic and sought to provide a significantly higher threshold for ascertaining that a company is insolvent.

It is reasonable to assume that the courts will be sympathetic to companies which have been negatively affected by Covid-19, and are likely to provide reasonable latitude in allowing a company faced with a winding up petition time to implement plans to stabilise itself.

In defending a winding up application, a company should provide the court with the reasons for its current position, the proposed steps to be taken, and the timing of those steps in order to stabilise the company. It is important to demonstrate that the creditor’s position will not be dramatically worse than if the winding up order was granted.

It would, however, be preferable if a company facing creditor pressure did not wait until there is a winding up application in the court, in order to seek a sympathetic view from the court.

Singapore has recently enhanced the provisions in the Companies Act, which, upon a company’s application, grant the court the power to restrain the following:

  • the passing of a resolution for the winding up of the company;
  • the appointment of a receiver or manager in the company;
  • the commencement or continuation of any proceedings against the company;
  • the commencement, continuation or levying of any execution, distress or other process against the company’s assets;
  • the taking of any step to enforce security of the company’s property; and
  • the enforcement of the right of re-entry.

The purpose of these provisions is to allow the company the opportunity to propose a compromise or arrangement with its creditors. The Act grants the court the power to also rule that the above powers of restraint shall apply also to the company’s subsidiaries and parent.

A company that would otherwise have a reasonable prospect of survival but is faced with a creditor that appears to be insistent upon bringing winding up proceedings against it should consider seeking the court’s protection under the enhanced provisions of the Companies Act. This is likely to be a preferable course of action than seeking to defend a winding up application where the company has an unsatisfied statutory demand. 

This article has been co-written with Tim Reid of Baker Tilly Reid.


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