Directors and Creditors: know your rights and obligations in a post-Covid world

know your rights and obligations

With government support for business coming to an end, it is important to know where you stand.

The government’s Covid-19 support for businesses may have come to an end, but many businesses remain under pressure. In this uncertain landscape directors need to make sure they are not trading recklessly, and creditors need to manage their risk of being left out of pocket. In this article we will explain the government support which has been withdrawn, director obligations, and the potential consequences of inadvertently trading with an insolvent business.

Much of the government’s Covid-support for businesses has ended in the last 6 months or more. Specifically:

  1. Debt Hibernation legislation, which provided for a moratorium on enforcement while businesses entered into arrangements with creditors, is no longer in force;
  2. Safe Harbour legislation, which provided relief from personal liability to directors specifically in relation to their duties around reckless trading in the face of insolvency, is no longer in force; and
  3. The last payments under the Covid-19 Support Payment for businesses initiative were made on 2 August 2022.

These legislative provisions allowed businesses to continue to trade through Covid-19 lockdowns, and afterwards, in the hope that doing so would hopefully prevent events of insolvency/ease the burden on directors whose businesses faced solvency issues during the Covid-19 lockdowns. However, it seems that in spite of this relief, businesses around the country are still under pressure after a tough two years of decreased revenue resulting from staff absences, and inability to trade, not to mention increased operating costs as a result of current rates of inflation.

With this ever-changing landscape, directors should be sure to reacquaint themselves with their duties and obligations. In respect of reckless trading, (noting that the New Zealand Supreme Court is shortly expected to deliver its decision in Yan v Mainzeal Property and Construction Limited (In liquidation) et al), directors need to consider whether continued trading is being carried on in a manner which is likely to create substantial risk of serious loss to a business’ creditors. Generally, the decision to continue to trade where a company has negative shareholder funds, or is insolvent, necessarily involves risk for creditors. Directors should be very cautious before continuing to trade in the hope that this will enable their company to revert to a solvent state.

In respect of incurring obligations (again noting the Supreme Court decision in Yan v Mainzeal may alter things slightly), directors must believe, on reasonable grounds, that the company incurring obligations will be able to satisfy those obligations, when they fall due.

As can be seen from the above, whether a company can continue to trade, or incur debt on the basis that it will be able to meet its obligations when they fall due is highly fact specific. This is something that creditors in particular should be aware of when transacting with a business with suspected liquidity issues.

Clawback claims are claims that a company’s liquidator can make in respect of all transactions which occur in the 6 month period immediately before a company is placed in liquidation. This means that in the 6 months immediately preceding a company being placed into liquidation, there is a presumption that that company is unable to pay its debts.

Creditors need to be vigilant with respect to any signs that might give rise to reasonable grounds for suspecting a business is insolvent.

In addition, if you, as a creditor, are served with a clawback claim notice from a liquidator, you should pay careful attention to the strict timeframes available to dispute the claim.

If you are in any doubt about what your rights and obligations are as a creditor or a director, we recommend you get in touch with one of our restructuring and insolvency specialists here at Govett Quilliam.

About the author: 

Heather-HubDB-Profile-1Heather Froude
Associate | Dispute Resolution Law Team

Heather is an Associate in our Resource Management, Litigation and Employment Teams.

Heather began her career at GQ as a graduate, before heading overseas to London, and eventually spending 6 years working in the Cayman Islands. Whilst in the Cayman Islands, Heather was most recently a Senior Associate at Appleby (Cayman Limited) where she was part of the Dispute Resolution Team, working on fund disputes, commercial litigation and a range of insolvency and restructuring matters.