Covid-19 Companies Act Changes – Government announces proposed Insolvency relief measures for companies affected by COVID-19
On Friday, 3 April 2020, the Government announced a number of temporary changes to the Companies Act to assist businesses facing insolvency due to COVID-19. The aim of these temporary changes is to ensure that businesses stay afloat during these times, to manage company debt coming out of the COVID-19 restrictions, and to retain as many jobs as possible for New Zealanders.
Legislation will be drafted urgently to give effect to the proposed changes and will be put to Parliament for debate and legislative approval. In general, and subject to these proposals being agreed by Parliament, these changes include:
(a) giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act 1993 (“the Act”);
(b) enabling businesses affected by COVID-19 to place existing debts into hibernation until they are able to start trading normally again (what is referred to as a Business Debt Hibernation);
(c) allowing the use of electronic signatures where necessary due to COVID-19 restrictions;
(d) giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation; and
(e) giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19.
The two major changes are those outlined in (a) and (b) above, and we comment on the details that have been announced on these changes below.
Safe Harbour from Insolvency Duties
There are two duties of directors which the Government has focused on in introducing a “safe harbour” proposal for directors’ insolvency duties.
- First, section 135 of the Act requires directors to not trade recklessly, i.e. not to carry on the business, or allow the business to be carried on, in a manner likely to create a substantial risk of serious loss to creditors.
- Secondly, section 136 of the Act imposes a duty on directors to not incur an obligation where the directors do not believe the company would be able to meet that obligation.
Each of these duties relate to decisions of directors to continue trading. If directors decide to continue trading, but are ultimately unable to pay their debts, the directors risk breaching these duties. A creditor may pursue the directors for compensation if they breach these duties.
With the changes proposed, directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next six (6) months will not result in a breach of these duties if:
(a) in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six (6) months as a result of the impact of the COVID-19 pandemic on them or their creditors;
(b) the company was able to pay its debts as they fell due on 31 December 2019; and
(c) the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to be able to reach an accommodation with their creditors).
The aim of this proposal is to give directors time to consider all of their options. This will allow directors to determine whether they can remain viable and continue to operate their business based on an assessment of the impacts of COVID-19 on the company’s business, rather than resorting immediately to insolvency.
The Government will be seeking to apply this “safe harbor” retrospectively from 3 April 2020.
Other director duties in the Act will remain in full force and effect.
Business Debt Hibernation
The introduction of a business debt hibernation scheme is designed to provide a simple and efficient way of allowing companies to put debts with creditors on hold, or in hibernation, without relinquishing control of the company to insolvency.
The aim of this scheme is to encourage directors to talk with their creditors with a view to agreeing the terms of a simple and flexible proposal to put their debts into hibernation. This will allow directors to retain control of their companies during this uncertain time. The key points to this scheme announced by the Government are as follows:
(a) directors will have to ensure the company meets a particular threshold before being able to access Business Debt Hibernation and putting a proposal to their creditors (details of this threshold are yet to be released);
(b) should the directors put a proposal forward, creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% of creditors (by number and value) agree;
(c) during that month, a moratorium will prevent creditors from taking action against the company to recover their debts, and a similar six (6) month moratorium will apply if the proposal is agreed; and
(d) a company in Business Debt Hibernation will be able to continue to trade (subject to any restrictions or conditions agreed by creditors).
Where directors are considering putting a proposal to their creditors, this should be well structured and well thought out. It should outline the steps the company has taken to mitigate the effects of COVID-19 on the business and reduce the risk to creditors.
One factor that directors should also consider is whether notifying creditors of a proposal to access Business Debt Hibernation is an act of default, for which a creditor may be entitled to terminate a contract. This is likely to be something which the Government will deal with in further announcements on the scheme, as such a result seems unreasonable in light of the outcome the scheme is trying to achieve.
Changes will also be made to the voidable transactions regime to encourage creditors to continue to transact with a company that has entered into a Business Debt Hibernation. Payments made during a Business Debt Hibernation will not be subject to the voidable transactions regime, so those continuing to trade with the company during a Business Debt Hibernation will not have to worry about a liquidator seeking to unwind transactions if the company is later placed into liquidation. This exemption would be subject to the transaction being entered into in good faith by both parties, on arm’s length terms and without the intent to deprive existing creditors of the company.
Business Debt Hibernation will be available to not only companies, but also trusts, partnerships and other trading entities.
Further information on the Government’s announcement can be found here. Further updates will be available once the draft Bill is released to the public.
If you have questions about your business during the COVID-19 restrictions, please get in touch with our CR Law – Cooper Rapley Lawyers legal team, or phone Adrian on 027 253 7483.