The Government has recently announced a number of proposed changes to the Companies Act 1993 to better protect New Zealand businesses during the pandemic.
One of the crucial changes provides a “Safe Harbour” from Insolvency duties for directors under sections 135 and 136 of the Companies Act 1993. This allows directors to, for a period of 6 months, be relieved of strict enforcement of their duties under these clauses;
Section 135 - Duty against reckless trading – A Director must not carry on, or cause or allow, the business to be carried on in a manner, that is likely to create substantial risk of serious loss to the company’s creditors; and
Section 136 - Duty in relation to obligations where a Director must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
The temporary Safe Harbour regime will only be deemed reasonable if:
The director of the company facing liquidity issues in the 6-month period (in good faith) believes that the liquidity issues has resulted from the impacts of the Covid-19 pandemic;
The company was able to pay its debts up until 31st December 2019; and
The Director thinks that within 18 months of July of 2020 that they will be able to pay their debts as and when they are due.
However, business owners should be cautious when relying on the Safe Harbour principle as this protection does not allow directors to trade without regard to their overarching obligations under the Companies Act 1993, which will continue to remain in good place. Directors are still required to act in good faith.
Another vital change the Government will be introducing is allowing companies to hibernate existing debts up to 7 months to encourage the longevity of the businesses affected by COVID-19.
While a business is in Business Debt Hibernation, it would be able to trade subject to any agreed restrictions imposed by its creditors that are affected but this endurance regime.
In order to encourage businesses to continue to transactions with a company that has entered Business Debt Hibernation, any further payments, or dispositions of property, made by the company to its creditors would be exempt from the voidable transaction’s regime. This principle will not extend to related parties.
This means anyone continuing to trade with the company will not have to worry about a liquidator seeking to undo transactions if the company is later put into liquidation. This exemption would be subject to a condition that the transaction was entered into, in good faith by both parties, with respect to the terms and without the intent to deprive the existing creditors of the company.
Business Debt Hibernation will be available to all forms of entities with (not just companies) or without (i.e. trusts and partnerships) some sort of legal personality.
It will not, however, extend to licensed insurers, registered banks and non-bank deposit takers alike, and sole traders. Sole traders who become insolvent are instead subject to the Insolvency Act 2006 (which covers personal insolvency) because there is no separation between the trader’s business finances and their personal finances.
The change is intended to encourage directors to talk to their creditors with a view to putting together a simple proposal for putting the business into hibernation (creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree, allow for the directors to retain control of the company rather than passing control to an insolvency practitioner.
The Business Debt Hibernation would be binding on all creditors other than the entity’s employees and would be subject to any conditions agreed with creditors.
If the creditors reject the proposal, the directors still have the range of existing options available including trading on, entering voluntary administration and appointing a liquidator.
In addition to the above changes, the Government will:
Bring forward an insolvency-related reform under the voidable transactions regime to reduce the vulnerability period from 2 years to 6 months where the debtor company and the creditor are unrelated parties.
Introduce the Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 that are scheduled to come into force on 17 June 2020. Although 17 June remains achievable and is still being targeted, unpredictability associated with COVID-19 means that implementation may have to be deferred. To cater for unexpected COVID-19-related delays, Cabinet has agreed to allow the commencement of the Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 to be in use for up to 12 months.
The Contract and Commercial Law Act 2017 will be amended to allow for electronic signatures to be applied where necessary.
Allow temporary relief for entities (including incorporated societies, charitable trusts, unincorporated associations and other entities) that are unable to comply with obligations in their constitutions or rules because of the impacts of COVID-19 are absolved from doing so until such a time when it is reasonably able to perform it. These entities can use electronic communications (including electronic meetings) even if their constitutions or rules do not allow them to.
We appreciate that COVID-19 may be creating uncertainty or anxiety within your business. The Companies Office and business.govt.nz websites will also provide further advice and guidance to both directors and creditors that are in this position.
We're also here to help. Feel free to also contact us. The iCLAW team is happy to provide advice and guidance in these trying times.