AN INTERVIEW WITH THE HEAD OF THE SINGAPORE GLOBAL RESTRUCTURING INITIATIVE
BY CATHERINE SHEN
The subject of insolvency law has been brought into sharp focus by pandemic-induced business struggles. In particular, the plight confronted by small businesses who are so vital to the economy yet do not generally enjoy more tailored rescue and liquidation procedures have spurred calls by academics and practitioners alike for further action to create dedicated procedures for such businesses. The Asian Business Law Institute (ABLI) sat down with Aurelio Gurrea-Martinez, Assistant Professor of Law of Singapore Management University and Head of the Singapore Global Restructuring Initiative, on his recent paper discussing insolvency for small and micro businesses and his vast experience studying this subject around the world.
ABLI: Your most recent academic paper has analysed the treatment of micro, small and medium-sized businesses (MSMEs) in insolvency, and how countries can improve their insolvency frameworks for them. What led you to write about this topic?
Aurelio Gurrea-Martinez (AGM): MSMEs represent the vast majority of businesses in most countries. Despite the economic relevance of these firms, however, most jurisdictions do not provide adequate responses to MSMEs in insolvency. Moreover, with a few exceptions, the academic literature on insolvency law has also omitted the debate on MSMEs. My article seeks to contribute to the debate in this area by analysing the primary features and problems of MSMEs in distress, the weaknesses of the ordinary insolvency framework in dealing with MSMEs, and the insolvency reforms for MSMEs taking place in several countries globally. After analysing these aspects, my paper concludes by suggesting various policy recommendations to design an efficient insolvency framework for MSMEs. Hopefully, the paper can be useful for regulators and policymakers, especially during these challenging times where Covid-19 has hit MSMEs the hardest. Implementing a suitable insolvency framework for MSMEs is more important than ever.
ABLI: In your opinion, what are some of the key reasons for the unsuitability of the existing insolvency frameworks in most countries for MSMEs?
AGM: Traditional insolvency proceedings can be very costly for MSMEs, especially taking into account the fact that many of these firms may not even have assets to fund the costs of the procedure itself. Therefore, initiating an insolvency proceeding is a luxury that many MSMEs cannot afford. Even if they can, they face a second problem: the insolvency procedure may not be suitable for them. The traditional insolvency proceedings in most countries can be very burdensome, rigid and complex for MSMEs. Furthermore, even if the insolvency framework is suitable for small businesses, there is an additional problem: many jurisdictions do not provide an effective discharge of debts for individuals. Since many MSMEs are not incorporated and, even if they are, the shareholders or managers often act as guarantors for the debts of the companies, the lack of a discharge of debts for the honest but unfortunate entrepreneurs behind MSMEs make the system less appealing.
ABLI: As you have observed, the majority of the jurisdictions in the world do not currently have a dedicated procedure for MSMEs in insolvency. Given the economic contribution of these enterprises, are you surprised that not more jurisdictions have already sprung into action to design a suitable system for them?
AGM: The lack of a suitable insolvency regime for MSMEs in many countries is probably due to the absence of an active academic and policy debate in this area. This lack of debate is, in turn, probably because individually examined, MSMEs are less economically relevant than large companies. However, once they are analysed from a macro-economic perspective, it can be observed that MSMEs actually represent a significant percentage of the jobs and GDP in a country. According to the World Bank, MSMEs represent about 90% of businesses and more than 50% of employment worldwide, and formal MSMEs contribute up to 40% of national GDP in emerging economies. If the informal economy – very relevant in emerging countries – is included, the economic relevance of MSMEs is even more significant.
ABLI: Do you think Covid-19 will be the “missing" catalyst that is needed to finally incentivise more jurisdictions to look at having a special framework for micro and small firms?
AGM: Absolutely. In fact, the Covid-19 pandemic is making us rethink many aspects: from our legal systems, to the business models of many companies, and even the way we work. In the context of insolvency law, many countries have realised that having an efficient insolvency framework for MSMEs is more important than ever. Therefore, I think the pandemic will indeed incentivise many countries to implement special insolvency frameworks for MSMEs.
ABLI: Singapore has introduced a simplified insolvency programme as part of the Government's Covid measures to help businesses, though the programme is currently a temporary procedure. Would you have preferred to make it permanent as part of the legislation?
AGM: Designing an efficient insolvency framework is no easy task. Some jurisdictions favour debtors at the expense of creditors, while others have traditionally put more emphasis on the protection of creditors. Both types of systems can create inefficiencies. If an insolvency regime is not attractive to debtors, it can harm entrepreneurship, innovation and the quick reorganisation of viable businesses. If an insolvency regime is not attractive to creditors, it can harm firms’ access to debt finance. Therefore, an insolvency framework should ideally be pro-both, which is something generally achieved by facilitating the effective reorganisation of viable companies and the quick liquidation of non-competitive businesses. While implementing an insolvency reform in that direction is challenging, Singapore has shown that it is doable. It is important to emphasize that the current balanced approach adopted in Singapore is the result of thoughtful policy discussions over many years.
The devastating economic effects of the pandemic have encouraged countries to quickly adjust their insolvency frameworks. In that context, Singapore is one of the first countries to implement an insolvency framework for MSMEs as part of the legal and economic package of reforms adopted in the pandemic's recovery phase. Due to the urgent need to provide MSMEs with a suitable insolvency response, adopting a temporary insolvency framework actually makes more sense since doing so enables the Government to test the desirability of the simplified insolvency programme. Then, depending on how it works out in practice, the Government will be in a better position to decide whether this programme should be kept permanent and, if so, whether any adjustments are needed.
ABLI: You have conducted research in an incredibly number of places. Could you share with us the approach taken by one of those countries that has left the most impression on you?
AGM: I learnt from every single country where I have had the opportunity to conduct research: from advanced economies, such as the United Kingdom, Continental Europe and the United States, to many emerging economies, particularly in Asia and Latin America. In the US, for example, I learnt that it is possible to design an insolvency system that it is attractive to debtors while remaining protective of the interests of creditors. However, my research in law and finance from a comparative perspective has also made me realise that one size does not fit all. Therefore, what works well in the US – or in any other jurisdiction – might not work well in other countries. For example, the US has many features not generally found in emerging economies, such as an efficient and sophisticated judiciary, a developed financial system, many large companies without any controlling shareholder, and a sophisticated restructuring ecosystem. As a result, the provisions in the US Bankruptcy Code might not work well in countries with totally different legal, economic and institutional realities. In fact, emerging markets are generally characterised by the exact opposite features: inefficient institutions, underdeveloped financial systems, many small companies and large controlled firms, and a relatively poor market and restructuring environment. Therefore, while the balanced approach found in the US or in Singapore should inspire other insolvency legislation around the world, the specific ways to design this approach may vary greatly across jurisdictions.
Assistant Professor Martinez will be speaking at a webinar co-organised by ABLI and the Singapore Global Restructuring Initiative (SGRI) at 3 pm (SGT) on 3 March to discuss insolvency for micro and small businesses. Alongside his co-speakers Mr Scott Atkins, Australian Chair, Partner, and Head of the Australian Risk Advisory Practice of Norton Rose Fulbright and Ms Smitha Menon, Partner of WongPartnership, he will share more about his extensive research in this topic, the practical issues faced by MSMEs in distress and how different players such as lawyers and mediators can play their role in assisting MSMEs. Sign up here.
