Insolvency Law Relief Package – A safe harbour in troubled waters?

Insolvency  relief package

The current COVID-19 restrictions will significantly impact the ability of some directors to comply with their duties and the Companies Act 1993.  The Government’s announcement on 3 April 2020 regarding the introduction of an insolvency relief package will therefore undoubtedly be welcome news for directors.

The duties owed by directors under the Companies Act 1993 (CA) include: primary responsibility for the company’s financial performance and statutory compliance; acting in good faith and in the best interests of the company; and exercising power for proper purposes. Importantly, they also include what are known as the insolvent trading duties. Namely, that directors must not cause or allow the company’s business to be carried on in a way likely to create substantial risk of serious loss to company’s creditors (“reckless trading” (section 135 CA) and that directors 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 (section 136 CA).

The Government is proposing to introduce changes to the CA to help businesses facing insolvency due to COVID-19 to remain viable, with the aim of keeping New Zealanders in jobs.

Safe harbour – Director duty relief

A key aspect of the proposed changes is that sections 135 and 136 CA will be amended to provide directors with a “safe harbour”.

Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties if:

  1. in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors;
  2. the company was able to pay its debts as they fell due on 31 December 2019; and
  3. 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 able to reach an accommodation with their creditors).

The Government has indicated it will be asking Parliament to agree that the “safe harbour” be backdated to the date of its announcement on 3 April 2020, however ultimately these proposed changes are subject to the agreement of Parliament. We recommend directors exercise caution in relying on these proposed changes until such stage as the specific details around the proposals have been released. New Zealand does have a commitment with Australia under the ‘Closer Economic Relations’ arrangement (CER) and its likely New Zealand’s safe harbour regime may be influenced by the Australian regime to ensure that there is consistency across the two markets.

Business Debt Hibernation

The second major change involves the introduction of a COVID-19 Business Debt Hibernation regime to the CA. This will effectively allow a moratorium on the payment of debts.

Key features of the proposal are that:

  1. directors will have to meet a threshold before being able to access the Business Debt Hibernation regime and putting a proposal to their creditors;
  2. 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;
  3. there will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further 6 month moratorium if the proposal is passed.

During the six month period the company can continue to trade, subject to any restrictions agreed with creditors as condition of entering into it but all other rights of enforcement against the company will be suspended.

In order to encourage businesses to continue to transact with a company that has entered Business Debt Hibernation, it is proposed that any further payments, or dispositions of property, made by the company to third party creditors would be exempt from the voidable transactions regime. This exemption would not extend to related parties.

Other insolvency law changes

In addition to the above, the following changes have also been proposed.

  • Insolvency law changes including:
    • bringing forward an insolvency related reform to reduce the period of vulnerability under the voidable transactions regime from two years to six months where the debtor company and the creditor are unrelated;
    • deferring the commencement of insolvency practitioner licensing for up to 12 months; and
    • amending the Contract and Commercial Law Act 2017 so that the provisions relating to electronic signatures apply to security agreements containing powers of attorney.
  • Extending statutory deadlines including:
    •  relaxing the statutory deadlines in some corporate governance legislation (e.g. for holding AGMs and filing annual returns); and
    • relaxing deadlines for Registrars to carry out certain functions, such as processing applications to reserve company names.
  • Relief for non-compliance with entity constitutions including:
    • temporary relief for entities (including incorporated societies, charitable trusts, unincorporated associations and other entities) that are unable to comply with their constitutions or rules because of the impacts of COVID-19; and
    • providing that entities can use electronic communications even if their constitution or rules do not allow them to do so.

Directors duties remain

While this insolvency relief package is helpful and may provide directors with some comfort in these challenging times, it is important to note that directors must continue to comply with their other duties, and in particular, the duty to always act in the best interests of the company.

If directors are unsure about the implications of the relief provided by these proposed changes, and in particular whether to enter into Business Debt Hibernation, it is strongly recommended they seek advice from their legal and financial advisors.

For more information on COVID-19 and its impact on your organisation, please contact our Civil Litigation and Commercial Specialists (Troy Wano, Lauren Wallace, Rebecca Eaton and Nic Croft) on 06 768 3710.