By way of an update to our previous article on the debt hibernation for companies, the Government has provided further information about how its proposed COVID-19 ‘safe harbour’ for directors and ‘business debt hibernation’ will work.
The measures are:
- giving directors of companies facing significant liquidity problems because of COVID-19 a ‘safe harbour’ from insolvency duties under the Companies Act
- enabling businesses affected by COVID-19 to place existing debts into hibernation.
The Government has said it will introduce legislation to make these changes so that businesses are more likely to continue trading.
The Government has advised that the safe harbour would relieve directors from sections 135 and 136 of the Companies Act 1993.
Section 135 relates to reckless trading and would ordinarily prohibit a director from causing, allowing or agreeing to the business being carried on in a manner likely to create substantial risk of serious loss to the company’s creditors.
Section 136 ordinarily prohibits a director from agreeing 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 required to do so.
With COVID-19 uncertainty, these sections make it difficult for a director to agree to take on obligations or carrying on the business where there are solvency issues in play. The prudent course of action, in light of these duties, might be for a director to liquidate the company.
The ‘safe harbour’ would mean that there is no breach to sections 135 and 136 if:
- “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;
- 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 able to reach an accommodation with their creditors)”.
This ‘safe harbour’ would be backdated to the date of the announcement (3 April 2020).
Business debt hibernation
The debt hibernation regime would be a new temporary regime in the Companies Act 1993.
This Business Debt Hibernation regime would be designed to make it easy for businesses to reach agreement with their creditors to freeze certain debts of the company.
The company would need to put together a proposal with its creditors. From the date of notification of the proposal, creditors would have a month to vote on it. Within that one-month notification period, there would be a moratorium on enforcement of debts.
The proposal would be binding if 50% of creditors (by number and value) agree. If agreed, there would be a further 6-month moratorium on the enforcement of debts – the company would be in “Business Debt Hibernation”.
Further conditions could be negotiated between the company and its creditors.
If the proposal is rejected, the company could pursue the standard options available, including trading on, voluntary administration and appointing a liquidator.
While in Business Debt Hibernation, the company can continue to trade, while complying with any further conditions between its creditors.
Any further payments or dispositions of property made by the company to third party creditors during this time would be exempt from the voidable transactions regime. This means a liquidator could not claw-back those transactions; so long as the transaction was entered into in good faith by both parties, on arm’s length terms and without intent to deprive the company’s existing creditors.
This regime would be available to any entity (not just companies), including trusts and partnerships. It would not apply to licenced insurers, registered banks, non-bank deposit takers and sole traders.
Current advice is that the Government will prepare a form to assist entities to put a proposal to its creditors.
There are a number of tricky issues in the new regime, and directors and companies should be seeking advice to make sure that they fit themselves squarely within these new regimes.
For More Information
Further information about these measures are available here: https://www.companiesoffice.govt.nz/about-us/what-we-do/insolvency-relief-for-businesses-impacted-by-covid-19/.
The Government advises checking the Companies Office website frequently for the most up-to-date information.
Morrison Kent’s commercial lawyers have experience and knowledge spanning a range of industries and specialisations, we work closely with you to share that knowledge to your advantage, and are well placed to help you assess your business needs during this time.
- Matthew Whimp – firstname.lastname@example.org
- Andrew Stewart – email@example.com
- Helen Nathan- firstname.lastname@example.org