This article first appeared in Forum, The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020

The scale of the Covid-19 pandemic means that no business of any size has been spared from the fallout. The unprecedented restrictions and health measures put in place across the globe, while necessary, have slowed economic activity, disrupted businesses and left many companies floundering.

In response, governments including in Malaysia have announced a slew of stimulus initiatives to help various groups and sections of the economy. While these measures have been welcomed by businesses, many are likely to need more assistance to weather the impact of Covid-19.

One of the most immediate challenges that businesses face is cash flow and the consequence of being able to fulfil contractual obligations. Border restrictions, operational constraints and lockdown measures have delayed the performance of contracts and, in severe instances, made contracts impossible to perform.

This has created a domino effect on other businesses along its supply chain, and a wave of breaches and rise in disputes now seem like an inevitability.

Commercial need for the Covid-19 Act

Even with the measures already announced, many individuals and businesses are still unable to perform their contractual obligations and face the risk of insolvency. Businesses in the retail and services sectors are, for example, recording record-low revenues while still having to pay their rents and employees’ salaries as well as fulfil other contractual commitments.

The Retail Group Malaysia (RGM) estimates that a total of 209,000 stores, accounting for 61% of total retail outlets in the country and 63.3% of total retail sales, were closed during the first six weeks of the Movement Control Order. During these six weeks, retailers of non-essential stores have incurred an estimated RM14.31 billion in operating costs, including rental of premises, insurance, advertising and promotional expenses.

This does not even account for the additional RM6.18 billion in staff costs, comprising salaries and wages, allowances and statutory contributions. It is predicted that as much as 40% of business in the retail and services sector will not survive the financial impact brought about by their rental, salary and contractual commitments.

These concerns have led Malaysian business associations to lobby for relief measures in the form of a single, holistic multi-sector Covid-19 Act to further mitigate the financial impact of the pandemic. Such an Act goes beyond what stimulus initiatives can offer because it provides temporary reprieve to allow business owners to avoid legal disputes and protects them from resulting legal suits, as they try to resuscitate their businesses.

So, the news that the Malaysian government is laying the groundwork to introduce a Covid-19 Act is welcomed indeed.

A Malaysian Covid-19 Act

To see what works, the government can perhaps look to the Singaporean Covid-19 (Temporary Measures) Act 2020 (Singaporean Act), which offers businesses relief from legal action for six months from April 20 to Oct 19, 2020.

Crucially, the Singaporean Act works retrospectively, covering contractual obligations to be performed on or after Feb 1, 2020, which are affected by reason of Covid-19 for contracts entered into before March 25, 2020.

It suspends contractual obligations for a prescribed list of contracts: (i) secured loan agreements to SMEs; (ii) construction contracts and supply contracts; (iii) event and tourism-related contracts; (iv) hire-purchase and conditional sales agreements; and (v) leases and licences of non-residential property.

The Singaporean Act also provides a range of dispensations:

•    Winding-up proceedings: For a prescribed period of six months commencing April 20, 2020, applications for winding-up cannot be made against a contracting counterparty or the counterparty’s guarantor;

•    Higher threshold for statutory demands: During a prescribed period of six months commencing April 20, 2020, the monetary thresholds of and deadlines to fulfil statutory demands will also be raised. The monetary threshold for a statutory demand against a Singaporean company will be raised from S$10,000 (RM30,505) to S$100,000, and the statutory deadline to fulfil the statutory demand will be extended from three weeks to six months. However, statutory demands served on a Singaporean company prior to the commencement of the relevant provisions in the Covid-19 Act will not be subject to these revisions;

•    Modified requirements for insolvent trading: The offence of insolvent trading will not be made out if a debt is in the ordinary course of the company’s business, during the prescribed period of six months commencing April 20, 2020 and before the appointment of a judicial manager or liquidator of the company;

•    Judicial management: Judicial management proceedings will be stayed for a prescribed period of six months commencing April 20, 2020, and applications for a judicial management order cannot be made against a contracting counterparty or that counterparty’s guarantor; and

•    Scheme of arrangement: For a prescribed period of six months commencing April 20, 2020, applications to convene a meeting of creditors to be summoned to approve a scheme of arrangement in relation to a contracting counterparty or that counterparty’s guarantor cannot be brought.

A similar Act that gives a moratorium to provide relief from court proceedings, arbitration, bankruptcy or winding-up actions would be welcomed in this particular time in Malaysia. It will enable business owners to focus on and dedicate their attention to reviving their operations and increasing business revenue.

This legislative safety net will not only save jobs for the many casual and other workers who have suffered as a result of the movement controls and restrictions but will also give a much-needed shot in the arm to the small and medium-sized businesses that need that lifeline to survive this difficult period.

To address the inevitable disagreements that will arise between the contracting parties, we can also take a page out of Singapore’s system and establish a panel of specialised assessors made up of industry experts to determine whether the non-performance is due to Covid-19 and grant the necessary relief appropriate in the relevant circumstances to ensure a joint and equitable outcome.

Moving forward

Covid-19 has underlined the need for regulators and businesses to be agile when crafting plans to get the economy moving again. An unprecedented event requires a united and holistic response.

By combining economic stimulus initiatives and a comprehensive Covid-19 bill, the government will be giving businesses the tools for recovery and renewal. The sooner it is done, the better.

Brian Chia and Ee Von Teo are partners at Wong & Partners, a member firm of Baker McKenzie International

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