Review insolvency regulations to keep businesses afloat

It is quite inevitable and perhaps the “expected new normal” that businesses are about to hit a downturn post Covid-19 crisis, not just locally but globally as well.

To prevent further spread of the disease, governments have urged their citizens to stay at home, and as such many have lost employment or income as a direct or indirect result of those directives.

Consequently, the future of small companies remains bleak as they are bound to face loss of business and liquidity crisis.

However, this is the time our legislators need to come up with ad-hoc insolvency measures that are intended to cushion businesses and individuals alike post the Covid-19 pandemic, to prevent bankruptcies and insolvency cases.

A while back, on this platform, I wrote on the need to improve and review our insolvency laws, particularly the need to introduce pre-insolvency measures. And inculcating the principle of debtor in- control or possession during insolvency.

Basically, reliefs corporate debtors can access before they become totally insolvent to avoid insolvency proceedings largely occasioned by “hell-bent” creditors.

Those proposals remain relevant during this pandemic as it puts to test whether our= insolvency law is well-designed to keep businesses afloat in case of a total economic shutdown. My proposal, in light of what the United Kingdom and other European countries have done, is to introduce ad-hoc insolvency measures capable of cushioning companies, such as suspending creditors’ right to file for insolvency post Covid-19 for a specific period.

The suspension of this right will act as a moratorium giving companies a “lifeline” or rather a “soft cushion” enabling them to restructure their debts without worrying about an involuntary creditor’s insolvency petition.

This moratorium should equally apply to any interest to be earned in case of a payment default.

While this “legislative” moratorium would be in force, no petition or resolution for winding up may be presented by any creditor. And no holder of a qualifying floating charge or debenture may cause the same to crystallise. Such a measure would not only preserve the economic value of the indebted= companies but also that of the creditors as well.

Secondly, there is a need extend the period requiring companies to respond to statutory demands from creditors. Currently, Section 384 of the Insolvency Act states that if a company receives a statutory demand, then it needs to respond to the same within 21 days, failure to which the creditor shall proceed to apply for a liquidation order.

Extending this period as an ad-hoc measure to about three months will enable indebted companies to come up with more practical ways of restructuring and planning their debts.

Some countries like Singapore have gone ahead and temporarily increased the threshold required to file an insolvency petition during and post Covid-19 from $10,000 to $100,000.