Support for Businesses during COVID-19

Introduction

0n 3 April 2020, the Government has proposed further measures to support businesses by way of introducing new legislative changes to the Companies Act. The purpose of the changes is to ensure as many businesses in New Zealand remain viable during a time when many are at a high risk of insolvency.

These changes are temporary but it is predicted that these measures will be in place for a short period, even after New Zealand has returned to Alert Level 2, to ensure that businesses are able to bounce back to normality.

A change in the legislature will require Parliament to review the draft bill. Currently, no timeframe has been provided as to when the draft bill will be presented. However, the changes will have a retrospective effect as of 3 April 2020.

The changes are:

  • Directors will be given a temporary period of “safe harbour” from insolvency duties under Section 135 (reckless trading) and Section 136 (duty relating to director obligations) of the Companies Act;
  • Businesses are entitled to a temporary period of “debt hibernation”, where existing debts are placed into a brief period of hibernation until they are able to start trading normally again;
  • Amendments under the Contract and Commercial Law Act 2007 so that electronic signatures are allowed where necessary despite the COVID-19 restrictions (i.e., for the signing of security agreements and powers of attorney);
  • The Registrar of Companies will have the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entitles under legislation (i.e., deferred AGMs and filing annual returns);
  • The provision of temporary relief to companies unable to comply with documents in its constitution or rules due to COVID-19

Director Duties

The implementation of a “safe harbour” will provide temporary relief for directors who, in otherwise normal circumstances, would need to ensure their company does not engage in reckless trading or incur obligations it cannot perform.

  • Reckless trading (s135): Directors must ensure that the actions of the business do not create a substantial risk of serious loss to the company’s creditors
  • Director’s duty in relation to creating obligations (s136): Directors must not allow the business to incur obligations unless the director believes on reasonable grounds that such obligations can be performed by the company

Directors are faced with the difficult decision of whether to continue trading or incurring new obligations, despite the current financial risks facing the company and the risk of being held personally liable if continued trading causes the company to suffer substantial loss. In many cases, directors may opt to simply liquidate the company, perhaps prematurely, to avoid the risk of incurring personal liability.

In allowing a temporary “safe harbour” period, directors during this period will not be held personally liable for breaches of Sections 135 and 136 if the company continues to trade and incur new obligations, if:

  • In their opinion and acting in good faith, the director believes that the company will likely face liquidity problems in the next 6 months due to COVID-19;
  • The company was unable to pay its debts as they fell due at 31 December 2019; and
  • In their opinion and acting in good faith, it is more likely than not that the company will be able to pay its debts as they fall due within 18 months, potentially as a result of improved trading conditions or genuine belief that they will be able to accommodate its creditors.

The “safe harbour” regime would only apply to Sections 135 and 136 of the Act, and does not affect other obligations, duties and protections under the Act.

Debt Hibernation

The introduction of a debt hibernation regime is to provide businesses with a quick and flexible process to put their debts on hold, without the risk of liquidation.

The regime will include:

  • Allowing creditors to vote on the debtor’s debt hibernation proposal
  • A 50% or more acceptance (number and value) by creditors of the proposal will mean the proposal is accepted in full and be binding on all creditors
  • There will be a one month moratorium from enforcement of debts from the date the proposal is notified
  • There will be a further six month moratorium from enforcement of debts from the date the proposal is passed
  • Changes in the voidable transactions regime to ensure that payments received by businesses will not be clawed back in future liquidations
  • The debt hibernation regime will be available to all businesses, not just companies, including trusts and partnerships.
  • The debt hibernation regime will not be available to licensed insurers, registered banks, non-bank deposit takers and sole traders.

Please stay tuned for further updates once the draft Bill has been presented for review.

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