Business / Commerical
As a result of liquidity and cash-flow problems caused by the Covid-19 pandemic, directors of companies may be facing difficult decisions of whether to continue to trade their companies or place them into voluntary administration or liquidation. Central to these decisions are the obligations imposed by the Companies Act 1993, which confers certain obligations upon directors of companies in New Zealand.
To allay some of these concerns, the Government announced in a press conference on 3 April 2020 that it proposes to introduce amendments to the Companies Act to provide temporary relief for companies and directors that have been impacted by the Covid-19 pandemic. These amendments will provide directors with a “safe harbour” with respect to insolvent trading and a business debt hibernation scheme whereby a company may be able to defer the payment of company debts.
Although this legislation has not yet been passed, Finance Minister Grant Robertson announced in the abovementioned press conference that Parliament intends to introduce legislation with respect to same as soon as possible and the Government will request that its effect be retrospective to 3 April 2020.
As many directors may be aware sections 135 and 136 of the Companies Act impose onerous obligations upon directors to not engage in conduct which may create serious risk to the company or its creditors and to not incur an obligation unless the company will be able to perform that obligation.
If passed, a safe harbour around the abovementioned obligations will operate for six months, allowing directors to avoid liability for breach of same if they meet the following criteria:
- In the good faith opinion of the director/s, the company is facing or is likely to face significant liquidity problems in the next six months as a result of the impact of the COVID-19 pandemic;
- The company was able to pay its debts as they fell due on 31 December 2019; and
- The director/s 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.
The Finance Minister was clear that these provisions will only protect directors of companies which were solvent prior to the Covid-19 crisis. Other obligations imposed by the Act will still apply and as a result, directors will still have to act in good faith and in the best interests of the company and exercise their powers for a proper purpose.
Business Debt Hibernation Scheme
The second amendment that the Government announced is a business debt hibernation scheme whereby companies who meet a threshold test will be able to defer the payment of debts for a total period of up to seven (7) months.
In order to qualify for the scheme, directors will have to meet a threshold test (yet to be disclosed). If they meet that test, they will be able to put forward a proposal to creditors and there will be a one-month moratorium on the enforcement of debts to allow creditors to vote on it. If 50% of those creditors agree to the proposal, it and any conditions contained therein will be binding upon all creditors (except for employees) for six months, which is in addition to the aforementioned one-month moratorium.
The scheme will not be available to sole traders, licensed insurers, banks or companies which were already on shaky ground prior to the pandemic. The scheme should give companies some breathing space during the Covid-19 crisis, allowing directors to retain control of their companies instead of placing them into the hands of an insolvency practitioner and/or avoid voluntary administration and liquidation. The aim being that companies which would have been solvent but for the crisis can trade their company out of trouble and return to being viable and solvent companies.
What should Directors do?
If you have a query regarding how these amendments will affect you and your company, whether you qualify for the “safe harbour” or the business debt hibernation scheme or wish to put to put a proposal forward to your company’s creditors, please do not hesitate to contact:
This information is intended to be general in nature. You are strongly recommended to seek your own legal advice in relation to the matters dealt with here.
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