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More firms are going bankrupt, data shows

More firms are going bankrupt, data shows

Source: Straits Times
Article Date: 27 Mar 2020
Author: K.C. Vijayan

More applications filed, more firms forced to wind up last year than in each of past 5 years.

Increasingly, companies are going bankrupt, a situation that could be exacerbated by the coronavirus pandemic.

Official figures show corporate insolvency is on the rise, with more applications filed and more companies forced to wind up last year than in each of the past five years. In all, 406 applications for compulsory liquidation were filed last year, up from 312 in 2018, crossing the 400 mark for the first time since 2005, based on records shown on the Law Ministry's Insolvency Office website.

Significantly, over the same period from 2005, the annual number of companies compulsorily wound up last year was 287, the highest yearly figure.

"The higher numbers certainly show there is a relatively higher level of default in debt repayments in 2019 compared with previous years," WongPartnership partner Chou Sean Yu told The Straits Times.

In a compulsory liquidation, a creditor, shareholder or a judicial manager of a company applies to the High Court for an order to wind up the company.

Under the Companies Act, one of the grounds for a court to liquidate a company is when a creditor, who is owed more than $10,000, is not paid in three weeks after he has served a demand for the money owed at the company's registered office.

Industry players said compulsory liquidations are driven by downturns in the economy in different years in different sectors, such as the construction, maritime and oil and gas industries.

"It is important to also consider the industrial sector of the companies put into liquidation, the size of the underlying debt and the proportion of trade creditors and financial institution lenders as the applicants," said Mr Chou.

Singapore Management University (SMU) law lecturer Aurelio Gurrea-Martinez pointed out that the number of insolvency proceedings in Singapore is relatively low compared with those in other developed economies such as the United Kingdom, Germany and France.

"I do not think the increase in the number of insolvency proceedings necessarily represents a problem for Singapore," said Dr Gurrea-Martinez, who is assistant professor of law at SMU.

"In fact, it can even reflect a positive signal if the rise of insolvency proceedings is due to the existence of more entrepreneurship and innovation, or to the lower stigma associated with insolvency proceedings.

"In my opinion, these latter explanations may sound more convincing to explain the data," he said.

He noted that, among other things, the number of companies incorporated here in the past years has gone up. He said the increased number of companies registered is positive news for the economy.

But more business activity will also be associated with more corporate insolvencies, since not all businesses are competitive enough to remain in the marketplace.

He pointed out that in the past years, Singapore has become one of the most important smart cities and financial technology hubs in the world. This shift towards a more technology-driven economy may imply an overall increase in the level of risk taken by Singaporean companies.

"Therefore, while this shift can generate significant benefits for our economy, especially in terms of innovation and long-term growth, it will necessarily imply that more companies will be exposed to a higher risk of failure."

Mr Tee Wey Lih, director-owner of restructuring and insolvency specialist Acres Advisory, said: "Reasons like business slowdown, capital foreclosures and mismanagement lead to liquidation, but the past figures may not be relevant when we consider the potentially bleak prospects ahead.

"This is possible when we consider the potential downside implications of the current economy affected by Covid-19."


INSOLVENCY ON THE RISE

406

Number of applications for compulsory liquidation filed last year.

312

Number of applications for compulsory liquidation filed in 2018.

Source: Straits Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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