Insolvency Law Relief Driven by COVID-19

April 17, 2020

Insolvency Law Relief Driven by COVID-19

The Government has announced temporary changes to the Companies Act 1993 to assist businesses facing financial stress and insolvency during the COVID-19 pandemic. The temporary changes include:

  • Providing the directors of companies facing significant liquidity problems due to COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act.
  • Enabling businesses affected by COVID-19 to place existing debts into hibernation until they can start trading normally again.
  • Allowing the use of electronic signatures where necessary due to restrictions caused by COVID-19.
  • Giving the Registrar of Companies the power to temporarily extend deadlines imposed on companies, incorporated societies, charitable trusts and other entities under legislation.
  • Giving temporary relief for entities that are unable to comply with requirements in their constitutions or rules because of COVID-19, such as the requirement to hold an Annual General Meeting.

Two of the changes are outlined further below:

1. Directors’ Duties

The temporary changes aim to provide a ‘safe harbour’ for directors in relation to sections 135 (reckless trading) and 136 (trading while insolvent) of the Companies Act 1993. In short, directors’ decisions to keep on trading, including taking on new obligations, over the next six months will not result in a breach of those sections if:

  • In the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six months because of the impact of the COVID-19 pandemic on them or their creditors; and
  • The company was able to pay its debts as they fell due on 31 December 2019; and
  • 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 reach an accommodation with their creditors).

Directors will need to remain aware of their duties under the Companies Act, such as to act in good faith, and to have up to date information to satisfy themselves that the company was solvent as at 31 December 2019 and that there are reasonable grounds to consider the company will be solvent again within 18 months.

The ‘safe harbour approach’ is aimed at helping businesses keep trading, rather than prematurely closing up therefore minimising disruption to the economy as much as possible.

2. Business Debt Hibernation

The Business Debt Hibernation scheme is designed to freeze existing debts and to provide businesses with room to return to adequate cashflow levels without fear or consequences of existing debts being enforced.

The scheme will be available to companies, trusts and partnerships with the proposed entry criteria being:

  • Directors can only put forward a scheme proposal to creditors if a (yet to be disclosed) threshold is met.
  • Creditors will have a month from the date of notification of the proposal to vote on it.
  • The proposal will be binding if 50% of creditors by both number and value vote in favour.
  • There will be a one-month moratorium on the enforcement of debts from the date the proposal is notified, and a further six-month moratorium if the proposal is passed.

The scheme is expected to be a step which businesses can take for themselves, without needing any external appointee to operate the business. It could be expected that minimum requirements would be that a business was solvent and would have been solvent, aside from COVID-19, and that it would be in the best interests of the business, including its ability to pay creditors, for the business to enter debt hibernation.

The exact details of the suite of proposed changes to insolvency law will not be known until the Bill is introduced when Parliament resumes after the lockdown, but once enacted, it is expected that at least most of the amendments will have a retrospective effect.

For further detail, please also refer to the New Zealand Companies Office.

Please consult your lawyer to discuss how these changes may assist your business during these uncertain times.